Forecasts & Trends : Politics

Stratfor: Odds of War with Iran Spiking

Gary D. Halbert — Tue, 13 Oct 2009 20:19:00 GMT

IN THIS ISSUE:

West Discovers Secret Nuclear Facility in Iran
Iran Much Closer to Nukes than Previously Thought
Russian Scientists Said to be Helping Iran Build Nukes

Introduction

Several very disturbing geopolitical revelations over the last two weeks regarding Iran and its possible nuclear weapons ambitions and capabilities have dramatically changed how the US and the international community are thinking in terms of the nuclear threat we face from Iran.

First, there was the announcement by President Obama, Britain's Prime Minister Gordon Brown and French President Nicholas Sarkozy on September 25 at the G20 summit in Pittsburgh that joint intelligence had proven that Iran has a secret uranium enrichment facility inside a mountain near Qom, a city south of Tehran. The Iranians quickly admitted to the existence of this massive compound but claimed, as usual, that it is solely for domestic energy purposes.

Second, shortly thereafter, The New York Times published an article reporting that staff at the International Atomic Energy Agency (IAEA), the U.N. nuclear oversight group, had produced an unreleased report saying that Iran was much more advanced in its nuclear program than the IAEA had thought previously. According to the report, Iran now has all the data needed to design a nuclear weapon.

Third, was a revelation in the first days of October by the Times of London which reported that Israeli Prime Minister Benjamin Netanyahu traveled to Moscow on September 7 to charge that Russian scientists and engineers are working directly with Iran on its nuclear weapons program. This intelligence suggests that Iran may be much further along in developing nuclear weapons than the international community previously believed.

Obviously, these very latest developments are hugely important and very alarming, especially if it is proven that the Russians are actively assisting Iran in developing nuclear weapons, possibly years ahead of previous intelligence reports. (And don't be surprised that you have not heard about all of this in the mainstream media.)

Whenever it comes to such matters of grave geopolitical importance, I always turn to our good friends at Stratfor.com to get the real story. As long-time readers know, Stratfor is an internationally respected source on geopolitical intelligence. I have quoted Stratfor and its founder Dr. George Friedman many times in the past.

In the pages that follow, I will again quote liberally from Stratfor's latest analysis on the disturbing situation with Iran, the possible Russian involvement in Iran's nuclear program, etc., etc. Suffice it to say that Stratfor now believes the odds of the US going to war with Iran have recently increased exponentially. This is very scary stuff!

I will start with Stratfor's new Forecast for the 4Q, which is most insightful in light of the latest news on Iran. I will follow that with their latest analysis of the very real possibility that Russia is assisting Iran in the development of nuclear weapons, and the likelihood that Iran may be much further ahead than the world has been led to believe.

No conclusion section is needed as the Stratfor articles below are most comprehensive and self-concluding. Let's get right to them, read carefully.

* Note that the bracketed comments within the Stratfor text are mine.

** You have my permission to reprint and/or forward this E-Letter
as you may wish, with proper credit to Stratfor and my company.

STRATFOR QUOTE:

Setting the Stage

Events are taking the fourth quarter of 2009 into new territory. The rising confrontation with Iran has taken center stage as a conflict with global participants and global consequences. As the final quarter of the year dawns, representatives from the world's major countries are meeting in Geneva with their Iranian counterparts. The official goal is to see if sufficient international safeguards can be placed on the Iranian nuclear program. Failure could well lead first to sanctions against Iran, and should those fail, possibly a U.S.-Iranian military confrontation.

At its core, the brewing crisis is this: Israel is too small a territory to tolerate a nuclear-armed Iran, and too militarily weak to guarantee that it can deal with the problem on its own. However, an Israeli strike would certainly generate Iranian retaliation against shipping in the Persian Gulf, which in turn would force the United States to act against Iran directly. So the question in STRATFOR's collective mind is whether or not any concessions Iran grants on its nuclear programs will be sufficient to satisfy Israel's security concerns. The Obama administration is obviously a player, and the onus is on the Americans to act, but the decisions that truly matter will be made in Israel, not the United States.

As goes this crisis, so goes the world.

Russia is attempting to lock down the United States in the Middle East so that Moscow can extend and deepen its efforts to re-create its Soviet-era sphere of influence, particularly in the former Soviet Union. Thus Russia is funneling various forms of assistance, primarily technical cooperation on weapons, energy and nuclear industries, to Iran. It is also making apparent its intent to do an end run around any sanctions the West might impose on Iran. An Iran strong enough and independent enough to keep the United States preoccupied is just what Russia wants.

After the worst recession in a generation, the global economy is on the mend. The ending recession was primarily financial in nature, meaning that it evolved primarily into a crisis of confidence. Confidence requires time to rebuild, and as such the recovery is both shallow and extremely uneven, with some regions as likely to descend back into recession as return to real growth. It is a recovery very vulnerable to disruption. A military confrontation in the Persian Gulf would send shock waves through the system, at a minimum interrupting the flow of Iran's 2.4 million barrels of daily oil exports. That alone would be more than enough to break the recovery's back.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Global Trend: The Iranian Nuclear Crisis

A new topic has rocketed to the top of STRATFOR's international concerns: the possibility of a war between the United States and Iran. There has been much discussion of this topic for years now, and STRATFOR has tended to dismiss it; there is a great chasm between remedial uranium enrichment programs and having a deliverable nuclear weapon. But events in the third quarter added credibility to the scenario. Primarily this is because of Israel. As a small state, Israel is not comfortable pinning its survival on Iran's choices. As Iran's nuclear program matures, Israel is feeling forced to eliminate the threat before it can manifest.

Israel does not have high confidence in the United States' ability to unilaterally remove the threat, but Israel does have the ability to rope the United States into an attack against Iran. Even an ineffectual Israeli strike against Iran would force Iran to respond. Since Iran lacks the ability to respond with a direct attack on Israel, it would likely need to settle for activating Hezbollah in Lebanon, various Shiite factions in Iraq and militant assets in Afghanistan, and attacking energy shipping in the Persian Gulf. This last action in particular would force an American response — perhaps even a pre-emptive one. And if the United States found itself engaging the Iranian military over maritime [Persian Gulf] issues, it would be illogical for the United States to not extend the conflict to Iran's nuclear assets.

The United States would prefer to avoid a war — in fact it would prefer a more cooperative arrangement with Iran in order to ease its exit from Iraq — but Washington understands the inevitability of conflict should Israel feel direly threatened. The opening weeks of the fourth quarter will be dominated by 11th-hour negotiations primarily between but not limited to Washington and Tehran to see if war can be avoided. Washington and its allies will seek formal, transparent oversight for the entire Iranian nuclear program, and failing that, sanctions on the Iranian sector that is most vulnerable to foreign pressure: gasoline imports.

Tehran, thinking (correctly) that the West in general — and U.S. President Barack Obama in particular — does not want a war and that its own retaliatory options are formidable deterrents, will equivocate. Russia, also thinking (correctly) that the West does not want a war and thinking little of Obama, has the option of bolstering Iran in the hopes of keeping U.S. forces tied down in the Middle East. Primarily STRATFOR expects this to take the form of circumventing Western gasoline sanctions — Russia and its allies have plenty of spare refining capacity and sufficient rail connections to backfill Iran's gasoline supply [if the US were to cut it off]. The Russians also retain the critical leverage of following through with a sale of S-300 strategic air defense systems to Iran — though such an action, if discovered in time, also runs the risk of precipitating an Israeli attack.

There is little but diplomacy preventing this conflict from happening. Between the Iraq and Afghan conflicts, the United States has the naval and air assets in the region that would be required for extensive and sustained air strikes against Iran. But both Iran and Russia feel they have the upper hand and both doubt Obama's nerve. Any of the sides could back down — Obama or Iran could flinch, Russia and the United States could strike a deal on sanctions, Israel could decide that Iran is not so far along in its nuclear program — to avert a war. But any of these options would clearly harm the national interests of one of the other players. War is not yet inevitable, but it is looking increasingly likely. [Emphasis added]

Global Trend: The Russian Resurgence

Moscow has been attempting for some time to consolidate its near abroad [Stratfor's term for expanding its sphere of influence] in preparation for the time when the United States is no longer distracted by events in the Middle East. The challenge has been simple: Either convince the Americans that they cannot achieve their ends in the Middle East without Russian assistance (and that the Russians must be amply compensated for their trouble), or ensure that the Americans remain locked down in the Middle East so that Russia can simply impose its will on the former Soviet territory without the threat of U.S. intervention.

The third quarter was when Russia got things done, using a mixture of diplomatic, military, intelligence and economic tools. Russia has managed to soften Azerbaijan, Turkey and Germany's pro-U.S. positions and, if it has not formally added them to the list of countries where Russian power is preeminent, it has at least made them neutral in the competition between Russia and the United States. Russia has persuaded nearly all factions in the Ukrainian political spectrum to favor a Russian-leaning (as opposed to Western-leaning) future and will cement that achievement in the country's January 2010 elections.

Georgia is now isolated, even from the United States. Poland might even be in play now; the American attempt to trade portions of its ballistic missile defense plans for concessions in Iran succeeded only in scaring Poland into believing that the U.S.-Polish alliance was not as strong as it had hoped, forcing Warsaw to re-evaluate its traditional hostility toward Russia and to consider closer integration into the European Union.

So Russia enters the fourth quarter feeling quite confident, if not downright smug. It sees the American [Obama] administration as overconfident, inept and simultaneously unwilling to make any geopolitical trades or commit to a military operation that could force Iran to capitulate. With such a geopolitical position, Russia has a threefold plan.

First, the Russians intend to do anything to ensure that the Americans remain locked in a conflict with Iran — that is, anything that will not cause more problems for Russia in the long run. Dangling nuclear and advanced military technology in front of Tehran without actually delivering it remains a cornerstone of this policy. But more concretely, the Russians are working to undermine any U.S.-led sanctions on Iran before they can get off the ground, and are highly likely to circumvent them directly should the sanctions materialize.

Russia and its near-proxy states of Azerbaijan and Turkmenistan each possess the ability to completely replace all sea-borne gasoline shipments to Iran, and to do so in a way that not even a full naval blockade of the Persian Gulf could stop. The only place where the Russians are likely to take a stance that is not obstructionist will be in Afghanistan, as the Russians do not wish to see the chaos there spread (that the Americans are the bulwark there is simply the icing on the cake). Of course, Moscow is willing to abandon all its plans for Iran in a heartbeat should Washington pay the right price to Russia.

Second, the Russians are putting the finishing touches on wrapping up their near abroad [expanding its sphere of influence]. Ukraine will remain chaotic (as always) but Russia is working to break up and perhaps even excise any remaining pro-Western power centers there. Pressure on Georgia is once again intensifying from "merely" economic and political to military, with naval forces now actively patrolling the coast of Abkhazia, one of Georgia's Russian-backed breakaway provinces. Russian troops will also be inserted into strategic locations in the former Soviet Central Asian states to limit American access, to lock down the allegiance of those states and also to prevent the region's would-be hegemon — Uzbekistan — from trying anything…

Two Leaks and the Deepening Iran Crisis

Two major leaks occurred this weekend [the weekend of October 2-4] over the Iran matter.

In the first, The New York Times published an article reporting that staff at the International Atomic Energy Agency (IAEA), the U.N. nuclear oversight group, had produced an unreleased report saying that Iran was much more advanced in its nuclear program than the IAEA had thought previously. According to the report, Iran now has all the data needed to design a nuclear weapon. [Emphasis added.] The New York Times article added that U.S. intelligence was re-examining the National Intelligence Estimate (NIE) of 2007, which had stated that Iran was not actively pursuing a nuclear weapon.

The second leak occurred in the British daily The Times, which reported that the purpose of Israeli Prime Minister Benjamin Netanyahu's highly publicized secret visit to Moscow on Sept. 7 was to provide the Russians with a list of Russian scientists and engineers working on Iran's nuclear weapons program.

The second revelation was directly tied to the first. There were many, including STRATFOR, who felt that Iran did not have the non-nuclear disciplines needed for rapid progress toward a nuclear device. Putting the two pieces together, the presence of Russian personnel in Iran would mean that the Iranians had obtained the needed expertise from the Russians. It would also mean that the Russians were not merely a factor in whether there would be effective sanctions but also in whether and when the Iranians would obtain a nuclear weapon.

We would guess that the leak to The New York Times came from U.S. government sources, because that seems to be a prime vector of leaks from the Obama administration and because the article contained information on the NIE review. Given that National Security Adviser James Jones tended to dismiss the report on Sunday television, we would guess the report leaked from elsewhere in the administration.

The Times [of London] leak could have come from multiple sources, but we have noted a tendency of the Israelis to leak through the British daily on national security issues. (The article contained substantial details on the visit [Netanyahu visit to Moscow on September 7] and appeared written from the Israeli point of view.) Neither leak can be taken at face value, of course. But it is clear that these were deliberate leaks — people rarely risk felony charges leaking such highly classified material — and even if they were not coordinated, they delivered the same message, true or not.

The Iranian Time Frame and the Russian Role

The message was twofold. First, previous assumptions on time frames on Iran are no longer valid, and worst-case assumptions must now be assumed. The Iranians are in fact moving rapidly toward a weapon; have been extremely effective at deceiving U.S. intelligence (read, they deceived the Bush administration, but the Obama administration has figured it out); and therefore, we are moving toward a decisive moment with Iran.

Second, this situation is the direct responsibility of Russian nuclear expertise. Whether this expertise came from former employees of the Russian nuclear establishment now looking for work, Russian officials assigned to Iran or unemployed scientists sent to Iran by the Russians is immaterial. The Israelis — and the Obama administration — must hold the Russians responsible for the current state of Iran's weapons program, and by extension, Moscow bears responsibility for any actions that Israel or the United States might take to solve the problem.

We would suspect that the leaks were coordinated. From the Israeli point of view, having said publicly that they are prepared to follow the American lead and allow this phase of diplomacy to play out, there clearly had to be more going on than just last week's Geneva talks. From the American point of view, while the Russians have indicated that participating in sanctions on gasoline imports by Iran is not out of the question, Russian President Dmitri Medvedev did not clearly state that Russia would cooperate, nor has anything been heard from Russian Prime Minister Vladimir Putin on the subject. The Russian leadership appears to be playing "good cop, bad cop" on the matter, and the credibility of anything they say on Iran has little weight in Washington.

It would seem to us that the United States and Israel decided to up the ante fairly dramatically in the wake of the Oct. 1 meeting with Iran in Geneva. As IAEA head Mohamed ElBaradei visits Iran, massive new urgency has now been added to the issue. But we must remember that Iran knows whether it has had help from Russian scientists; that is something that can't be bluffed.

Given that this specific charge has been made — and as of Monday not challenged by Iran or Russia — indicates to us more is going on than an attempt to bluff the Iranians into concessions. Unless the two leaks together are completely bogus, and we doubt that, the United States and Israel are leaking information already well known to the Iranians. They are telling Tehran that its deception campaign has been penetrated, and by extension are telling it that it faces military action — particularly if massive sanctions are impractical because of more Russian obstruction.

If Netanyahu went to Moscow to deliver this intelligence to the Russians, the only surprise would have been the degree to which the Israelis had penetrated the program, not that the Russians were there. The Russian intelligence services are superbly competent, and keep track of stray nuclear scientists carefully. They would not be surprised by the charge, only by Israel's knowledge of it.

This, of course leaves open an enormous question. Certainly, the Russians appear to have worked with the Iranians on some security issues and have played with the idea of providing the Iranians more substantial military equipment. But deliberately aiding Iran in building a nuclear device seems beyond Russia's interests in two ways. First, while Russia wants to goad the United States, it does not itself really want a nuclear Iran. Second, in goading the United States, the Russians know not to go too far; helping Iran build a nuclear weapon would clearly cross a redline, triggering reactions.

A number of possible explanations present themselves. The leak to The Times might be wrong. But The Times is not a careless newspaper: It accepts leaks only from certified sources. The Russian scientists might be private citizens accepting Iranian employment. But while this is possible, Moscow is very careful about what Russian nuclear engineers do with their time. Or the Russians might be providing enough help to goad the United States but not enough to ever complete the job. Whatever the explanation, the leaks paint the Russians as more reckless than they have appeared, assuming the leaks are true.

And whatever their veracity, the leaks — the content of which clearly was discussed in detail among the P-5+1 [US, UK, France, Germany, Russia, China] prior to and during the Geneva meetings, regardless of how long they have been known by Western intelligence — were made for two reasons. The first was to tell the Iranians that the nuclear situation is now about to get out of hand, and that attempting to manage the negotiations through endless delays will fail because the United Nations is aware of just how far Tehran has come with its weapons program.

The second was to tell Moscow that the issue is no longer whether the Russians will cooperate on sanctions, but the consequence to Russia's relations with the United States and at least the United Kingdom, France and, most important, possibly Germany. If these leaks are true, they are game changers. [Emphasis added.]

We have focused on the Iranian situation not because it is significant in itself, but because it touches on a great number of other crucial international issues. It is now entangled in the Iraqi, Afghan, Israeli, Palestinian, Syrian and Lebanese issues, all of them high-stakes matters. It is entangled in Russian relations with Europe and the United States. It is entangled in U.S.-European relationships and with relationships within Europe. It touches on the U.S.-Chinese relationship. It even touches on U.S. relations with Venezuela and some other Latin American countries. It is becoming the Gordian knot of international relations.

STRATFOR first focused on the Russian connection with Iran in the wake of the Iranian elections and resulting unrest, when a crowd of Rafsanjani supporters began chanting "Death to Russia," not one of the top-10 chants in Iran. That caused us to focus on the cooperation between Russia and Iranian President Mahmoud Ahmadinejad and Supreme Leader Ayatollah Ali Khamenei on security matters.

We were aware of some degree of technical cooperation on military hardware, and of course on Russian involvement in Iran's civilian nuclear program. We were also of the view that the Iranians were unlikely to progress quickly with their nuclear program. We were not aware that Russian scientists were directly involved in Iran's military nuclear project, which is not surprising, given that such involvement would be Iran's single-most important state secret — and Russia's, too.

A Question of Timing

But there is a mystery here as well. To have any impact, the Russian involvement must have been under way for years. The United States has tried to track rogue nuclear scientists and engineers — anyone who could contribute to nuclear proliferation — since the 1990s. The Israelis must have had their own program on this, too. Both countries, as well as European intelligence services, were focused on Iran's program and the whereabouts of Russian scientists. It is hard to believe that they only just now found out. If we were to guess, we would say Russian involvement has been under way since just after the Orange Revolution in Ukraine [late 2004-early 2005], when the Russians decided that the United States was a direct threat to its national security.

Therefore, the decision suddenly to confront the Russians, and suddenly to leak U.N. reports — much more valuable than U.S. reports, which are easier for the Europeans to ignore — cannot simply be because the United States and Israel just obtained this information. The IAEA, hostile to the United States since the invasion of Iraq and very much under the influence of the Europeans, must have decided to shift its evaluation of Iran. But far more significant is the willingness of the Israelis first to confront the Russians and then leak about Russian involvement, something that obviously compromises Israeli sources and methods. And that means the Israelis no longer consider the preservation of their intelligence operation in Iran (or wherever it was carried out) as of the essence.

Two conclusions can be drawn. First, the Israelis no longer need to add to their knowledge of Russian involvement; they know what they need to know. And second, the Israelis do not expect Iranian development to continue much longer; otherwise, maintaining the intelligence capability would take precedence over anything else.

It follows from this that the use of this intelligence in diplomatic confrontations with Russians and in a British newspaper serves a greater purpose than the integrity of the source system. And that means that the Israelis expect a resolution in the very near future — the only reason they would have blown their penetration of the Russian-Iranian system.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Possible Outcomes

There are two possible outcomes here. The first is that having revealed the extent of the Iranian program and having revealed the Russian role in a credible British newspaper, the Israelis and the Americans (whose own leak in The New York Times underlined the growing urgency of action) are hoping that the Iranians realize that they are facing war and that the Russians realize that they are facing a massive crisis in their relations with the West. If that happens, then the Russians might pull their scientists and engineers, join in the sanctions and force the Iranians to abandon their program.

The second possibility is that the Russians will continue to play the spoiler on sanctions and will insist that they are not giving support to the Iranians. This leaves the military option, which would mean broad-based action, primarily by the United States, against Iran's nuclear facilities. Any military operation would involve keeping the Strait of Hormuz clear, meaning naval action, and we now know that there are more nuclear facilities [in Iran] than previously discussed. So while the war for the most part would be confined to the air and sea, it would be extensive nonetheless.

Sanctions or war remain the two options, and which one is chosen depends on Moscow's actions. The leaks this weekend have made clear that the United States and Israel have positioned themselves such that not much time remains. We [STRATFOR] have now moved from a view of Iran as a long-term threat to Iran as a much more immediate threat thanks to the Russians. [Emphasis added]

The least that can be said about this is that the Obama administration and Israel are trying to reshape the negotiations with the Iranians and Russians. The most that can be said is that the Americans and Israelis are preparing the public for war. Polls now indicate that more than 60 percent of the U.S. public now favors military action against Iran. From a political point of view, it has become easier for U.S. President Barack Obama to act than to not act. This, too, is being transmitted to the Iranians and Russians.

It is not clear to us that the Russians or Iranians are getting the message yet. They have convinced themselves that Obama is unlikely to act because he is weak at home and already has too many issues to juggle. This is a case where a reputation for being conciliatory actually increases the chances for war. But the leaks this weekend have strikingly limited the options and timelines of the United States and Israel. They also have put the spotlight on Obama at a time when he already is struggling with health care and Afghanistan. History is rarely considerate of presidential plans, and in this case, the leaks have started to force Obama's hand.

END QUOTE

This is quite a LOT to think about, but think about it we must. It will not go away anytime soon, so I will revisit this issue in upcoming E-Letters. Sorry to add something else to our worry list.

As always, my personal thanks extend to Dr. George Friedman and Stratfor for allowing us to reprint their always insightful analyses from time to time. Be sure to visit their website at www.stratfor.com and consider subscribing.

Very best regards,

Gary D. Halbert

Healthcare Reform or Government Takeover?

Gary D. Halbert — Tue, 22 Sep 2009 20:54:00 GMT

In This Issue:

Reactions to the President's Healthcare Speech
Omissions & Falsehoods In President Obama's Healthcare Speech
A Re-Run of Clinton Nationalized Healthcare?
Conclusions - So What Should We Think Now?

Introduction

President Obama addressed a rare joint session of Congress on September 9 when he spoke at length about his desire to substantially reform America's healthcare system. Whether you are among the apprx. 56% of Americans who now oppose the healthcare reform bill in the House, or you are among the apprx. 43% who support it (latest Rasmussen poll), it is important to know the facts - a number of which the president failed to address or misrepresented in his speech.

With opposition to the House healthcare reform bill rising almost daily over the last month or so, there was great anticipation ahead of the president's speech. Many in the media commented that Mr. Obama needed to "hit it out of the park," and that the speech needed to be a "game-changer." Politicos on both sides of the aisle agreed afterward that the speech was delivered extremely well. Unfortunately, it raised more questions than answers.

Many thought the president would soften his recent healthcare rhetoric and reach out to Republicans and Independents. He didn't. He chose instead to shore up his base. Many thought he would compromise on the so-called "public option." He didn't, exactly. And while President Obama's approval ratings rose a few points just after the speech, opposition to the Democrats' healthcare reform bill has soared to new highs since then.

While I have refrained from writing at length on the healthcare reform debate, I feel the issue is just too important, and too politically charged, not to speak out. In the pages that follow, we will delve into some of the biggest problems and challenges with the House healthcare bill, H.R. 3200 - America's Affordable Health Choices Act of 2009. Given that there is so much misinformation on healthcare reform out there, on both sides, maybe this will help.

Reactions to the President's Speech

As noted above, the immediate reactions to the president's healthcare speech on September 9 were almost unanimously favorable. There is no question that Mr. Obama is a great orator. But the real question is whether the president changed enough minds to breathe new life into the struggling healthcare reform bill stuck in Congress To my surprise, George Stephanopoulos of ABC news (and a former Clinton aide) wrote a column entitled "Obama Speech No Game-Changer" soon after the speech.

Whether you liked or disliked the president's speech, it did change some minds favorably, but for only a few days. A Rasmussen poll released a few days after the speech showed that, for the first time, a slim majority - 51% - of Americans favored the Democrats' healthcare plan, while 46% opposed it. But those approval numbers began to fall significantly last week. This from Rasmussen on September 16, one week after the speech:

One week after President Obama's speech to Congress, opposition to his health care reform plan has reached a new high of 55%. The latest Rasmussen Reports daily tracking poll shows that just 42% now support the plan, matching the low first reached in August. [As noted above, the latest numbers this week are 56% opposed and 43% in favor.]

Just a few days earlier, Rasmussen's poll showed that those who "strongly favor" the plan were at 28%, while those who "strongly oppose" were at 38%. Now, two weeks after President Obama's speech, the latest numbers are only 23% strongly favor the plan and 44% strongly oppose it. This is very bad news for Team Obama.

Conclusion: President Obama gave a great speech, as he is known to do, and it helped the healthcare ratings for a week or so. But the reality is that a majority of Americans do not want this government healthcare plan, and that number is likely to rise even more as people learn more about the Democrats' plan.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Misrepresentations, Omissions & Falsehoods
in President Obama's Healthcare Speech

The number one problem with the Democrats' massive healthcare reform proposal is a simple matter of supply/demand. There is no way to provide healthcare insurance and coverage to 46 million people who do not currently have coverage, with the same number of doctors, nurses and hospitals/clinics, without rationing healthcare. Even if the number is half that, some 23 million people (or even just 15-20 million as some argue), the problem is still the same.

The law of supply and demand also dictates that if we substantially increase the number of Americans covered (demand) with the same number of doctors, nurses and hospitals/clinics (supply), the cost of healthcare will increase, perhaps significantly, unless there is rationing. We must look no further than Canada or Great Britain to see how this will happen.

The question at the end of the day is, why can't the president and the Democrats just admit that there will be rationing and just be straight with the American people? In all of his healthcare speeches, President Obama totally avoids this simple supply/demand fact. The president wants us to believe that we can insure and provide healthcare to at least 15-20 million more Americans and actually spend less. No wonder that millions of Americans are up in arms over this!

Some observers have called this a "convenient fantasy" on the part of President Obama and the Democrats. How are we are going to save money by spending a lot more money - $1 to $2 trillion over the next ten years? How are we are going to solve our exploding fiscal problems with a massive new federal bureaucracy that will control at least one-sixth of the national economy going forward?

President Obama claims that the new government-run healthcare system "won't add one dime to the deficit." Unfortunately, presidential administrations and Congress are notoriously bad at forecasting the costs of their pet projects, especially entitlement programs that are intended to be permanent.

President Bush's Medicare Prescription Drug program is a perfect example. When it was passed in 2003, the White House and the Congressional Budget Office forecast that it would cost apprx. $400 billion over 10 years. Guess what - the CBO now projects it to cost $1.2 trillion over 10 years. Do we really think Congress and Obama's cost forecasts are any better? I doubt it!

Obama says the government will guarantee that you can keep your current insurance, even though his healthcare plan would encourage your employer to stop offering it; and when they do, you will have no option except the government-run plan. The same is true should you get fired or decide to change jobs - the government-run option is the only option in H.R. 3200.

In addition, he says we aren't going to insure any illegal aliens; however, in H.R. 3200 passed by the House Committee on Education and Labor, there were no citizenship verification provisions to assure that illegals can't apply and get benefits. Yet President Obama promises that the new healthcare plan will only cover American citizens. (Maybe he plans to make them all citizens - amnesty - before the new system goes in place - think about it.)

At one point during his healthcare speech to a joint session of Congress, President Obama drew cackles for remarking that "there remain some significant details to be ironed out." No kidding! Here again, Obama delivered a message that was strikingly similar to the one that has failed to resonate with the American people thus far. The reason is that while Obama can paper over political and policy realities by speaking in broad strokes, it's always the specifics that have caused him problems. Healthcare is too big not to nail down the specifics!

As he has done before, Obama pledged to veto any bill that added to the federal deficit. But despite that commitment, the Congressional Budget Office projected that the House Democrats' healthcare reform plan would cost over $1 trillion over the next decade and add a minimum of $239 billion to the deficit.

Obama again touted the cost-saving potential of "preventive care." Here, too, the independent Congressional Budget Office has determined that preventive measures would actually increase health care costs, and that a so-called Medicare Commission that Mr. Obama has suggested would have a negligible impact on curbing government healthcare spending. Why are the president and the Congress ignoring these warnings from the independent CBO?

Back in May, President Obama went before the American Medical Association and declared, "No matter how we reform health care, we will keep this promise to the American people: If you like your doctor, you will be able to keep your doctor, period. If you like your health care plan, you'll be able to keep your health care plan, period. No one will take it away, no matter what." He has made this exact claim in numerous other healthcare speeches.

In his latest speech before Congress on September 9, Obama offered a more nuanced pledge that "nothing in this plan will require you or your employer to change the coverage or the doctor you have." As noted above, this is simply not true if you lose your current coverage for any reason under H.R. 3200.

Regardless of whether or not the proposed healthcare legislation specifically requires that Americans give up their private coverage, there are still many changes to the system that could cause many people to lose it anyway. For instance, one provision Obama backed in his latest speech - to tax expensive health plans - is explicitly aimed at encouraging employers to drop benefit-rich policies in hopes that it would help rein-in medical spending (ie - rationing).

At another point in his recent healthcare speech, Obama said that, "The middle-class will realize greater security, not higher taxes." How does this jibe with the preceding sentence in the paragraph just above? Then, at another point in his latest speech Obama gave an unwavering endorsement of a requirement that individuals either purchase health insurance, or pay a tax.

Under the Senate version of healthcare reform/mandate proposed by Senate Finance Committee Chairman Max Baucus (D-MT), individuals would face a tax of at least $750 annually if they do not purchase health coverage. How is this "greater security, not higher taxes"?

And while the Baucus healthcare proposal would provide subsidies to lower-income Americans, those subsidies would stop at 300% of the federal poverty level. What that means is that a family of four with a household income above $66,150 would face a tax of $3,800 if they do not obtain health insurance, while individuals with income above $32,490 would face a tax of $950. Yet Obama argues that this is not a "tax," if it's something that is good for you. Yeah, right!

This is a problem that Obama himself noted when he was campaigning against Hillary Clinton back when he said he opposed such mandates. In a February 2008 debate referring to healthcare reform, he said, "In some cases, there are people who are paying fines and still can't afford it, so now they're worse off than they were. They don't have health insurance and they're paying a fine." He was referring to conditions under a similar healthcare mandate in Massachusetts.

During his speech two weeks ago, Obama advocated the creation of a plan to be offered on a government-run insurance exchange that would be "administered by the government just like Medicaid or Medicare." He said that the reason we need such an option is that, "by avoiding some of the overhead that gets eaten up at private companies by profits, excessive administrative costs and executive salaries, it could provide a good deal for consumers."

Yet later in the same speech, he argued that he could pay for most of his proposal with cuts to Medicare that would not have any impact on benefits to seniors. Say what? The reason, he explained, is that we could save money by reducing "the hundreds of billions of dollars in waste and fraud…" in Medicare - the very government-run program he touts as a model for the creation of a new government-run healthcare program. Do they really think we are that stupid?

While acknowledging that the new plan would be run by the government, Obama tried to argue that it wouldn't be subsidized by taxpayers, but only funded by the premiums it collects. Sorry, but I must point out that any new government plan would require taxpayer money to fund huge start-up costs - at the least, and should it run into financial trouble, it's hard to believe that lawmakers would allow it to fail without pumping taxpayer money into it, just as they did in the cases of Fannie Mae and Freddie Mac (and those were allegedly private companies).

President Obama speaks in such broad circles and contradictions. You can keep your current plan and doctors, but not really; your taxes will not go up, but they probably will have to; we won't cover illegals, but there's no way not to; etc., etc. No wonder the number of Americans who oppose government-run healthcare is now at a record high - 56%!

A Re-Run of Clinton Nationalized Healthcare?

A recent article on Forbes.com, just after the president's latest speech before Congress, caught my attention and further explained the current healthcare debate as follows:

Before a tense and packed House, the President told Congress:

‘Millions of Americans are just a pink slip away from losing their health insurance, and one serious illness away from losing all their savings... And in spite of all this, our medical bills are growing at over twice the rate of inflation...'

That's President Clinton, sixteen years ago almost to the day, in a speech about a complex health-care plan built on government expansion, with billions in hidden costs. Last night, a President--who was only 32 then--is now in the White House, out to prove that nothing has changed in the minds of the Democratic leadership since the Clinton debacle.

President Clinton's health-care legislation didn't fail in 1994 because people didn't want better health care. The White House plan failed because it was too bureaucratic, too complicated, and too expensive.

Last night, President Obama's response to sixteen years (and one angry August recess) worth of bi-partisan doubt was to double down and bet even more political capital on the same approach. It's as if he expected Americans to tune in, and suddenly realize their mistake.

This was supposed to be the Administration of the post-partisan rational center. Arguments were supposed to work with this White House. While many critics of President Obama's health-care plan have been too extreme, some rational criticism should have broken through. The speech was brilliant--unless you've actually read the [healthcare] legislation behind it, which contradicts many of the President's restated "commitments."

Last night, the President said that, "Nothing in this plan will require you or your employer to change the coverage or the doctor you have." Countless observers have already shown that this is not true, as proposed new regulations mandating a whole range of benefits, setting community rating schemes, and banning individual incentives will radically change many existing plans.

Last night, the President said his reforms would fight rising costs, not add to the deficit, and reduce government waste. Countless observers have already shown that the President is wrong, among them the Congressional Budget Office, which calculates that the plan will increase costs and explode the deficit. And, as I observed in the Washington Examiner, government waste will grow under ObamaCare, since the House bill creates a sea of new Washington-based programs, offices, and bureaucracies (53, by one count) to micro-manage your health insurance, your hospital, and even your family doctor.

Last night, the President said competition from a government-run insurance plan was needed to "give Americans a choice." And the President has been shown to be wrong there, too. Federal employees have over 230 private alternatives to choose from in their existing health exchange…; a public plan would just add one new option (a government financed and price controlled one, at that). [Emphasis added, GDH.]

It's not that President Obama wants to turn the health-care policy clock backwards sixteen years. It's worse than that. It's as though the last sixteen years never even happened. It's like a health-care Groundhog Day where Americans wake up to the same tired arguments for government-run care every morning, simply because Democratic Presidents can't resist testing the same pick-up lines on an unwilling America.

And the lines are wearing thin. The President (yes, Obama this time) told Congress that "our collective failure to meet this challenge--year after year, decade after decade--has led us to a breaking point." Has it really? When President Clinton conjured similar fears about pink slips and millions losing coverage to Congress in 1993, 15.3% of Americans were uninsured. In 2007, the percentage of Americans without insurance was...15.3%. A solution to this problem is needed, but the fact that it hasn't grown worse is a sign that Congress has time to think, and little reason to panic.

Since President Clinton spoke of health inflation in 1993, health costs continued to rise faster than wages, but President Obama refuses to acknowledge years later that the U.S. health inflation rate is almost identical to rates in government-run systems [in other countries]. Rising costs must be attacked, yes, but if rationed health management can't stop health inflation in Britain or Ireland, will a rush to President Obama's version of HillaryCare do any better?

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions - So What Should We Think Now?

Some surveys indicate that a majority of Americans think we need reform of our healthcare system. This explains, in part, why President Obama and the Democrats are so hell-bent on passing a massive overhaul of our healthcare system this year. Yet plenty of other surveys show that appx. 80% of Americans are happy with the healthcare insurance and care they have now. So what gives?

What gives is that liberal presidents dating back to Theodore Roosevelt have tried to nationalize healthcare, and every attempt has failed. The simple fact is that virtually all Americans would favor healthcare that costs less - what else is new? Likewise, a majority of Americans would like to see healthcare insurance available to everyone - somehow.

But as has been consistent for over 100 years, a majority of Americans do not want to see the federal government take over healthcare - doctors, nurses, hospitals, etc. - and be in a position to mandate what care we can and cannot receive.

The problem is, the current president and the Democrats in the majority in Washington feel otherwise. They see government-run healthcare as a giant power grab, as I have discussed previously. They believe that the government is a better arbiter of our healthcare needs than we are. And they see Obama's presidency as the best opportunity they have had in years to ram it down our throats, even if it means by a simple Democrat majority "reconciliation" (51%), which they just might be arrogant enough to pull off. Nancy Pelosi and Harry Reid have all but promised to do this if necessary to pass their healthcare plan.

On most political issues, I would argue that the party in power should go ahead and try to ram it down our throats, and suffer the political backlash in the next election, in this case the 2010 mid-terms and the 2012 general elections. But when it comes to healthcare reform, if it passes, there is almost no chance to roll it back once it is in place. This is precisely why the Democrats don't want their takeover of healthcare to be implemented until 2013!

President Obama and the Democrats in Washington know this. They thought they had it during President Clinton's administration, but the American people fought back and stopped it. Now they see their odds even better with President Obama in office, although public opposition is now growing daily, 56% oppose/43% approve as this is written. So, it remains to be seen what will happen this year.

As it stands now, most of the political observers I read believe that some form of government-run healthcare will pass this year or next under President Obama. Even some moderate to conservative analysts I read have concluded that the time has come to provide some form of health insurance to all Americans. But the question is, as always, how to pay for it?

Sadly, I have not seen a single comprehensive healthcare reform proposal from the Republicans or other non-Democratic groups, and that disappoints me greatly. Streamlining the complex insurance licensing process so that insurance companies can offer policies across all state lines is not being discussed, in what would seem to be a slam-dunk starter for reforming healthcare.

Likewise, letting small businesses band together to buy insurance to cut costs is not on the table. Serious medical malpractice (tort) reform is also AWOL. Providing tax credits/subsidies for low-income Americans to purchase health insurance is not on the table either.

Plus, if we can reform Medicare and trim hundreds of billions in waste, as President Obama suggests, why not do that now and use those savings to subsidize health insurance for low income Americans?

I am also puzzled as to the rush to pass healthcare reform at any cost. We're talking about reforming an industry that makes up 16-17% of the world's largest economy. Doesn't that merit taking the time necessary to do it right? Evidently not, if you're a Democrat.

At the end of the day, I just don't get it. Have we reached the point where there is no alternative to a massive government-run healthcare system? I don't think so. But it remains to be seen if we can derail the Democrats' plans for nationalized healthcare.

Finally, I recognize that this has been a polarizing editorial on my part. I will get roundly criticized for it by my moderate/liberal readers, and those who favor government-run healthcare, which I can handle as always. But the issue of nationalized healthcare is just too important for all of us - and for the economy - for me to remain silent.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Has Obama misread the tea leaves? (excellent read!)
http://www.realclearpolitics.com/articles/2009/09/10/the_goldilocks_principle_in_american_politics_98233.html

Does Obama lie?
http://www.realclearpolitics.com/articles/2009/09/18/does_he_lie_98363.html

Obama omits crucial details on healthcare
http://article.nationalreview.com/?q=ZTI2YmFlYmVkYjgwZmQ0NTk2MjUzNzZhYTgyOTVmMTY=

Federalization of college loans teaches health care lesson
http://washingtontimes.com/news/2009/sep/18/back-door-to-a-public-option/

Support Wanes For Obama's Huge Stimulus Plan

Gary D. Halbert — Tue, 10 Feb 2009 22:01:58 GMT

IN THIS ISSUE:

Public Support For Trillion Dollar Stimulus Plunges
Senate Passes $838 Billion "Stimulus" Package
Republicans' Propose Alternative Stimulus Package
Problems With Obama's Trillion Dollar "Stimulus"
Final Stimulus Bill Will Be Higher Than $838 Billion
Frustrated Obama Says Spending IS Stimulus
50% of Americans May Pay Zero Income Taxes
Geithner Announces $2-$3 Trillion To Rescue Credit Markets

Introduction

Our new president called upon Congress to come up with a giant stimulus package. And there was never any doubt that the members of the House and the Senate would deliver. There's little in life they enjoy more than spending our money! The huge stimulus bill passed in the House on January 28, and the one the Senate passed today will cost American taxpayers over $1 trillion including interest.

Public support for the so-called "stimulus" plan was at 75% just a couple of weeks ago as reported by Gallup. However, as the American people got a good look at the massive $820 billion package passed by the House, and saw that apprx. two-thirds of the money would be spent on liberal spending programs rather than stimulus, support plummeted. As this is written public support for the huge rescue package is down to only 37% and falling.

Republicans introduced alternative spending packages in the Congress that were smaller and included a much higher percentage of stimulus versus spending, but they were ignored by the Democrats who were determined to pass their much larger, pork-laden bills.

It may surprise long-time readers that my oldest and most respected source for economic and market forecasts actually agrees that the government should pass a huge stimulus bill, and even a lot more if necessary to head-off deflation. They agree with the "Bad Bank" plan I discussed last week, whereby the government would reportedly loan banks up to $2 trillion as well as taking "toxic assets" off the banks' hands. In fact, they think the government should do whatever it takes to get the credit markets functioning again, including insuring bank loans if necessary, and it should do it sooner rather than later.

Whether we believe the bailouts and the stimulus package(s) are going to be a colossal failure that could lead to hyperinflation, or whether we believe they are likely to work – it doesn't matter. President Obama got his way, and we are about to see the largest government bailout in world history.

Public Support For Trillion Dollar Stimulus Plunges

Given the business I am in, I get lots of questions from friends, relatives and business associates about the huge bailouts and stimulus packages in the wake of the recession, the financial crisis and historic stock market meltdown last fall. Interestingly, almost everyone I talk to is against the government bailouts to banks, investment houses, AIG, automakers and the like. And now that President Obama and Congress are hell-bent on a new trillion dollar "stimulus" package, most people I talk to are livid!

But while most people I talk to are opposed to the bailouts, Obama had widespread public support for a large stimulus package just a few weeks ago. A Gallup poll in late January found that 75% of Americans polled wanted Congress to pass a big economic stimulus package. Yet that was before the House of Representatives passed its $820 billion "stimulus package" on January 28.

Many Americans who had been for a big stimulus package were not happy when they learned that almost two-thirds of the House bill was mostly pork-barrel spending, while only apprx. one-third went for tax cuts. Many in the national press are already referring to the bill as the "SPENDULUS" package.

As of late last week, the latest Rasmussen poll found that public support for the rescue package had plunged to only 37% for the bill and 43% opposed! Public support is falling by the day, and Rasmussen reported yesterday (Monday) that 62% of Americans now want more tax cuts and less spending in the stimulus bill. That explains why President Obama pulled out all the stops last week to get it passed quickly in the Senate, which will apparently happen later today.

Senate Passes $838 Billion "Stimulus" Package

Last Friday night, a compromise (if we can call it that) was reached between Senate Democrats and the three "moderate" (read: liberal) Senate Republicans: Olympia Snowe (R-Maine), Susan Collins (R- Maine) and Arlen Specter (R-Pennsylvania). Why they switched and agreed to vote for the Senate stimulus bill at the last moment is not known, as their meeting with Democrats was behind closed doors. But it is no surprise that these three "RINOs" (Republicans In Name Only") voted with the Democrats to give them a filibuster-proof 61 votes to enable passage of the Senate stimulus package.

As veteran political observers knew, the final Senate stimulus package would not be far from the House version – that's just how things work in Congress. Both the House and Senate Democrats wanted to give President Obama something in the ballpark of what he asked for, and they did, as they are in the majority, with a little help from the three liberal Republican senators noted above.

The Senate stimulus bill came in at apprx. $780 billion as a baseline, plus several amendments passed earlier to add another $55-$60 billion or more to the final price tag. While the final number is not yet clear as I hit the "send" button, it is estimated to be apprx. $838 billion, slightly higher than the House version.

The Senate version, we are told, has a slightly larger portion devoted to tax cuts, and a slightly lower portion going to spending programs than the House bill. Supposedly, the Senate version has apprx. 40% in tax cuts and apprx. 60% in spending programs, versus apprx. 33% and 66% in the House version, respectively.

The bottom line is, President Obama asked for, and the Congress provided, the largest spending bill in the history of the world by far, even though no one on the planet knows if it will work. And there is another $3 trillion on the way, as I will discuss at the end.

Now the US is committed to spending well over one trillion dollars (including interest) over the next several years on an economic rescue package, with no assurance that it will work.

Senate Stimulus Amendment To Help Automakers

Last Tuesday, the Senate passed an amendment aimed at helping both automakers and car buyers that will be a part of the $838 billion stimulus package. The amendment would allow most car buyers to claim an income tax deduction for the cost of automobile sales taxes and interest payments on car loans.

The amendment would permit qualified car buyers to deduct the sales tax on the purchase of new cars up to $49,500 in price. Individuals with incomes of up to $125,000 and couples earnings as much as $250,000 could qualify, including those who do not itemize their deductions. This tax break applies to new car purchases between last November 12, 2008 and Dec. 31, 2009. The cost is estimated at $11 billion.

While this amendment was hailed as a tax cut for consumers, it was probably more intended to help the struggling automakers and their union workers. Of course, there is no guarantee that car buyers will "Buy American."

Republicans' Proposed Alternative Stimulus Packages

As I wrote last week, the giant stimulus package requested by President Obama and drafted and passed by the House totaled appx. $820 billion. Unfortunately, the bill included only about one-third in tax cuts (stimulus) and two-thirds in pork barrel spending, with relatively little for "infrastructure" projects. So much for Obama's campaign promise to end wasteful spending in Washington!

The Senate stimulus bill, by comparison, includes apprx. 40% for tax cuts and apprx. 60% for spending programs. While an improvement, the Senate bill still has well over half of the money going to spending projects, with less than half going to direct stimulus in the form of tax cuts.

Given the very negative reactions to the bill proposed and eventually passed by the House, some Senate Republicans offered alternative stimulus bills of their own. One Republican group headed by Senator Mel Martinez (R-FL) introduced an alternative stimulus plan with a price tag of apprx. $713 billion. The proposal included $430 billion in tax cuts, $114 billion for infrastructure projects, $138 billion for extending unemployment insurance, food stamps and other provisions to help those in need and $31 billion to address the housing crisis.

All of these are expenditures that would directly help Americans. This Republican plan would direct 60% of the funds to tax breaks, whereas the Congressional Democrats' plans have only 33% or 40% going for tax breaks. The McCain alternative plan directed nearly 80% of the money to tax cuts as I will discuss below.

The Democrats' $820 billion House bill included apprx. $550 billion in spending that is reportedly divided among these areas: $142 billion for education and labor, $111 billion for health care, $90 billion for infrastructure, $72 billion for aid and benefits, $54 billion for energy, $16 billion for science and technology and only $13 billion for housing. Clearly, the Martinez-sponsored GOP stimulus plan would be preferable to the version passed by the House and the Senate bill that will be voted on later today.

Another alternative stimulus plan was offered by a Republican group headed by Senators John McCain and Lindsey Graham. Their alternative stimulus package totaled apprx. $445 billion and was heavily slanted toward tax cuts that I believe make much more sense than either the House or Senate bills.

The McCain plan would cut in half the payroll tax for all U.S. employees for one year to 3.1% at a cost of $165 billion. It would lower the 10% income tax bracket to 5% and the 15% bracket to 10% for one year at a cost of $60 billion. Slash the corporate tax rate to 25% from 35% percent for a year and drop the rate for small businesses filing as individuals to 25% from 35%, all at a cost of $50 billion.

The McCain alternative would also offer homebuyers a tax credit of $15,000 or 10% of the home purchase price, whichever is less, starting immediately at a cost: $20.4 billion. The plan would also extend unemployment insurance benefits and food stamps through 2009 and eliminate taxes on unemployment benefits for the same time period at a cost of $48.15 billion. The plan also includes $11 billion to discourage mortgage servicers and lenders from executing home foreclosures, beginning immediately.

Thus, over $356 billion – or almost 80% - of the $445 billion in the McCain plan would be spent for meaningful tax cuts and other benefits to individuals, and these things would happen in the first year.

The remainder of the $445 billion would be spent on building and repairing roads and bridges ($65 billion), improve, repair and modernize Defense Department facilities, and order and/or repair equipment, vehicles, material and ammunition for combat troops ($17 billion). It also includes $4.1 billion for public transportation systems, airport improvements and other infrastructure projects.

Republican Plans Never Had A Chance, Of Course

As noted above, I liked the McCain plan a lot and it would get the stimulus money spent much faster than any of the other rescue plans propose to do. Yet at the heart of McCain's plan was lowering key tax rates, including payroll taxes, which the Democrats thoroughly oppose. The $15,000 tax credit for home purchases, which House Democrats also opposed, would immediately boost home sales, which is the epicenter of this economic crisis.

Even the considerably larger Martinez plan discussed above is preferable to either the House or Senate plans which spend less on tax cuts and more on spending programs (on a percentage basis) than the Martinez plan. But neither the McCain plan nor the Martinez plan were even considered.

The Democrats in Congress shunned these plans and gave President Obama what he wanted - the largest spending bill in history with well under half the money going to tax cuts and most going to new and existing federal spending programs. In the end, Congress was all too happy to oblige.

With Democrats holding sizable majorities in the House and Senate, the Republicans had no chance of defeating Obama's trillion dollar so-called "stimulus" package, even though 11 House Democrats voted against their own plan.

Problems With Obama's Trillion Dollar "Stimulus"

As should be obvious from the discussion above, I have lots of problems with the giant spending plans passed by the House and likely later today by the Senate. First, they are too big in my opinion. Both of the bills allocate well over half of the money to mostly wasteful spending programs that Democrats have wanted for years. Second, the money will be spent over the next 3-4 years; if it was really a true stimulus package, at least half of the money should be spent over the next year.

The next area of concern is whether or not these new spending levels will become permanent. As an example, let's say that the Department of Education gets $100 billion in additional money on top of their already oversized budget. Is the $100 billion a one-time infusion, or will it become a permanent part of their "baseline" budget each year? We don't know, but certainly some Democrats will try to make them permanent.

Another area of serious concern is that the final stimulus bill will become a vehicle for new protectionism policies. The House added "Buy American" protectionism provisions for iron, steel and textiles to its stimulus bill. The Senate stimulus package also includes similar Buy American provisions, but the details are not yet clear.

Almost immediately, criticism was heard loud and clear from all of our major trading partners. The United States has made deals under NAFTA and the WTO to give trading partners such as Canada, Mexico, Japan and the European Union access to our huge "government procurement market." In exchange, we have received similar commitments from those countries. Hopefully, the final stimulus package will water down or eliminate the Buy American requirements so as not to damage trade relations.

Here is what the Wall Street Journal had to say about the "Buy American" issue:

"On Tuesday the Senate Appropriations Committee added ‘manufactured goods' to the list of items that must be American-made in order to qualify for stimulus dollars under the American Recovery and Reinvestment Act. Congress is signaling to the rest of the world that U.S. protectionists are in charge. Forcing U.S. contractors to buy domestic goods instead of shopping for the best price available world-wide means that taxpayers risk overpaying for their roads and bridges. And that means capital will be misallocated, fewer projects will be built and the bill will go ever-higher.

There is also the little matter of retaliation by our trading partners. The European steel industry has said that it will urge the EU to challenge the [‘Buy American'] provision at the World Trade Organization. That's the high road. Another course would be for other countries to lock American companies out of the bidding on their projects. China's stimulus is estimated at $600 billion. Caterpillar Tractor says that it has a ‘major initiative to compete in infrastructure projects around the world -- particularly in China -- and this would seriously undermine it' Congress must want more Caterpillar layoffs.

Increased protectionism didn't stimulate the American economy in 1930 and it won't now. In the post-bubble environment, Americans are likely to save more and countries like China are probably going to have to spend more. Washington should ask whether it wants to close down export markets just when those markets are offering the U.S. economy its best opportunity for recovery. One more thing: Is President Obama going to exert any restraint in this stimulus bill on the worst instincts of Congress?"

The Obama administration thus far seems unconcerned about the danger these measures pose. The protectionism provisions insisted on by the Democrats could undo whatever measured job creation the stimulus plan achieves by provoking US trading partners to reduce purchases of American-made goods. We need to keep a close watch on this.

This protectionist language also begs the question: "Where's Bernanke?" In 2006 and 2007, the financial media was full of articles about how Fed Chairman Ben Bernanke warned against protectionist policies, saying in a 2007 speech, "In the long run, economic isolationism and retreat from international competition would inexorably lead to lower productivity for U.S. firms and lower living standards for U.S. consumers."

Thus, you would think that Chairman Bernanke would be issuing similar warnings now as the protectionist-laden Obama stimulus plan rolls through Congress. Yet, I cannot find any reference of recent comments by Bernanke on this detrimental part of the stimulus plan. It has been reported that the Senate amended the stimulus bill to soften the "Buy American" provisions, so perhaps Bernanke has been exerting his influence behind the scenes to help us avoid repeating mistakes of the past.

Final Stimulus Bill Will Be Higher Than $838 Billion

Early last week, the Senate stimulus bill was actually above $900 billion. RINO Senators Collins, Snowe and Spechter refused to sign on unless the size of the bill was reduced. So Senate Democrats actually reduced the price tag by more than $80 billion, bringing it down to the $838 billion number, at which point the RINOS agreed to vote for it last Friday night.

It is important to note that of the apprx. $100 billion taken out, $40 billion was money directed to go to the state and local governments. One of President Obama's top economic advisors said on Sunday that the administration would press hard to get that $40 billion back in the stimulus bill when it goes to the Conference Committee later this week.

Lawrence Summers, Obama's chairman of the White House National Economic Council warned that without the infusion of federal money to state and local governments, the country could face "a vicious cycle of layoffs, falling home values, lower property taxes, more layoffs." So it is clearly possible, even likely, that the final stimulus bill will be higher than the $838 billion passed by the Senate.

Frustrated Obama Says Spending IS Stimulus

Clearly frustrated, President Obama ditched his teleprompter in a nationally broadcast speech before House Democrats last Thursday night to bash Republicans for opposing his giant stimulus package. In what was the most pointedly partisan speech of his young presidency, Obama rejected Republican arguments that the massive spending in the $819 billion House stimulus bill should be replaced by a new round of massive tax cuts.

At one point, Obama not only chided Republicans for opposing the stimulus, but also for getting us into this economic and financial crisis in the first place. The President also defended the enormous spending in the stimulus package, saying at one point:

"What do you think a stimulus is? It's spending – that's the whole point! Seriously."

Millions of Americans watched this speech last Thursday night. Based on the media reactions, many people were very surprised by the President's remark above. But if you've been reading this E-Letter for long, you should not have been surprised.

50% of Americans May Pay Zero Income Taxes

It is currently estimated that apprx. 40% of Americans pay no income taxes. With the tax cuts, tax credits and tax rebates that will result from the massive stimulus package, millions more Americans will pay no income taxes going forward. Even worse, millions of Americans that pay no income tax will get another round of checks from the Treasury. Numerous articles I have read estimate that once the stimulus bill becomes law, 50%-52% of all Americans will pay no income tax at all.

This can only mean that the 50%-48% of us who do pay income taxes will be paying more, especially those with higher incomes. Obama has said repeatedly that he will only raise income taxes on those making $250,000 or more. But with half or more of the population paying no income taxes, Obama will be forced to tax the wealthy at European rates of 60-70% or more, or he will have to raise taxes on those making less than $250,000 – or both.

Along this line, I fully expect Congress to go after the Bush tax cuts very soon. I predict that Congress will roll back the Bush tax cuts as of the end of 2009 rather than waiting until the end of 2010 when they are set to "sunset" automatically. I also expect President Obama to go along. I have often written about how America's income tax burden is increasingly falling on those who make the most money and create the most jobs. Apparently, President Obama and the Democrats want them to foot the whole bill.

Treasury Secretary Announces $2-$3 Trillion To Rescue Credit Markets

Earlier today, Treasury Secretary Tim Geithner announced a massive new government effort to unfreeze the credit markets, purchase troubled assets from financial institutions, make loans available to small businesses, etc., etc. Secretary Geithner indicated that the government will spend up to $2 trillion to support these vast rescue efforts.

Geithner also indicated that the government would undertake serious measures to stimulate private investment in the troubled assets it will be buying from financial institutions, but he made it clear that the government will act swiftly in the meantime.

Secretary Geithner also indicated that the government is in the process of organizing another massive project to directly stimulate the housing market. He said the details of this housing revival effort will be announced soon and did not put a number on the amount of money they plan to spend on this project, but the assumption is it will be at least $1 trillion.

I wrote about the likelihood of this massive financial rescue effort last week, so you should not be surprised. Nevertheless, the prospect of the government spending another $3 trillion, in addition to the $1 trillion stimulus package passed by the Congress is simply staggering!

I will have more to say about this latest development as the details are made available. In the meantime, the stock markets are selling off hard following Geithner's much-anticipated speech. We can only hope that today's Treasury announcement and the passage of the Senate stimulus package don't send stocks into a new downward leg in the bear market.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Buy American, Buy Depression (very good)
http://www.realclearmarkets.com/articles/2009/02/buy_american_buy_depression.html

Pelosi's Indefensible Bill
http://online.wsj.com/article/SB123422399517965573.html

Detailed analysis of the "Buy American" protectionist threat
http://www.realclearmarkets.com/articles/Buy%2520American%2520_%2520Feb%25202009.pdf

Obama's Tax Policy: None Dare Call It Welfare

Gary D. Halbert — Tue, 13 Jan 2009 18:54:31 GMT

IN THIS ISSUE:

Obama Pushes His Stimulus Plan
Dick Morris -- Tax Exempt Tyranny?
More On Obama's Plan From Peter Ferrara
It Depends Upon Your Definition Of "Tax Cut"

Introduction

I had originally planned to write about the Bernie Madoff scandal this week. In fact, I had already written the E-Letter that described how Madoff swindled investors out of tens of billions of dollars in a giant Ponzi scheme. Maybe I'll send that one to you next week.

But just in the last few days, we have learned the details of President-elect Obama's massive income tax overhaul, and the plan is much worse than we had anticipated. And you need to know about it ASAP, since it will negatively affect most of you who read this E-Letter on a regular basis.

Obama's liberal tax plan would give annual tax rebates to millions of Americans who already pay no income taxes whatsoever. Giving government tax rebate checks to those who already pay zero income taxes is nothing short of expanding the welfare state (or socialism as I prefer to call it).

Worst of all, if Obama gets his massive tax plan approved, it will mean that a majority of Americans will pay little or no income taxes, while the so-called "wealthy" will foot the rest of the bill. If we reach such a point, there will be little to no chance of true tax reform for the foreseeable future.

While the "rich" can afford to pay higher income taxes, it is this same group that creates most of the new jobs in this country. As we have seen often in the past, when the government unduly taxes the "rich," job creation grinds to a halt. We can hardly risk that in the current economic recession and credit crisis.

To get you the information you need to know, I have reprinted two articles below that are right on point. The first is from political writer Dick Morris who was a top advisor to Bill Clinton, who has since converted to a conservative. The second is from Peter Ferrara who is director of budget and entitlement policy at the Institute for Policy Innovation and general counsel for the American Civil Rights Union.

Together, these two articles expose the fallacies of Obama's proposed tax policies. Please read what follows closely. If Obama gets his way (and he probably will), it will affect us in profound ways, which is part of his grand plan. Hint: it will affect your pocketbook!

QUOTE:
"Obama Stimulus Fosters Tax-Exempt Tyranny
by Dick Morris & (wife) Eileen McGann

It now looks like half of President-elect Barack Obama's stimulus package will take the form of "tax cuts" for 95 percent of all Americans. Yet this wouldn't boost the economy as much as trigger a massive, unhealthy shift in American politics.

Under Obama's plan, the majority of American voters would pay no federal income taxes but would get money from the government instead. That is, these "refundable tax credits" are basically welfare checks -- and Obama's plan would leave the most of us collecting, not paying.

A $200 billion giveaway won't do much to get a $14 trillion economy rolling again. But the plan would leave any future taxpayer revolt no hope of majority support.

Today, the bottom 50 percent of U.S. taxpayers pays a total of $30.6 billion in federal income taxes on a combined income of about $1 trillion. So about 3 percent of all federal income-tax payments come from the poorest half of the country. (The top 1 percent pays 40 percent; the top 25 percent pay 85 percent of the federal income tax.)

Obama's plan -- he'd give all couples a $1,000 refundable tax credit and all single people $500 -- would funnel more than $50 billion to the lowest half of the country, thereby completely wiping out their total federal tax liability. In most cases, it would trigger a "refund" welfare check.

In one stroke, this would transform the majority of voters from taxpayers into tax eaters, and leave an increasingly small minority to pay the bill. Regardless of whether this is good economics, it is very dangerous politics.

Essentially, it would put those who actually pay the taxes that fund our government into much the same situation as landlords in New York City: hopelessly outvoted by their tenants, who use their political clout to limit rents and landlords' profits.

Since Ronald Reagan, the anti-tax movement has been based on a blue-collar revolt against high taxes; it would lose that constituency under the Obama plan. Taxpayers would be politically helpless and the tax-eating majority would have free reign to impose any levies it wished.

Almost all of the 68 million tax filers in the country's bottom economic half would get checks from Washington at tax time. Some would be among the 22 million who get money from the Earned Income Tax Credit. Others would get a $500 check through the (Bush-passed) Child Tax Credit -- and all would get funds through the new Obama tax credit.

Welfare no longer would be only for the poor because the majority of the voters would depend on government handouts. This very system is what makes European social democracies so resistant to change.

In 1980, the bottom 50 percent of the nation paid 7 percent of the national tax bill, after refund and credits. It now pays 3 percent; under Obama's plan, it would pay less than nothing (that is, it would net a profit from the IRS). In 1980, the top 1 percent paid 19 percent of the income-tax burden; now, it's 40 percent. Taxes have become the province of only the rich.

Of course, the shift in tax burden also mirrors the incredible increase in incomes of the wealthy during the past 30 years: The top 1 percent earned only 8 percent of the total national income in 1980; now, it earns 22 percent. And the poorest half has seen its share of national income fall from 17 percent in 1980 to only 12.5 percent today.

So it is both fair and sensible to give the poor a tax break and to draw the bulk of federal revenues from the rich. But to exempt the bottom half -- a majority of the voters -- from paying any taxes and to award them refund checks instead would dangerously alter the fundamental balance of national politics. For the economically well off, it effectively could become taxation without representation, which, as the founders of our nation warned, leads to tyranny." END QUOTE

I trust that most of my readers can fully understand the implications for high net worth investors if Obama gets his way, as looks increasingly likely. Now let's take it a step further with another thought-provoking article from Peter Ferrara, another high-level source. Read closely.

QUOTE:
"The Tax Cut Mirage
by Peter Ferrara

Obama Eyes $310 Billion in Tax Cuts" the headline blares. The Obama team comes to town to start the new year, and the run-up to his inauguration, with this announcement. How sly.

This Obama tax cut package is to be part of the broader stimulus package now estimated to cost $775 billion. The problem is that there are tax cuts and there are tax cuts, and there are other things Obama calls tax cuts that are not even tax cuts. The "tax cuts" Obama is proposing for his stimulus package, like the rest of his stimulus package, are not going to stimulate anything.

Tax cuts do not stimulate the economy by "putting money in people's pockets" which they can then spend, as even some Republicans, including George Bush, mistakenly say. That's an old-fashioned Keynesian strategy, and, if it worked, the same result could be achieved by sending out increased welfare checks, which also puts money in people's pockets, which they can spend. But it doesn't work, because it doesn't do anything to change the basic incentives governing the economy, and because just borrowing money and then sending it out to people, in "tax rebate" checks or welfare checks, doesn't add anything to the economy on net.

Tax cuts stimulate the economy when they involve reductions in tax rates. The reduction in rates improves incentives for savings, investment, business creation and expansion, job creation, entrepreneurship, and work, by allowing people to keep a greater percentage of the reward produced by these activities. This improves the economy not just by the dollar amount of the tax cut. The improved incentives affect every economic decision and every dollar in the entire economy. The astoundingly successful Reagan tax cuts in the 1980s, as well as the astoundingly successful Kennedy tax cuts of the 1960s, were both based on reducing tax rates, and were successful for these reasons.

But the Obama tax cut package studiously avoids any reductions in tax rates anywhere. The centerpiece of the plan is a $500 per worker tax credit, estimated to cost $150 billion. The government will just borrow $150 billion from the private economy to give away in these tax credits, so there will be no net gain to the economy. Nor will there be any improved incentives to save, or invest, or start or expand a business, or hire new workers. The credit does not even provide increased incentives to work, because once the worker is over a very low income threshold of about $8,000 per year, the amount of the credit does not increase for increased work and income.

Notice that these arguments apply even for workers who do pay considerable income taxes. Suppose you work and earn enough to pay $5,000 per year in income taxes. The Obama tax credit will reduce your income taxes by $500. In this case, the credit is a real tax cut. But it still will not stimulate the economy for the reasons stated above, it does not add to the economy on net and it does not improve incentives. It is a Keynesian tax cut, not a supply-side tax cut, because it is a flat cash rebate, effectively the same as more government spending, not a reduction in rates.

Keynesians think that the way to increase economic growth is to increase deficits and government spending. We tried that in the 1970s, and we got inflation along with ever worsening recessions. We tried it in the 1930s, and we got the Great Depression lasting for over 10 years. It doesn't work.

Indeed, the Wall Street Journal news story on the Obama tax package says regarding this $500 per worker tax credit, "This part of the plan is similar to a bipartisan initiative launched in early 2008, which sent out checks worth $131 billion." Precisely. Bush and the Democrats joined together a year ago to agree on a stimulus package sending out $131 billion in "tax rebates" to workers all across the country. Those tax rebates were very similar to Obama's tax credits today. They involved no reduction in tax rates, or improved incentives anywhere. They were based on a Keynesian rationale, just like Obama's tax credits -- stimulate the economy by increasing government deficits and providing cash rebates for people to spend.

And, of course, that tax rebate stimulus package from a year ago didn't work. The economy continued to worsen throughout the year, and financial markets collapsed in the fall. Henry Paulson was back in September asking for another $700 billion, to save the economy supposedly from complete collapse, and another Depression.

Then there is the part of the Obama tax cut that is not a tax cut. The bottom 40% of income earners do not pay income taxes on net. The $500 per worker Obama income tax credit will consequently not reduce income taxes for these workers. It will involve instead another check going from other taxpayers to these workers, which is actually just increased government spending, indeed, increased welfare.

Indeed, another part of the Obama tax cut plan is even more overt. Obama proposes to include in that plan an increase in the scandal-ridden Earned Income Tax Credit (EITC). The EITC goes to the lowest income workers, who do not pay federal income taxes, and it is universally recognized as a welfare program. In this, as in other provisions of the overall stimulus package, Obama and the Democrats are effectively arguing that they are going to stimulate the economy by increasing welfare. Reagan and the Republicans stimulated the economy by cutting marginal tax rates, providing incentives to save, invest, produce, start and expand businesses, and create jobs (as Kennedy and the Democrats did in the 1960s). Now Obama and the Democrats claim they are going to do the same by increasing welfare and government spending.

Obama tries to argue that his $500 per worker income tax credit is a tax cut even for workers who do not pay income taxes because these workers still pay payroll taxes for Social Security and Medicare. But the only connection between this tax credit and payroll taxes is purely rhetorical. If Obama wants to claim credit for a cut in payroll taxes, then he can propose a cut in payroll taxes. Then Obama can tell us how much sooner the Social Security trust funds will run out and leave the program bankrupt because of his tax credit. The answer in regard to Obama's $500 per worker credit is zero, because that credit does not involve a reduction in payroll taxes of any sort; it is an income tax credit, not a payroll tax cut.

Another component of the Obama $310 billion "tax cut" package is a proposal for a one-year tax credit of $3,000 to businesses for each new job created, costing a pricey $40 billion to $50 billion. Congress already adopted a similar plan proposed by former Sen. Dan Quayle back in the 1980s, called the Targeted Jobs Tax Credit (TJTC). Over the years this has been changed into the Work Opportunity Tax Credit (WOTC), which provides $2,400 for each new adult worker hired, $4,800 for hiring a disabled veteran, and $9,600 for hiring welfare recipients, high risk youths, and qualified ex-felons. It is unclear whether Obama is aware of this history, but his tax credit is not going to produce any more hiring than the already existing WOTC.

Studies of these tax credits over the years have concluded that the credits have mostly gone for workers that would have been hired anyway, with little if any net new jobs created. And this does not include the jobs lost from the private sector when the government borrowed the additional funds to cover the tax credits. Steve Entin of the Institute for Research on the Economics of Taxation argues that such a tax credit is unlikely to stimulate much employment when the economy is down and businesses are not expanding. "Given the current degree of uncertainty about where the economy is headed," he writes, "the credit is not likely to achieve much for many months, until we are already on the upturn, at which time it would not be needed."

Other provisions of the overall stimulus package follow on the theme of stimulating the economy through increased welfare and government spending. The plan includes major expansions of unemployment compensation, including extending unemployment insurance to part-time workers. It also includes increased Medicaid coverage, and subsidies for employers continuing health insurance for laid off workers. Another $140 billion to $200 billion would go for aid to states to be spent on Medicaid and education. The government's borrowing hundreds of billions for such spending is not going to stimulate anything. It may produce a drag on the economy by increasing dependency.

Then there is another couple of hundred billion for increased spending on infrastructure, including building and renovating roads, highways, bridges, and schools, and making government buildings more energy efficient. Such infrastructure spending was the central strategy Japan used to counter its severe economic downturn of the 1990s, which nevertheless continued for over 10 years. In the U.S., these infrastructure projects take years to get up and running, and are often bogged down by lawsuits relating to the environment and other factors, leaving such projects unsuited for short-term stimulus spending. In any event, again, government borrowing of hundreds of billions for such increased spending would not add anything to the economy on net.

The Wall Street Journal reports Obama transition spokeswoman Stephanie Cutter as saying, "We're working with Congress to develop a tax cut package based on a simple principle: What will have the biggest and most immediate impact on creating private sector jobs and strengthening the middle class? We're guided by what works, not by any ideology or special interests."

This propaganda spin is exactly the opposite of what Obama is doing. Obama is studiously avoiding exactly what would work, with the biggest and most immediate impact, because he is so ideologically opposed to the pro-growth, free-market policies that would produce that result. Instead, his ideology is leading him to exactly what will not work to promote an economic recovery, increased welfare, government spending, and trillion dollar deficits. Here is what would work.

The Republicans should advance a proposal that would sharply reduce the 25% income tax rate that applies to the middle class to 15%. This would leave 90% of workers with a flat rate tax of 15%, or even less. Such reduced tax rates would provide real incentives to stimulate the economy, as discussed above. A bill providing for this should be introduced as soon as possible, to get the debate going. This proposal serves as an alternative to the rest of the Obama tax plan to be introduced later, as well as the stimulus package. Senate Minority Leader Mitch McConnell raised precisely this proposal last Sunday. Bravo.

Other proposals would promote economic recovery and growth even more. Most urgent, in terms of producing the biggest and most immediate pro-growth impact, is to reduce the outdated and uncompetitive federal corporate tax rate of 35% at least to 25%, if not the 19% recently adopted by Germany and Canada. The Bush tax cuts for capital gains and dividends should be made permanent. Also urgent would be to adopt immediate expensing, meaning deductions, for investment in capital equipment, rather than depreciation, which drags the deductions out over many years. This would have the same effect as a rate reduction for investors, by increasing the percentage of the reward that such investors could keep. A true economic boom would be created if Congress also reduced the top marginal income tax rate to 25%.

But McCain proposed most of these ideas, and Obama ridiculed them, and Obama won. So Republicans should not expect to be able to advance such ideas effectively in Congress right now, especially since they are in such a distinct minority. Conservative commentators can and should promote these ideas as the real effective and practical ways to promote economic growth and get America booming again, and Republicans can run on them in future races. But the one idea that Republicans can effectively advance right now politically is the middle class income tax rate reduction discussed above.

Another urgent, pro-growth reform is deregulation to allow drilling for oil and natural gas, offshore and onshore in ANWR and elsewhere, and renewed expansion of nuclear power production. This would promote economic growth both by reviving a powerful energy industry in America, and by providing low cost, reliable supplies of energy to the rest of the economy. Removing any regulatory barriers to development and production of alternative energy would be very helpful as well. But an alternative energy industry built on massive government subsidies would be a net drag on the economy.

Republicans and conservatives should be careful to note that the inherently powerful American economy retains natural tendencies to recover. They should not preclude that possibility in criticizing the Obama/Democrat stimulus package. Economic growth may well return later this year regardless of what Obama and the Democrats do.

But neither can we allow Obama to pose unchallenged as proposing enormous tax cuts when they are mostly a mirage, or worse, actually increased government spending and welfare, rather than tax cuts. We must start aggressively advancing that argument now, and the case more generally against Keynesian government spending and enormous deficits as the keys to recovery, and aggressively offer instead the real policies that would restore growth and prosperity, and set off a new economic boom." END QUOTE

[Peter Ferrara is director of budget and entitlement policy at the Institute for Policy Innovation and general counsel for the American Civil Rights Union. He formerly served in President Reagan's White House Office of Policy Development, and as Associate Deputy Attorney General of the United States under the first President Bush. He is a graduate of Harvard College and Harvard Law School.]

Conclusions

President-elect Obama's tax cut proposal has been criticized by many conservatives (and even some moderates and liberals) for being misleading because he says that it will benefit 95% of American households. Supporters, however, claim that the promise is legitimate and even some objective, third-party analysis has supported its merits. So who's telling the truth?

That's a very good question. I find it interesting that anyone can come to the conclusion that an income tax cut will benefit 95% of American households when the non-partisan TaxPolicyCenter estimates that approximately 38% of income tax filers pay no tax at all! To make Obama's statement true, you have to resort to an old Democratic tradition and ask what the meaning of ‘tax cut' is.

The secret of how the common-sense definition of reducing income taxes somehow morphs into a plan that benefits individuals who currently pay no income tax is a tale of political slight of hand at the highest level. After all, how can you reduce the income tax bite for someone who already pays NO income taxes? It sounds impossible, doesn't it? If your tax rate is effectively zero, then it would seem that you are already benefiting from the master design of a progressive tax system that increases rates as incomes go higher, right?

Wrong! (At least according to Obama and Congressional Democrats)

In today's world of political spin, a tax cut proposal need not apply only to those with income tax rates above zero. Instead, today's definition of a tax cut can include allowing those who already pay no income taxes to receive a check from the government. Let me make it clear, I'm not talking about getting a refund of all of the income tax withheld from pay. No, we're talking about receiving a government check over and above all of the withholding. In effect, it amounts to a negative tax rate for those who qualify, which is reportedly going to be over 50% of American households.

This negative tax rate is officially deemed to be a "refund," since certain tax credits are deemed to be "refundable," meaning that they are payable even if the filer's total tax bill is zero. Excuse me, but a "refund" used to be defined as a return of something that you had paid in. But that's not the case in the fairy tale world of Washington, DC. In Obama's plan, you can get something called a refund even though it really represents a check from the government drawn from all those unfortunate souls who actually had to pay income taxes. Can you say WELFARE?

Thus, in today's political world, we need to alter our common-sense definitions of some key terms, as follows:

Tax cut = Receipt of other people's tax money (but don't call it welfare or redistribution of wealth)

Refund = Check from the government that may or may not include any money you have actually paid in.

Taxpayer = Tax receiver, unless you have worked hard to earn a lot of money, and then the old definition applies.

Welfare = An outdated, politically incorrect word that used to mean government assistance. For the new definition of government assistance, see "Tax Cut" above.

Redistribution of Wealth = A socialist philosophy generally unacceptable to capitalist societies unless repackaged under another definition found to be more palatable to the general public. See "Tax Cut" and "Refund" above.

If Obama wants to put money in the hands of people in an effort to stimulate the economy, then he should proceed as Bush did last year and dole out checks to the populace. I don't particularly agree with the practice, but at least people would know what is happening.

To dress a government handout (more welfare) in the garb of a tax cut can have some very drastic and negative effects, in my opinion. First, as Dick Morris points out, it means all income tax receipts will come from the top 50% of wage earners. I still happen to be in the camp of those who believe that you hold government more responsible when part of the money is yours. Plus, it makes changing the current complexity-laden tax code virtually impossible since the alternatives such as a "Flat Tax" or "Fair Tax" would mean that the 50% who pay no taxes would have to start paying taxes again.

Another big negative is that the majority of voters can elect representatives that will pass laws with no tax consequences to the bottom 50%. Why not vote for expanded social services, it won't cost them anything, and they may even get a bigger government check. Can you say welfare? Or socialism?

Lack of participation in the funding of government is not a good thing. Alexis de Tocqueville, a 19th Century thinker, said, "A democracy cannot exist as a permanent form of government. It can exist only until the voters discover they can vote themselves largess out of the public treasury. From that moment on, the majority always votes for the candidate promising the most benefits from the public treasury, with the result that democracy always collapses over a loose fiscal policy, always to be followed by a dictatorship."

Don't look now, but it looks like the time when the majority of American households that receive from the government, rather than pay any income taxes, is about to be upon us.

Very best regards,

Gary D. Halbert

Economic & Investment Outlook For 2009

Gary D. Halbert — Tue, 06 Jan 2009 22:10:01 GMT

IN THIS ISSUE:

Editor's Notes On BCA & The Other Gary Halbert
Obama & The New Age Of Big Government
The Economy -- Have We Seen The Worst Of It?
Are The Bailouts Necessary & Will They Work?
The Latest Disappointing Economic Reports
Stock Markets -- Might We Have Seen The Bottom?

Introduction

2008 proved to be a catastrophic year in the financial and credit markets as well as for most investors as judged by the global equity markets. The credit markets and bank lending activity ground to a virtual halt, something not seen in most of our adult lifetimes. Consumer confidence and spending, which now accounts for over 70% of US GDP, fell off a cliff in the span of just 3-4 months late last year. We are now in an unprecedented "credit crisis," the outcome of which remains to be seen.

The US government and the Federal Reserve have responded to the credit crisis in ways that most of us could never have imagined, and they are not nearly done yet. Much more is to come. We can agree or disagree with these giant bailout measures, but like them or not, even more enormous government rescue programs are sure to come in the Barack Obama administration, on top of his already aggressive plans such as nationalized health care, etc.

One thing to keep in mind is that our new President is a man who embraces government ownership and control of the private sector, so we can expect more massive bailouts in the next year or longer as needed. Already, Mr. Obama is suggesting another fiscal stimulus package approaching $1 trillion this year, and that is just the beginning -- I promise. But the point of what follows is not a political piece. The question is whether or not the plans will work.

What we do know is that we are officially in a recession that reporting agencies now believe began in December 2007. Most forecasters now expect that GDP plunged 4-5% (annual rate) in the 4Q of last year, and will continue to fall for at least a couple more quarters. Meanwhile, deflation is becoming a greater threat. In the pages that follow, we will take an in-depth look at the latest economic and inflation numbers. I'll give you the latest thinking from my best sources on what may lie ahead.

But first, I have a couple of important Editor's Notes that have resulted from many reader inquiries, before we get into the meat of this week's letter. Let's get going.

Editor's Notes

The Bank Credit Analyst: I frequently get questions from long-time readers asking why I do not mention the Bank Credit Analyst (BCA) or quote from their monthly reports as I have for many years. Considering the amount of interest, an explanation is in order.

You may recall that BCA maintained throughout 2007 that the subprime mortgage dilemma would be contained to the housing market, and that a recession was not the most likely scenario for the US or the rest of the world. Then in early 2008, BCA did an abrupt about-face on the subprime crisis, complete with a forecast of a credit crisis and a potentially deep global recession.

I have to admit I was surprised that BCA was late in identifying perhaps the most significant trend change in our lifetimes and an oncoming credit crisis. However, no economic forecasting service is perfect, and I have a number of other sources of economic and financial forecasts that were also late to recognize the full effect of the subprime debacle. So that is not the reason I no longer quote BCA.

Quite the contrary. In early 2008, BCA contacted me in regard to my summarizing and quoting their materials. According to BCA, some of their subscribers had complained about having to pay a large amount of money for what I periodically offered to my clients and E-Letter readers for free. When I first began sharing BCA's outlook over 20 years ago, my comments were limited to a monthly newsletter that went only to my clients and prospective clients. Now, however, my Forecasts & Trends E-Letter goes out to over a million e-mail addresses each week.

While BCA has long been a valuable source of information for me, I fully understand their concerns. After all, they make their money through subscriptions, so anything that might diminish their subscription base would obviously need to be addressed. As a result, I agreed to no longer quote or summarize BCA's views of the economy or markets in light of their concerns.

Finally, it is important to note that BCA has never been my sole source of economic information and forecasts. My staff and I review numerous other sources for forecasts and analysis that help me in forming my own view of the economy, the markets, etc.

The "Other" Gary Halbert: As a reminder, to this day I am often confused with Gary C. Halbert, which is most interesting since Gary C. Halbert passed away in early 2007. For the record, I am Gary D. Halbert and am no relation to Gary C. Halbert; in fact, I never met the man. Apparently, Gary C. Halbert was a successful copywriter and marketer at some point in his life, and he had a newsletter called "The Gary Halbert Letter" and a website by the same name.

The confusion typically occurs when someone does an Internet search for "Gary Halbert." If you type Gary Halbert into Google, for example, the entire first page of results are for Gary C. Halbert -- even though the man has been dead for nearly two years. The first Google result for me -- Gary D. Halbert - is not until the lower part of page two.

We have often wondered how much business we have lost over the years from investors who searched the Internet looking for me but found the other Gary Halbert instead and were not favorably impressed! I have no idea why Gary C. Halbert's website is still on the Internet.

If, however, you type in "Gary D. Halbert," you'll find me at the top of the non-sponsor results. Bottom line: if you should refer someone to me, please advise them to include my middle initial "D." if they wish to find me on the Web. Better yet, advise them to go to my website at www.halbertwealth.com.

On that note, let me extend a huge THANK YOU to all of our clients who have referred friends, relatives, etc. to us over the years. Client referrals are one of our best sources of new business!

With the above noted housekeeping items out of the way, let's turn our attention to the economy, the ongoing credit crisis and the investment markets. But first, let's consider the bigger picture of what to expect from President Obama. The following is not meant to be a political slam on our soon-to-be new president; rather it is simply a perspective on the times to come.

Obama & The New Age Of Big Government

There is no arguing that Barack Obama is one of the most liberal politicians of our time, as is Joe Biden. President-elect Obama believes that more government is the solution, not the problem. He has stacked his new Cabinet with Clinton retreads who believe as he does, including Hillary Clinton as his Secretary of State designee.

President-elect Obama vows that as soon as he is in office, he will pass a gargantuan financial rescue bill (bailout) that is estimated to be as large as $800 billion to $1 trillion in an attempt to unfreeze the credit markets and create at least one million new jobs. No doubt the Democrat controlled Congress will go along. It appears that a number of Republicans will go along as well.

Mr. Obama says his huge rescue plan will be targeted at tax cuts and infrastructure projects that will create new jobs. I, however, predict that much of the bailout money will continue to go to recapitalize banks, financial institutions, automakers and other large companies that get into serious trouble. Obama may have no choice if he and the Fed are to stave off a debt deflation and a depression.

In fairness to President-elect Obama, he comes into office at one of the worst possible times in the last century. He is inheriting the worst economy in decades, the worst financial crisis since the Great Depression and a record large federal budget deficit -- just to name a few. He has an enormous job ahead of him with major problems that have no immediate solutions, and which may get worse before they get better.

But keep one thing in mind dear readers. President-elect Obama comes from a political persuasion that believes it is perfectly acceptable for the government to own equity stakes in the private sector. And he comes into power at exactly the time in which much of the public is more than willing to see this happen, and when even some conservative analysts admit that such steps are probably a "necessary evil."

Based on the many comments I receive from readers, it is obvious that many of you are totally against the government bailouts. Be warned, however, that the bailouts are far from over in my opinion. So it is in this context that I move on to more specific issues.

The Economy -- Have We Seen The Worst Of It?

As noted above, we see and read lots of economic, financial and investment forecasts at my company. Here is the general consensus on the economy of late (obviously, there are forecasts that are better and worse than the consensus I see out there). The general consensus is that the US economy (GDP) fell by an annual rate of 4-5% in the 4Q. We won't get the first official GDP estimate until the end of this month.

The general consensus is that the first half of 2009 will also see negative GDP, but perhaps not as bad as the 4Q we just endured. The unemployment rate is expected to rise to at least 8%, and some believe 10%, well before the end of this year. However, most forecasters currently believe that the US economy will bottom out and begin a slow recovery some time in the second half of this year -- assuming, of course, that there are no more big negative shocks, and that the banks slowly resume lending.

Some of my respected sources believe that, if necessary, the Obama administration and/or the Fed will institute some government mechanism that will guarantee bank loans if that's what it takes to unfreeze the credit markets. (I'm not making this up, folks.)

Assuming the economy bottoms out sometime in the second half of this year, the general consensus is that GDP will grow at a below-trend rate of only 1½-2½% for the next several years following 2009 as the world continues to deleverage (i.e. -- reduce debt).

Of course, there are some respected forecasters that believe the above noted scenario is too optimistic. Some believe that the bailouts will not be successful, the credit markets will not unfreeze this year, and that we are headed for a modern day depression. Others believe that even if the bailouts work, we will be facing runaway inflation in 2010 and beyond. Clearly, there are few, if any, rosy scenarios floating around today.

Are The Bailouts Necessary & Will They Work?

Most conservatives (and even some liberals) I talk to are opposed to the various government bailout measures to-date and the trillion dollar rescue package that President-elect Obama has planned. Many say, "Let ‘em all fail." Several media polls have shown that a majority of Americans are opposed to the bailouts. Personally, I would much prefer an economic stimulus plan that eliminated the capital gains tax and reduced other taxes, but that is not going to happen with the Democrats in control of Congress and the White House.

Given that reality, most of the sources that I respect agree that the bailouts and the various actions by the Fed were necessary in an effort to avoid a debt deflation and a possible depression. Their argument is that with consumer spending accounting for over 70% of GDP, and with consumer spending having fallen off a cliff, the government had to step in to keep us from going from a serious global recession to something worse.

In fact, some forecasters are calling on other countries to follow the lead of US policymakers and slash their interest rates and recapitalize their money center banks. Some actually criticize Europe for resisting such rescue efforts, while praising the UK for its financial rescue efforts.

Further, I would also say that there is a consensus in the forecasting world that it was a huge mistake for the government to let Lehman Brothers go bankrupt. Many analysts believe that it was the failure of Lehman that caused the major banks to put a lockdown on lending, even to each other.

I certainly don't expect to make any bailout converts with this discussion. However, I think it is pertinent to point out that there are respected analysts and forecasters that believe the government and the Fed had no choice but to do what has been done, and that the government may have to do even more if we are to avoid a depression.

Now to the question of whether the bailouts will work. At this point, the answer is we don't know. The first "economic stimulus package" of $168 billion last spring was considered pretty much a non-starter. Various sources have estimated that most Americans who received the tax rebate checks in late April and May saved most of the money or used it to pay off credit card debt or other bills, rather than spend the money as was hoped by the Bush administration.

One thing is clear, however: the Bush administration did not have a well-designed plan for how it intended to use the first $350 billion of the $700 billion Troubled Asset Relief Program (TARP). That was obvious when President Bush and Treasury Secretary Paulson changed the objective of the TARP from buying up troubled mortgage-related securities to recapitalizing the major banks and most recently the automakers.

Some (but certainly not all) of the criticism of Bush and Paulson may have been unfair. I don't believe anyone knew how difficult it would be to reinstate trust in the credit markets and to get the major banks lending once again. As discussed above, President-elect Obama will face the same challenge when he takes office, and talk of some kind of government loan guarantee program for the banks continues to gain momentum, for better or worse.

While it remains unclear if the bailouts will work, there is now little doubt that Mr. Obama's request for a massive new rescue program of up to $1 trillion will be passed by the Congress within the next month or two. Over the weekend, several leading Republicans stated that they would support such a huge stimulus program, provided it was not loaded with earmarks. So I believe it is safe to assume we will see Obama get his wish.

The Latest Disappointing Economic Reports

I have been poring over economic data for over 25 years, and I do not remember another time when the various reports have been as overwhelmingly negative as over the last month or so. Let's take a look at the latest numbers. As noted earlier, most forecasters expect that 4Q GDP fell by 4-5%; however, that report won't be out until January 30.

The final report on 3Q GDP was an annual rate of --0.5%, about as expected, following +2.8% in the 2Q. The decline in 3Q GDP was largely the result of a 3.8% drop in personal consumption expenditures.

The Index of Leading Economic Indicators (LEI) fell 0.4% in November (latest data available). The LEI has been falling for over a year. More troubling, the six-month change in the LEI was negative 2.8%, and the 12-month change was --5.6%. The Conference Board reported that the Consumer Confidence Index fell to a new all-time low of 38.0 in December.

Consumers' appraisal of current conditions grew substantially worse in December. Those claiming business conditions are "bad" increased to 46.0% from 40.6% in November, while those claiming business conditions are "good" declined to 7.7% percent from 10.1%. Consumers' assessment of the labor market was also considerably more negative than in November. Those saying jobs are "hard to get" rose to 42.0% from 37.1% in November, while those claiming jobs are "plentiful" decreased to 6.2% from 8.7% a month earlier.

The plunge in consumer confidence resulted in even worse than expected retail sales during the holiday season. Spending Pulse, an organization that collects consumer spending data from MasterCard, says consumers spent about 20% less on electronics, women's clothes and jewelry in November and December in comparison with the same period last year. Spending Pulse says total retail sales declined up to 8% during this holiday season.

The numbers are not all in yet, but it also appears that online sales declined for the first time ever. Reuters reported that online sales for the holiday period up to December 23 fell 3% from the same period last year, marking the first decline in Internet spending since comScore, Inc. started tracking online sales in 2001.

On the manufacturing front, the news is equally dismal, if not worse. The Institute for Supply Management (ISM), a purchasing management group based in Tempe, Ariz., said its manufacturing index was 32.4 for December, the lowest reading since June 1980, when it stood at 30.3.

Manufacturing activity failed to grow for the fifth consecutive month, according to the ISM, and ISM noted that the December decline was representative of all sectors of manufacturing. An ISM index reading above 50 indicates growth, while a reading below 50 indicates a slowdown. A reading below 41 is typically associated with recession in the broader economy.

Industrial production fell 0.4% in November and was 5.5% below yearago levels. Capacity utilization (the factory operating rate) fell to 75.4 in November, down from 81.1 a year ago. Durable goods orders declined 1.0% in November, following the huge drop of 8.4% in October. It was the fourth consecutive monthly decline in durable goods orders.

The unemployment rate jumped to 6.7% in November, the highest level in more than 14 years. Forecasters expect the December unemployment rate to jump to 7% when the latest report comes out on Friday. Nonfarm payroll employment fell sharply by 533,000 in November. As noted earlier, most analysts expect the unemployment rate to rise to 8% or higher in the first half of 2009. At 500,000 jobs lost per month, it could hit 10% by the end of this year if the economy doesn't begin to rebound.

News on the housing front was equally disappointing. Sales of existing homes plunged 8.6% nationally in November. New homes sales also declined again in November. The national median sales price for existing homes fell by the largest monthly amount on record in November. The median price was $181,000 as compared to $208,000 a year ago, a decline of 13.2% nationally. Of course, in many areas prices are down far more than 13% over the last year.

The National Association of Realtors reported that there were 4.2 million unsold homes on the market at the end of November. At the current sales pace, it would take 11.2 months to sell all the homes on the market. NAR also notes that many homeowners have taken their properties off of the market. Understandably, housing starts continue to plunge, with November starts at 625,000 versus 771,000 a month earlier.

Deflation -- Consumer Price Index Goes Negative

As I have discussed above and in previous E-letters, the government and the Fed desperately want to hold off deflation in the economy. This fear is the overriding reason behind the bailouts, including the potentially $1 trillion stimulus package Mr. Obama and Congress are planning. Lawmakers are particularly frightened now that the Consumer Price Index has gone negative for the last several months, and especially as it plunged lower in October and November.

In October, the CPI fell by a full 1.0% - the largest monthly dive since records began to be kept in 1947. Yet the record October decline was significantly eclipsed in November when the CPI plunged 1.7%. The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) decreased a full 2.0% in November. Of course, the significant fall in energy prices is helping this trend along, but there is much more at work here than just falling gasoline prices.

For the 12 months ended November, the CPI actually rose 1.1%. That compares starkly to July of last year when the CPI was up 5.6% on a year-over-year basis. The trend in price inflation is clearly falling rapidly. Even the "Core" CPI -- less food and energy -- is falling. The Core CPI was down 0.1% in October and was unchanged in November.

Wholesale prices are falling even faster. The Producer Price Index fell 2.8% in October and another 2.2% in November. The 2.8% dive in October was the largest monthly decline on record. The Labor Department also reported that the price of imported goods dropped 4.7% in November and more than 10% in the past quarter. Prices are coming down in a hurry! This is Bernanke's worst nightmare!

Price data such as the above, and similar numbers from around the world, are leading to increased discussion about deflation. A recent cover story in The Economist made it pretty much official: Deflation, not inflation, is now the greatest concern for the world economy.

Over the past year, producer prices have fallen throughout the developed world. Consumer prices have been falling for the last six months in France and Germany. In Japan, wages have actually fallen 4% over the past year. Prices are also falling in China and Hong Kong.

So far, none of these price declines looks anything like the massive deflation that accompanied the Great Depression. But the appearance of deflation as a widespread problem is disturbing, not only because of its immediate economic implications, but because until recently most economists regarded sustained deflation as a fundamentally implausible prospect, something that should not be a concern.

Such assumptions are now under fire as the Fed has slashed short rates to zero. I assume we'll be discussing deflation a lot more this year.

Stock Markets -- Might We Have Seen The Bottom?

The US and global equity markets will be buffeted in 2009, on the negative side, by slowing economic growth, continued deleveraging, a shortage of credit and possible deflation. On the positive side, the markets should be aided by extremely low interest rates, the government's massive efforts to reflate the economy and unfreeze the credit markets and the possibility that a lot of money now on the sidelines could come back into the market at some point.

Unlike the general consensus about where the economy is headed this year (worse in the first half, but a recovery by year-end), there is no such consensus regarding where the stock markets are going over the next year or longer. Opinions and forecasts are all over the board.

Some analysts I respect believe that the US stock market is in a secular bear market, and that we probably have not seen the worst of it. If the economy is going to get worse in the near-term, and then grow at below-trend rates of 1½-2½% over the next 2-3 years after 2009, this is a rather dire forecast for corporate earnings, which supports the case for lower stock prices over time.

Other analysts I also respect believe that the waterfall collapse in equity prices in 2008 significantly overshot on the downside, and that the November lows could represent the bottom, although they would not be surprised to see a retest of the late November lows at some point.

Forecasters in the latter camp point to the fact that there is an ocean of money around the world that is sitting in Treasuries and other no-risk/low-risk vehicles earning next to nothing. They suggest that with an even modest uptick in consumer confidence, a flood of domestic and international money could come rushing back into US equities -- especially with the rebound in the US dollar last year.

Most analysts in both camps seem to agree that the equity markets are overdue for a potentially strong corrective rally which could play out over the next several months. Specifically, most forecasters I read believe that there will be some kind of "Obama rally" after the inauguration. The problem is that the broad equity indexes have already rallied 20-25% from the five-year lows in November.

Conclusions

One thing appears clear: 2009 is likely to be another wild year in the markets. So, what is an investor to do? Remain in cash and earn little or no return, or jump back into equities and risk losing even more money if the market retests the November lows as some analysts expect? I can't tell you what the market is going to do in 2009, but I can restate what I have said since beginning this E-Letter in 2002 -- it's wise to have at least part of your portfolio in an investment program that can switch to a defensive posture (cash or hedged) in uncertain markets, in my opinion.

While I don't have space in this week's E-Letter, in upcoming issues I'm going to discuss how active management -- investment programs that have the ability to go to cash or hedge long positions - benefited investors in 2008. I'm also going to highlight the huge inflows into some of these programs during 2008, even though most mutual funds were hemorrhaging assets badly. And you may be interested to learn where these inflows were coming from. What do they know that you don't know? The answer may surprise you.

I'll also bring you up to date on the performance of the latest additions to our AdvisorLink team, the Scotia Partners Growth S&P Plus and S&P Moderate Growth programs. While past performance cannot guarantee future results, suffice it to say that Scotia's programs continue to meet our expectations.

If you'd rather not wait on these future issues and want to learn more about Scotia and the other actively managed investment programs that have the potential to become defensive when market conditions warrant, feel free to give one of our Investment Consultants a call at 800-348-3601 or send us an e-mail at info@halbertwealth.com. You can also find out more about these programs on our website at www.halbertwealth.com, or request a complete Scotia Investors Kit by completing our online Scotia request form.

Wishing you a profitable New Year,

Gary D. Halbert

SPECIAL ARTICLES

Tyranny of the Tax-Exempt (Must Read!!!)
http://www.newsmax.com/insidecover/obama_stimulus_package/2009/01/06/168219.html

Obama's Trillion Dollar Political Stimulus Package
http://www.realclearpolitics.com/articles/2009/01/fiscal_follies.html

Obama Eyes $300 Billion Tax Cut - What A Surprise!
http://online.wsj.com/article/SB123111279694652423.html

Obama Lies About Government Bailout Plan
http://www.aim.org/aim-column/obamas-lies-about-government-bailout-plan

Obama's Judges vs. Republican Opposition

Gary D. Halbert — Tue, 02 Dec 2008 23:02:31 GMT

IN THIS ISSUE:

Judicial Appointments - A Most Important Issue
The Bush Record On Judicial Appointments
Get Ready For Liberal Judicial Nominees
Will Minority Republicans Roll Over Or Fight Back?
What About The Obama Supreme Court?
Conclusions - What Obama Has In Store

Editor's Note

It didn't come entirely as a surprise that I got a lot of negative feedback on my November 4 E-Letter about the Democrats holding hearings on ways to highjack our 401(k) plans - and eventually other types of retirement accounts as well - into a quasi-socialistic "let us take care of you" Guaranteed Retirement Accounts (GRA).

Since that E-Letter was sent in the late afternoon on Election Day, I'm sure many readers didn't see it until Wednesday, and perhaps more than a few readers thought it came across as a sour-grapes piece because Barack Obama won the election by a comfortable margin.

In actuality, my article on the 401(k) proposal had nothing to do with Obama. Democrats were already holding these hearings before the election, and it will be these same Democrats who may send a bill to the president for his signature with the provisions I discussed, or worse.

The most important point, however, is that I have said since the inception of this E-Letter that I write about politics because I firmly believe that politics affect investments and the markets, and vice versa. Anyone with common sense should recognize that my article about the Democrats' 401(k) trial balloon actually proves the point I have been making all along.

The 401(k) proposal was purposely sweetened to fix the problem of recent large market losses by having 401(k) participants turn their accounts over to the government, which would in turn restore such account values to their August 15 balances. But the trade-off would be that these accounts would be invested in 3% government bonds, and Congress could then spend the money as it always does. Tell me how this does not affect our investments!

If you have been reading this E-Letter very long, you know that I often remind my readers of the unintended consequences that sometimes arise from laws intended to "help" people or right a perceived wrong. A good example is the Alternative Minimum Tax (AMT) law. When originally passed, it was targeted at less than 200 super-rich who were not deemed to be paying their fair share of taxes. Now, it hits millions in the middle class right where it hurts, and Congress has been wrestling with how to undo what was done in error.

If Congress can capitalize on the fear gripping retirement plan participants and pass a 401(k)/GRA law or something like it, we could be in for another round of unintended consequences. However, one consequence I can already predict is going to be higher taxes, and not just on those making over $250,000 per year.

Why write about politics and investments? So you, my readers, will know what's going on and contact your congressional representatives to tell them what you think. As for those who feel that I shouldn't write about politics in general, and about conservative politics in particular, I suggest you consider it a learning experience - just as I do when I regularly read liberal points of view.

Introduction

I have long maintained that the most enduring legacy of many presidents is often the judicial appointments they make, and especially those for Justices of the Supreme Court. You may recall that I wrote about the importance of this issue in regard to the 2008 election in my July 1, 2008 E-Letter.

Most people focus only on the Supreme Court nominations that presidents make during their terms in office. However, there are also very important judicial appointments presidents make to the various District Courts and the Circuit Courts of Appeal. Since judicial appointments are for life, they not only have the potential to extend a president's legacy beyond one or two terms in office, but can also affect the manner in which laws and even the Constitution are interpreted for many years to come.

It's no wonder then that the Democrats are now very excited about the prospects of judicial appointments. As President-elect Obama prepares to take office, he enjoys a majority in both Houses of Congress. As such, his judicial nominations should be slam dunks, no matter how liberal they are, unlike when President Bush found it almost impossible to get appointees confirmed as the Democrats found them to be "too conservative."

I'm sure you will recall this issue playing out before us as George W. Bush fought with Senate Democrats to have his nominees for federal judiciary vacancies confirmed. This confrontation eventually introduced such terms as "nuclear option" and "Gang of 14" into the national lexicon, which I will discuss further as we go along.

In a President Obama Administration, the shoe will be on the other foot, and it will be the Republicans in the minority who will be fighting Obama's presumably liberal and possibly activist judicial nominations. It's going to be very interesting to see how much or how little difficulty Obama will have filling judicial vacancies with left-leaning judges while his party controls the Senate.

Currently, there are 37 federal judiciary vacancies with 26 Bush appointments pending. Virtually all of the names pending the certification process were nominated in 2007 or later, while the Democrats have had control of Congress. Thus, there's little wonder why these nominees have not been confirmed, and I trust they never will. With a Democratic president and Congress, the liberals have to be salivating at the prospect of being able to substitute their own nominees for all of these vacancies.

This week, I'm going to discuss the importance of federal judiciary appointments, and what kind of judges Obama is likely to nominate. Will the Republicans roll over and allow liberal judicial nominations to be confirmed? Or, will they exhibit the same cohesiveness that Democrats showed during the Bush Administration and attempt to block unacceptable nominees, even though they are in the minority? These are good questions, and ones that might be among the earliest tests of the Republican Party.

Judicial Appointments - A Lasting Presidential Legacy

As a practical matter, many of the policies of a particular presidential administration may disappear shortly after they leave office. However, judicial appointments continue on for the life of the appointee and thus, can have a much longer effect. Unfortunately, most Americans are usually more attuned to what new administration policies are being proposed and what laws are being passed by Congress than the judges that are being appointed to the courts.

The federal judiciary includes Supreme Court justices, US Courts of Appeals (Circuit Court) judges, and District Court judges. Individuals for these positions are nominated by the President and confirmed by the Senate. Nominees are typically suggested by members of the president's political party, and generally share a similar political ideology.

Before being confirmed, however, the nominees are subjected to confirmation hearings by the Senate Judiciary Committee, and these events are usually more of a partisan political forum than actual hearings. Once these hearings are completed, the full Senate votes on the nominees. A simple majority vote is necessary for confirmation, and judges are appointed for a life term. Obviously, the Democrats will have more than a simple majority in the Senate next year and beyond.

In years past, these judicial hearings were generally quite respectable with tempered dialogue between the Committee members asking the questions and the nominees. But those days of reasoned debate vanished when Ronald Reagan nominated Robert Bork for the Supreme Court in 1987. Judge Bork, who was a devout anti-abortion conservative, was vehemently opposed by the Democrats who attacked him viciously.

Judge Bork unfortunately became the ‘poster child' of such partisan attacks, lending his name to a now-generic verb - "Borked" - meaning to prevent someone from attaining a public office by attacking their character and/or political philosophy. While Robert Bork's name was eventually withdrawn from nomination, similar attacks occurred during the confirmation hearings of Justice Clarence Thomas. One speaker at a 1991 National Organization for Women conference stated, in reference to Clarence Thomas, "We're going to Bork him. We're going to kill him politically..." Despite these attacks, Thomas was eventually confirmed by the Senate, but not until after one of the ugliest hearings processes in recent memory.

Thus, it was no surprise that President Bush had difficulty getting many of his judicial appointments confirmed, especially when the Democrats regained majority control of Congress beginning in January 2007. Since then, judicial hearings have regularly been highly politicized, decency and decorum were thrown out the window, and nominees were frequently subjected to an uncomfortable and often bitter confirmation process filled with both partisan and personal attacks.

Now, it will be very interesting to see how things change next year when Barack Obama becomes president. I fully expect the Democrat-controlled Senate to once again return to the days of decency and decorum and rush to confirm Obama's judicial appointees, many of whom are almost certain to be "activist" judges... But I'm getting ahead of myself.

The Bush Record On Judicial Appointments

During his two terms, President Bush has had mixed success in regard to federal judiciary vacancies. According to the White House website, Bush has had 61 Circuit Court judges and 261 District Court judges confirmed as of October 6, 2008. Plus, President Bush has had two nominees for Supreme Court justices also confirmed by the Senate.

However, as discussed above, the road to these confirmations was not without serious bumps along the way, and numerous nominees withdrew their names after being blocked by Democrats. The Dems didn't approve of judicial nominees with political values attuned to those of Republicans, and who would be more likely to resist "legislating from the bench" and other forms of judicial activism.

Thus, Senate Democrats banded together and filibustered Bush's "objectionable" nominees during Senate debate. I'm sure you recall from high school government class that a filibuster is an obstructionist tactic, usually in the form of indefinite debate, intended to stall or kill legislation by preventing it from coming to a vote. It is most often used by a minority party to block votes on objectionable legislation, or in the case of this discussion, votes on judicial nominees.

There is a way to end a filibuster, called "cloture," which ends debate and forces a vote. Invoking cloture takes the vote of three-fifths of the Senate, or 60 Senators. Thus, if the minority party knows that the majority party can muster 60 votes, it probably wouldn't pursue a filibuster. However, if the majority party does not have 60 votes to bring debate to an end, then even the threat of a filibuster can be a powerful weapon.

During President Bush's first term, and until the end of 2006, the Senate Democrats knew that the Republicans could not muster the 60 votes necessary to invoke cloture. As a result, Senate Democrats threatened to filibuster those judicial nominees that they felt were inappropriate for the job due to their conservative political views.

All of this came to a head in 2005 when Senator Trent Lott coined the term "nuclear option" in regard to a little-used procedural way to end a filibuster with a majority vote instead of the usual three-fifths rule. The term was later changed to "constitutional option" in light of negative connotations surrounding anything termed "nuclear," but the result is the same.

Interestingly, the Republicans lost their nerve and chose not to use the nuclear option for shutting down Democrats' filibusters over judicial nominees, which disappointed many conservatives. The Republicans buckled when the Democrats threatened to shut down the Senate and prevent consideration of routine legislative business if the Republicans tried the nuclear option.

Threatened with gridlock over judicial nominations, the stalemate was finally broken by the now-famous "Gang of 14," led by none other than John McCain, among others. The Gang of 14 was a bipartisan group made up of enough Senators from both political parties to prevent the use of the nuclear option as well as filibusters in regard to judicial nominees. The result was that certain of President Bush's nominees were blocked, but others were confirmed without filibusters, nuclear options or shutting down the Senate.

I'm providing all of this background because now the tables are turned and the Democrats are in control of both the Executive and Legislative branches of government. Depending on the outcome of Senate elections in Minnesota and Georgia, the Dems may or may not have the 60 votes necessary to invoke cloture, so we could see a repeat of the 2005 judicial battle played out in the months and years ahead - only this time with the Republicans in the minority. I will come back to this issue later on.

Get Ready For Liberal Judicial Nominees

Of course, Senate Republicans might not threaten filibusters if they feel the judges nominated by President Obama are mainstream jurists who are not judicial activists or do not engage in "legislating from the bench." Some consider the Cabinet appointments President-elect Obama has announced so far as being moderates for the most part, so they expect future judiciary nominations might be the same.

However, Obama's appointments so far have largely been announced to show Wall Street and foreign nations that he's willing to go with experience rather than a strict liberal philosophical alignment. Since judicial appointments can carry on long after these Cabinet members are retired and selling their memoirs, it's possible that Obama might pay homage to the far left by nominating liberal judges. This is actually what I expect to happen.

Since we do not yet know the identity of Obama's judicial nominees, we don't really know how liberal they might be, or how the Republicans will react. However, we do have some hints about who Obama may nominate based on his past statements.

Considering that Barack Obama was a professor of constitutional law for 10 years would seem to indicate that he knows a thing or two about the principles upon which the country was founded. However, constitutional lawyers, scholars and judges tend to fall into one of two categories: First, is the category called "originalists," meaning that they tend to believe that the Constitution should be interpreted based on its original wording and intent.

Basically, originalists believe that if judges are allowed to interpret the Constitution to mean anything they want within the context of current society, then the Constitution means little or nothing. Instead, originalists believe that the original document is sufficiently flexible to take into consideration the changes in our society without sacrificing the wording and original intent of the Founding Fathers.

The other constitutional interpretation category is made up of legal practitioners and scholars who believe the Constitution is a "living document" that should evolve over time to take into consideration societal changes. In contrast to originalists, those who support the living document thesis believe the Constitution should be subject to re-interpretation and even amendment from time to time to fit the needs of current society.

Generally speaking, most conservatives are originalists, while most moderates and liberals support the ‘living document' interpretation of the Constitution. Unfortunately, the majority of lawyers, judges and legal professors are now in the living document camp, as noted in a recent speech by Supreme Court Justice Antonin Scalia.

So, in which camp does Obama reside? He's firmly in the camp of those who believe the Constitution should be interpreted as a "living document." This is not just speculation by conservative pundits, but is clearly evident from Obama's writings and speeches regarding judicial issues. The following are quotes made by or about Obama on various occasions that speak directly to the issue:

From Obama's book, The Audacity of Hope: "I have to side with Justice Breyer's view of the Constitution--that it is not a static but rather a living document and must be read in the context of an ever-changing world."
When asked about what kind of justice he would want to appoint to the Supreme Court during a primary debate, Obama said, "I taught constitutional law for 10 years, and . . . when you look at what makes a great Supreme Court justice, it's not just the particular issue and how they rule, but it's their conception of the Court. And part of the role of the Court is that it is going to protect people who may be vulnerable in the political process, the outsider, the minority, those who are vulnerable, those who don't have a lot of clout."

". . . ometimes we're only looking at academics or people who've been in the [lower] court. If we can find people who have life experience and they understand what it means to be on the outside, what it means to have the system not work for them, that's the kind of person I want on the Supreme Court."
In explaining his vote against [Supreme Court Nominee John] Roberts, Obama opined that deciding the "truly difficult" cases requires resort to "one's deepest values, one's core concerns, one's broader perspectives on how the world works, and the depth and breadth of one's empathy." In short, "the critical ingredient is supplied by what is in the judge's heart [not the Constitution]."
"We need somebody who's got the heart, the empathy, to recognize what it's like to be a young teenage mom, the empathy to understand what it's like to be poor or African-American or gay or disabled or old - and that's the criterion by which I'll be selecting my judges."
Surprisingly, however, when faced with the nomination of conservative Janice Rogers Brown for the DC Circuit Court of Appeals, Obama said the following in opposing her confirmation: "The test of a qualified judicial nominee is also not whether that person has their own political views. Every jurist surely does. The test is whether he or she can effectively subordinate their views in order to decide each case on the facts and the merits alone. That is what keeps our judiciary independent in America. That is what our Founders intended."

Hmmmm....It seems that our new president is fine with straying from a strict interpretation of the Constitution in some cases, but not in others. Put differently, Obama seems to believe it is fine for liberal judges to "interpret" the Constitution as they see fit, but conservative judges must "subordinate their views."

In any event, it's pretty clear, at least to me, that Obama is in the camp that believes the Constitution is a living document and should be interpreted accordingly. In other words, judicial activism will be just fine as long as it's the little guy against the big guy, but is not acceptable if it is deemed to line up with a conservative political mindset.

In addition to his own well-documented feelings about judicial activism, there is little doubt Obama will also feel pressure from Democrats in Congress to appoint liberal, activist judges. Based on a number of articles and blog entries I have read, the liberals feel that it's high time they had their turn to appoint judges with political views akin to their own. In essence, they see the federal judiciary as being slanted to the right as a result of Republican presidential administrations in 20 of the last 28 years.

Will The Republicans Roll Over Or Fight Back?

There seems to be no question about the liberal ideology that is likely to influence Obama's judicial nominees. As noted above, Obama's own words indicate that he advocates judicial activism on matters where the heart should overrule the letter of the law. Thus, the big question becomes, what will Republicans do when faced with Obama's liberal judicial nominees with a proven record of judicial activism?

While judicial appointments may not be the first potential area of conflict the Republicans will encounter with the new Administration, they are likely to become prominent within the first year of an Obama presidency, especially given the many unfilled judicial seats. How they react to Obama's judicial nominees, especially if they are known judicial activists, may set the tone for the next four years or longer.

As noted above, when the Democrats were in the minority and were faced with conservative nominees, they held together and filibustered nominees that they felt were too conservative for their tastes. President Bush was forced to withdraw numerous judicial nominees. This resistance eventually escalated to the point when the Gang of 14 intervened. The point is, all of this resulted in more moderate judicial nominees after 2005.

Knowing that the Senate Republicans didn't resort to the "nuclear option" when they were in the majority, will they wake up and become a cohesive resistance to activist judges nominated by Obama? Or will they roll over and allow them to be confirmed? I hope that they do provide some stiff resistance to judges who want to legislate from the bench, but I have to admit that I wonder if the defeated Republican establishment has the stomach for such a fight.

Of course, the next question to ask is whether the Democrats will be as fearful of using the "nuclear option" should the Republicans filibuster Obama nominees. Buoyed by the shift in power to the left in both the Executive and Legislative branches of government, my bet is the Dems will have no trouble at all resorting to the nuclear option to block efforts by the minority Republicans to stall judicial appointments.

Not only do I think the Senate Democrats won't hesitate to use the nuclear option, I also think their constituency would rebel if they hesitate to employ this drastic step. There is no doubt that the liberals are going to demand that Obama load the courts up with the most activist judges they can find. It remains to be seen if he will oblige them, but I would not be surprised.

What About The Obama Supreme Court?

Much of the above analysis is directed toward appointments to the District and Circuit Courts. While these positions are certainly important, we also need to be thinking about the potential for Supreme Court appointments during Obama's presidency. As I noted above, I wrote about the importance of the 2008 presidential election on the makeup of the Supreme Court back in July. However, since we now know who the president will be over the next four (or possibly eight) years, it bears repeating.

It is very likely that President Obama will have the opportunity to appoint at least two and possibly three Supreme Court justices in his four year term, and probably more if he wins a second term. Considering the above discussion about the liberal mindset Obama has in regard to judicial activism, his Supreme Court appointments are almost certain to be on the liberal side.

Thus, let's look at the current makeup of the court, and who may be retiring soon. In the current makeup of the Supreme Court, we have four generally conservative judges - Roberts, Scalia, Thomas and Alito; four consistently liberal judges - Stevens, Souter, Ginsburg and Breyer; and one sometimes swing voter - Anthony Kennedy (often more on the liberal side).

Casual readers might tend to think it is a good idea to have the High Court so well balanced. Admittedly, there are arguments to support such a position. But President Obama has the potential to change that if more than two Supreme Court justices retire on his watch.

Supreme Court justices tend to keep their retirement thoughts and plans to themselves, so there is no way to know with certainty if any of the current justices are likely to retire over the next four years. However, it is believed that some of the older Supreme Court justices have had health issues, so it would seem very likely that at least one or two or more will retire over the next four years.

Next, it has long been believed that certain Supreme Court justices prefer to retire when the sitting president is someone who shares their political ideology, and who is likely to appoint a like-minded replacement. So, even if their health isn't a problem, some justices choose to retire when it is politically expedient in terms of their likely replacements.

Now that Barack Obama is President-elect, it is widely believed that the two most likely Justices to retire will be John Paul Stevens and Ruth Bader Ginsburg. Justice Stevens is now 88 years old, so it would come as no surprise if he chooses to retire during the next four years, perhaps as early as next year.

Interestingly, Justice Stevens was thought to be a conservative judge when Richard Nixon appointed him to the 7th Circuit Court of Appeals in 1970, and when Gerald Ford appointed him to the Supreme Court in 1975. Yet Justice Stevens was at best a moderate on the High Court in his early years, and soon shifted to the liberal side on most issues.

The next most likely Justice to retire is thought to be Ruth Bader Ginsburg, who is now 75 years old. Justice Ginsburg was diagnosed with colorectal cancer in 1999 and underwent surgery followed by chemotherapy and radiation treatments. While the surgery and treatments were deemed to be successful, it is unclear how long she wishes to remain on the High Court. Justice Ginsburg is widely considered to be the most liberal justice on the Court, and like Justice Stevens, she may have been waiting to retire until someone more liberal is in the White House.

Most analysts agree that the make-up of the High Court won't change much if Justices Stevens and Ginsburg retire (or pass away) during an Obama presidency, and I might agree. Obama will likely appoint two equally liberal judges. I think we can count on that.

Judging by age alone, the next most likely justices to retire over the next few years are Antonin Scalia (72) and Anthony Kennedy (72). Importantly, if either Justice Scalia or Justice Kennedy should retire, Obama will have the opportunity to dramatically shift the balance on the High Court to the liberal side. Justice Scalia is widely considered to be the most conservative judge on the Supreme Court. If Justice Kennedy, who is considered the "swing" vote, is replaced with another liberal ideologue, that too would represent a significant shift on the High Court.

Conclusions - Who Knows What Obama Has In Store

President Obama will likely have the opportunity to appoint at least two Supreme Court justices in the next four years. His appointments will very likely be liberal, "living document" judges. Most likely, Obama will be appointing liberal judges to replace retiring liberal judges with no net change on the overall balance of the High Court. That's the good news, we hope.

Yet if more than two Justices retire in the next four years, or should Obama go on to a second term, he may have the opportunity to shift the Supreme Court to a much more liberal bias. And keep in mind, these Supreme Court choices are lifetime appointments.

As a practical matter, I don't care quite so much what the political orientation of a judge is, IF they make their decisions based on what the Constitution says and not what they want it to say. No doubt there are some conservative judges that slant their interpretations to fit their political orientation, but I think they are the vast minority. Likewise there are plenty of other judges who are overly liberal in their decisions.

Judicial activism, however, is alive and well and it now appears that we have a president and majority in Congress who agrees with this method of interpreting the Constitution and the laws of the land. Fortunately, Presidents Reagan, Bush I and Bush II have had a conservative impact on the judiciary that should continue to reduce legislation from the bench in the future. But that can change decidedly in President Obama's Administration.

I have reluctantly refrained from discussing my many problems with Barack Obama in recent weeks as it looked increasingly that he would be our next president. And now he is. So just as well that I refrained. I have chosen my topics carefully.

As I discussed last month, our 401(k) plans may be at risk of government takeover under the new Democrat regime. This week, I focused on the Supreme Court and lower court implications. These are two topics we Americans need to be very aware of.

There will be other topics that we, as investors, will need to focus intently on in the months ahead, and I will get back to those in future issues. The combination of the global recession and financial crisis will likely dominate upcoming topics. But we cannot lose sight of critical issues like our retirement plans, the Supreme Court and what the liberal Congress is up to.

With a new, liberal president coming into office, we need to keep our antennae up!

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Obama's Judges and the Senate
http://online.wsj.com/article/SB122792243571465873.html?mod=googlenews_wsj

Obama's Far-Reaching Reforms Can Wait
http://www.realclearpolitics.com/articles/2008/12/obamas_hard_choice.html

In Barack we trust? (written by a liberal)
http://www.salon.com/opinion/feature/2008/11/29/obama_choices/

Bill Clinton to release donor list & more (very interesting)
http://www.politico.com/news/stories/1108/16054.html

The Democrats' Plan To Highjack Your 401(k)

Gary D. Halbert — Tue, 04 Nov 2008 22:19:23 GMT

IN THIS ISSUE:

The Economy Falling Fast Into Recession
Democrats Want To Highjack Your 401(k)
The Democrats' 401(k) Replacement Plan
Socialism Du Jour - "Spread The Wealth Around"
Can We Afford This Nonsense? No, But So What
Conclusions - After Today, Anything Is Possible

Introduction

On this Election Day that is expected to end with a win for Senator Barack Obama, I think it's important to let you in on what the liberals in Congress are already discussing about your retirement planning options. Earlier in October, Congressional Democrats began discussing the possibility of eliminating the favorable tax benefits related to 401(k) plans, effectively killing the very popular retirement planning device.

In its place, the Dems propose to enact a government-sponsored plan that would transfer the role of total retirement security into its hands. The problem is, could the investment options be limited to only a special type of government bond? You know, the kind they use for the Social Security System where you can claim there's a trust fund but the money's all gone.

In any other circumstances, I would say that this proposal doesn't have a snowball's chance of becoming law. However, a year ago I would have told you it would be next to impossible for the Fed and Treasury to guarantee hundreds of billions in worthless bonds, force mergers of financial services companies, buy hundreds of billions in equity stakes in our largest banks or take ownership in a public corporation. If the Dems get a supermajority in both Houses of Congress, I won't be surprised by any neo-socialist boondoggles that may well appear, especially if Obama wins the election.

I fear that the recent bailout maneuvers have started us on a slippery slope toward socialism. Where will it stop? Hopefully, today. If not then, we might see it get a lot worse before it gets better. Whatever turns out to be the case, you need to know what may be coming on the retirement account front, specifically for 401(k)s.

Before we get to that, I will quickly review the latest economic numbers which are grim. We are now in a recession, textbook definition or not, and I expect it will only get worse for some time to come. I will have a more detailed analysis on the economy and what we should expect in an upcoming E-Letter.

The Economy Falling Fast Into Recession

Last Thursday the Commerce Department announced that 3Q Gross Domestic Product fell at an annual rate of -0.3%. This was the "advance" report which relies on somewhat scant data for September, so the next GDP report late this month could well be revised downward. The much-watched ISM Manufacturing Index plunged from 43.5 in September to 38.9 in October, a 26-year low. The Chicago Purchasing Managers Index, a proxy for business spending, imploded from 56.7 in September to 37.8 in October.

Consumer confidence fell off a cliff in October, plunging from 61.4 in September all the way down to 38.0, an all-time low for the index. Personal consumption spending fell 0.3% and durable goods orders slumped 2.9% in September (latest data available). General Motors reported yesterday that car sales for October were down over 45% from yearago levels. Retailers are bracing for a very disappointing holiday season.

Our economy is in serious trouble, folks! And the credit crunch is far from over. I could see this recession lasting a year or longer. I will have more detailed economic analysis in the next week or so, depending on what new surprises we see in the days just ahead.

Democrats Want To Highjack Your 401(k)

By now, many of you may have read about a new Democratic proposal to eliminate the tax incentives provided to 401(k) retirement plans, and replace them with 'government-guaranteed' retirement accounts. On its face, this plan is being touted as a way to restore stock market losses incurred by 401(k) participants over the past couple of months. However, the real agenda is far more rooted in liberal ideology. If you read what follows, I think you'll agree, and it should scare you!

Before getting into what has been proposed, let's take a look at exactly what the Democratic proposal would do away with. Many Americans are not aware of all of the tax benefits available to help workers save for retirement in 401(k) plans, including plenty of people who actually have these retirement plans. The Democrats are no-doubt counting on participants not knowing what they are giving up to make the sale easier.

The Democrats' proposal does not seek to do away with 401(k) plans. Instead, it places the tax advantages enjoyed by employers and employees in the crosshairs. Therefore, it would be beneficial to review just what those tax advantages are. Note that the following benefits pertain to traditional 401(k)s, but are not applicable to special "Roth" 401(k) contributions, which I will cover a little later on. Again, these are the current tax advantages for 401(k) accounts:

Employee contributions to the 401(k) are deductible for income tax purposes, but not for Social Security tax purposes;
Employer contributions are not taxed as compensation to participating employees for income tax or Social Security tax purposes;
Earnings (interest, dividends, capital gains, etc.) on employer and employee contributions are not currently taxed to the participant, but are allowed to accumulate on a tax-deferred basis. To illustrate, let's compare the accumulation of a contribution of $300 per month on a taxable and tax-deferred basis. Assuming a 30-year time horizon and 6% earnings (which are for illustration purposes only and not guaranteed), the taxable account would grow to $172,453, while the tax-deferred account would grow to $227,146. You can see the results using other assumptions by going to the following website for a tax-deferral calculator:

http://www.calcxml.com/do/inv07
Finally, assets grow tax-deferred in traditional 401(k) plans, not tax-free. Thus, withdrawals at retirement are taxed as ordinary income in the year in which they are actually withdrawn. Most retirees withdraw annually only what they need to supplement their other sources of retirement income.

I noted above that these tax benefits pertain to traditional 401(k) plans, but they do not apply to special "Roth-type" contributions and earnings. In Roth plans, contributions are not tax-deductible when made. However, earnings on all Roth contributions can be withdrawn tax-free IF they are held for a sufficient period of time. For younger 401(k) participants, this can be a huge advantage. Note, however, that these special rules do not apply to employer matching contributions.

As you can see, the tax benefits associated with traditional 401(k) plan contributions and earnings are not only favorable to the employer, but also to the employee. The ability to grow retirement assets on a tax-deferred basis is a huge benefit, and is part of the reason that these plans have gained so much in popularity over the last 20 years or so.

The Democrats' 401(k) Replacement Plan

I have read a number of articles describing the alternative 401(k) plan being considered by some of the Democratic leadership. This plan was the brainchild of Dr. Teresa Ghilarducci, an economics-policy professor at the New School for Social Research in New York (where else?). However, I got so many different details from the various articles I read, I figured it would be best to review Dr. Ghilarducci's own testimony and briefing paper rather than counting on hearsay.

It's a good thing I did, because Dr. Ghilarducci's original proposal is quite different in some respects than the plan she revealed in her Congressional testimony. However, either proposal would still likely result in the death of 401(k) plans and would put the government in the role of providing retirement security. Here are the details of her original briefing paper from November of 2007:

As already noted, the proposal would not do away with 401(k) plans, but would eliminate all of the tax benefits as discussed above. I must assume that this also means the tax benefits associated with Roth-type 401(k) contributions as well. This would, in effect, kill 401(k) plans as the tax incentives for employers and employees are the main drivers for their adoption and participation.
Instead of employer-sponsored 401(k) plans, the government would set up special Guaranteed Retirement Accounts (GRAs). Participation would be mandatory for all workers except for those who are covered by an equivalent or better defined benefit retirement plan.
Required contributions of 5% of salary (equally shared by employer and employee) would be made to the GRA each year, and would be administered by the Social Security Administration. Contributions will apply only up to the Social Security earnings cap (currently $102,000 for 2008), and workers will have the option to make additional after-tax contributions to the GRA.
To offset the loss of before-tax contributions in 401(k) plans, workers would receive an annual $600 refundable tax credit, indexed to inflation. Note that the "refundable" nature of this tax credit insures that workers receive it even though they may not pay any income taxes. For lower-paid workers, all or part of the $600 tax credit would be directed into the GRA to insure at least a $600 annual contribution for every worker.
As noted above, the GRAs would be administered by the Social Security Administration and would be guaranteed at least a 3% annual return. However, the original proposal suggests that these contributions be managed by a unit of the government's Thrift Savings Plan, and not placed into government IOUs. Independent trustees would direct the investment of contributions and have the authority to hire commercial money managers. While the government would guarantee a minimum return of 3%, it would also be possible to earn excess returns which could be credited to GRA accounts.
Finally, at retirement, GRA account balances are converted to inflation-indexed annuities based upon the life expectancy of the participant. Even so, individuals will be permitted to take a partial lump-sum distribution equal to the greater of 10% of their account balance or $10,000, and will also be able to select among optional survivor benefits in exchange for a smaller monthly check.

The supposed benefits of this new retirement arrangement will be to provide a benefit roughly equal to 25% of the pre-retirement income of a full-time worker who works 40 years and retires at age 65. Noting that Social Security replaces approximately 45% of pre-retirement income of the average worker earning $40,000, the proposal states that the combined programs can replace 70% of pre-retirement income of such workers.

Of course, that only applies to workers earning their "averages" and working for the period of time they consider to be typical. The actual amount of replacement income will depend upon actual earnings. A table in Dr. Ghilarducci's briefing paper notes that a "high earner" averaging $60,000 per year in earnings at retirement will replace only 61% of pre-retirement pay, while a "low earner" with only $20,000 of earnings at retirement will replace 89% of pre-retirement pay. Now that's what I call spreading the wealth, but more about that later on.

There are many other details of this plan that space does not permit me to discuss. For more details of the original proposal, see Dr. Ghilarducci's briefing paper for the Economic Policy Institute at the following web address:

http://www.sharedprosperity.org/bp204.html

Congressional Testimony Paints A Different Picture

It's safe to say that Dr. Ghilarducci's original proposal is not as bad as what we heard being proposed during her October testimony before the Committee on Education and Labor. This testimony provides some insights as to how the proposal has changed as the markets have wreaked havoc upon the account balances of 401(k) participants, and the government has moved to "bail out" various financial sectors.

For example, the original proposal didn't spend much time talking about "trading in" existing 401(k) accounts for the new GRA, but Dr. Ghilarducci's testimony notes that such a trade-in could occur based on "mid-August [stock market] prices." In other words, the government would pony up the difference between participants' current reduced account balances and what they had in mid-August before the latest stock market meltdown.

Other testimony given during the same Committee hearings stated that $2 trillion of value had been lost by participants in 401(k)s, IRAs and similar retirement plans over the course of the past 15 months. How much of this represented "lost" 401(k) balances is unknown, but whatever disappeared between mid-August and October would be restored by the government.

Also recall how Dr. Ghilarducci originally proposed a reasonable trustee-directed investment plan for the entire GRA. However, her recent Congressional testimony modified this stance. She now proposes that 401(k) accounts "traded in" to restore their mid-August values would be invested in a special type of government bond that earns 3%, adjusted for inflation. The testimony makes it clear that the government bond proposal would apply only to restored account balances traded in for GRAs, but who knows what Congress may decide.

Plus, we all know that these special bonds would likely be similar to those in the Social Security "trust funds." It is a sad fact that money contributed to the Social Security trust funds is simply spent by the government in exchange for IOUs. I have written previously about how the Congressional Budget Office described the bonds in the Social Security trust fund back in 2002, but I'll reproduce it below just to drive home the point:

"Trust fund holdings, as internal liabilities between government accounts, are not assets of the government. Nor do they represent money owed to program recipients individually; payments to Social Security recipients and beneficiaries of other social insurance programs are based on a variety of rules set by law unrelated to trust fund holdings. A federal trust fund is basically an accounting device that measures the difference between the income designated for a specific program and the expenditures made to its beneficiaries. The accumulated difference, or balance, often represents a reserve of future 'spending authority' for the program, but it is not a reserve of money for making payments." [Emphasis added]

"In the future, when receipts for such programs as Social Security fall below their expenditures, the legal authority to pay benefits will exist as long as their trust funds have balances, but the government will have to generate cash to pay benefits either by running a surplus in the rest of the budget--which would probably require cutting other spending or raising taxes--or by borrowing from the public."

Understand that the above described makeover plan for 401(k)s is just the starting point, especially under an Obama Administration and Democrat majorities in the House and Senate.

Specifically, Dr. Ghilarducci's testimony also made it clear that she is not just aiming at 401(k) plans, but also various other types of "defined contribution" plans including profit sharing, money purchase pension plans, 403(b) plans and even IRAs. Perhaps we should christen this proposal "Social Insecurity 2.0."

Other details are far less than clear right now, such as the tax treatment of 401(k) account balances transferred into a GRA, what would happen to workers who don't fit the "average worker's" 40 years to contribute to the plan, and many, many others. If this plan gains any traction in the new Congress, I'm sure we'll hear more about these and other details yet to be disclosed.

Whatever the final form of an actual bill to introduce GRAs, if any, Dr. Ghilarducci's proposals are still a major diversion from retirement planning law that has steadily evolved since the passage of the Economic Recovery and Income Security Act of 1974, otherwise known as ERISA. What would cause Congressional Democrats to trash over 30 years' worth of retirement planning law? I'll give you a hint: it starts with an "S."

Socialism Du Jour - "Spread The Wealth Around"

The first hint at the real motivations behind the GRA proposal should come from the fact that Dr. Ghilarducci's paper was published by the Economic Policy Institute, not exactly a bastion of conservative thought. Plus, the table of contents on the briefing paper was punctuated by the tagline "Agenda for Shared Prosperity." Isn't this just another way to say, as Senator Obama suggests, to "spread the wealth around?"

And don't think this is just an over-the-top reaction from a conservative. Dr. Ghilarducci, the architect of the new plan, said the following during a recent interview:

And what's amazing about this is that it's actually, um, doesn't cost the government anybody (sic). I'm just rearranging the tax breaks that are available now for 401(k)s and spreading -- spreading the wealth.
[Emphasis added - GDH]

You would think that the Democrats would have coached her to not describe it in those exact words, but the bottom line is that spreading the wealth is exactly what GRAs are designed to do.

The carrot at the end of the stick is the restoration of accounts to their August 2008 values, before the latest market crash. Imagine how many Americans would jump at the chance to recoup the market losses of the last couple of months!

Free money, or so it would seem. That's how socialism works: give 'em a short-term benefit in exchange for a lifetime of bondage.

While a lot of Dr. Ghilarducci's testimony dealt with enhancing retirement security, reducing investment-related fees and making up for losses incurred during the recent bear market, a quick review of her Congressional testimony reveals the real reason for this desire to change to a new government-sponsored universal retirement plan.

According to Dr. Ghilarducci, the current system of providing tax incentives to companies and workers for sponsoring and participating in 401(k)-type plans is inefficient. While you and I might define the term "inefficient" much differently, for purposes of the "spread the wealth" crowd, Dr. Ghilarducci defines it as having too much of the tax subsidies go to people who actually pay taxes (ie - higher income earners).

Her testimony notes that 6% of taxpayers with incomes over $100,000 per year reap 50% of the total tax benefits from 401(k) and related plans. Never mind that this 6% of taxpayers pay the lion's share of all income taxes. I don't have numbers for the top 6%, but in 2006, the top 5% of taxpayers paid 60% of all income taxes. Plus, approximately 1/3 of filers pay no income tax at all based on 2006 income tax statistics.

I would argue that it makes sense that people who actually pay taxes should be the ones receiving the lion's share of any tax benefits, not those who pay no taxes at all. Demographics would also seem to dictate that high earners would get most of the benefits. My firm counsels workers to start contributing to their 401(k) plan early to allow compound interest to grow. Thus, it makes sense that those with larger balances are those who have been saving a long time, and who are most likely to have worked their way up into high-paying positions. This proves that working hard and saving early pays off in the long run.

However, the Democrats now want to say that those who worked hard to excel and who took advantage of tax incentives to save a sizeable nest egg should be punished and have their tax benefits given to those who have not been as industrious or mindful about saving.

The bottom line is that this whole proposal is nothing more than a way to redistribute wealth based on liberal ideology. It's being sold as a way to restore balances, guarantee minimum future returns and reduce the uncertainty of market-based investments, but you can rest assured that it's just another step on the road to increased government control of every part of our lives, also known as socialism.

A New Democratic Piggy Bank

I also find it very interesting that one of the new wrinkles that has appeared in Dr. Ghilarducci's proposal between its original release and her recent testimony would allow 401(k) participants to have their account balance restored if they move their account into a new government bond. Considering that billions of dollars will be required to bail out Wall Street due to the subprime crisis, the future of social programs under a Democratically controlled Congress were in question. Where would they get the money?

Now we know one way they might try to get some cash in the coffers - highjack our 401(k)s and other tax-deferred retirement accounts.

Plus, it is currently unknown how much, if any, of the ongoing contributions would be allocated to these special government bonds. Since the whole matter is currently in flux, I could see a Democratic Congress mandating all or part of ongoing contributions be placed into government-guaranteed bonds. Sure, the Democrats will try to sell GRAs as a way to insure retirement stability, but it will really be a way to have access to a gigantic stash of cash.

Can We Afford This Nonsense? No, But So What?

This new 401(k) replacement proposal results in affordability issues at several levels. First, can the government afford to restore mid-August values for everyone in a defined contribution type of retirement plan? After all, the amount of money to do so would be gargantuan! Well, I guess it can as long as they keep the printing presses going at the Fed. However, that doesn't mean it's affordable.

The Congressional Budget Office has estimated that all types of retirement plans (IRAs, defined benefit, 401(k), etc.) have lost apprx. $2 trillion over the last 15 months due to stock market declines. I cannot find a statistic showing how much of that loss was in defined contribution plans like 401(k)s, but I would guess it's in the hundreds of billions.

Plus, what about the defined benefit plans that are now going to be under-funded. It probably won't be long until we see companies with at-risk pension plans asking for a bailout of their own. If we bail out 401(k) participants, can we justify not bailing out employers who may have no other choice than to terminate their plan if they can't get a government handout?

Another level of affordability is in relation to the returns needed in a 401(k) to produce a meaningful retirement benefit. The proposed bond investments will guarantee 3% above inflation on balances "traded in" to the GRA. Since inflation historically runs about 3% per year, that means a 6% return. It will be hard for workers to build much wealth with such low returns.

Finally, we have to look at the effects on the stock market. We don't know exactly how the money "traded in" to a GRA will be treated, but that giant sucking sound you'll hear might be money flowing out of the equity markets and into government bonds. That will mean more downward pressure on stock market prices.

And what will the government do with the trillions of dollars it will be given? Three guesses and the first two don't count: Spend it, of course. Maybe this is how Obama gets the money to fund his lavish new spending programs. It could happen.

What is really hard to understand is that Democrats continually grouse about the regressive nature of the Social Security tax, which is currently 7.65% of pay (matched by the employer). Self-employed individuals must pay both shares, so their tax rate is 15.30%. While Obama's tax plan promises to rebate part of this tax, it would seem a contradiction to add yet another 5% mandatory contribution/tax/whatever for employees to pay. Plus, if employers have to pay half of this mandatory contribution, it will represent yet another expense during a period of recession. Not a good idea!

The entire idea of replacing employer-sponsored 401(k) plans with a government sponsored Social Security - II plan would have been considered ludicrous prior to August of this year. However, after banks, brokerage firms, insurance companies and car makers all lined up for a share of government's largesse, it's now not hard to imagine something this insane actually becoming law.

Conclusions - After Today, Anything May Be Possible

Considering that this proposal has been trotted out during a Committee hearing at a time when Congress is not even in session likely indicates that it's no more than a trial balloon to gauge public reaction. Dr. Ghilarducci's original proposal made no waves when it was released a year ago, likely because no one felt there was a snowball's chance of it ever becoming law.

Now, however, times have changed. The recent market meltdown has many investors worried about their ability to retire with sufficient income. On top of that, lawmakers have seen that the major Wall Street bailouts have been passed without riots in the streets. This just might give them the ability to answer all of their constituents who have asked, "Hey, where's my bailout?"

I want to think that this proposal has very little chance of ever becoming law. Over the last 2-3 decades, there has been a continual expansion of tax incentives to get workers to save for retirement, and for employers to help them do so, and there is no doubt this has been a good thing. Thus, I would hope this will not be dismantled in the next Congress.

But we should all understand that, if Barack Obama becomes our new president with supermajorities in Congress, anything is possible. A massive expansion of government and a rollback of our freedoms are not out of the question. Such an expansion of government has to be funded somewhere, and 401(k)s and other supposedly sacred retirement plans, including IRAs, may appear to be the low-hanging fruit to the liberals who will be in control in Washington.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

'Panic of 2008' - Will the Democrats bring us a Depression? (must read)
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_hassett&sid=aY3kqxNeV7lU

We Could Be In for a Lurch to the Left
http://online.wsj.com/article/SB122576065024095511.html

Economic Ills Will Force Winner's Hand
http://online.wsj.com/article/SB122575838410095279.html

Thomas Sowell - Obama all "Ego and Mouth"
http://www.realclearpolitics.com/articles/2008/11/ego_and_mouth.html

Might Uncle Sam Make Money On The Bailout?

Gary D. Halbert — Tue, 30 Sep 2008 19:36:00 GMT

IN THIS ISSUE:

The Latest $700 Billion Bailout Package
What Could Go Wrong? Potentially A Lot
What Could Go Right, If We're Lucky?
What Would Happen To The Profits, If Any?
A "Main Street" Backlash To Come?

Introduction

Like it or not, members of the House and Senate, with the approval of President Bush and both Senators McCain and Obama, reached a final agreement on the massive $700 billion mortgage bailout package over the weekend, with the much-awaited announcement on Sunday afternoon. Yet on Monday, the bailout bill failed to pass in the House of Representatives. As this is written, is not certain what will happen next. The next action probably doesn't happen until Thursday.

Assuming the latest rescue package (or some version of it) passes both houses of Congress, which is a real stretch at this point, it will give President Bush, Treasury Secretary Paulson and Fed Chairman Bernanke most of what they asked for. I'll discuss the details below.

Most Americans do NOT like the latest huge government bailout of Wall Street banks, brokers, etc. Some polls late last week and over the weekend suggested that 65-75% of Americans opposed the bailout. I can understand why, especially with millions of American families struggling to make their monthly mortgage payments.

One reason for this anger over the bailout is the widespread perception that the $700 billion (or whatever the number turns out to be) is money down a rat hole that the government and taxpayers will never see again. While there are numerous risks in the bailout, the odds seem low that the government will lose all or even most of the bailout money. I will discuss some of the main risks to the bailout as we go along.

Interestingly, there is a growing number of intelligent folks in the financial world that believe the government could actually make a lot of money on this huge bailout effort, especially if they play their cards correctly. As I will discuss below, some respected analysts believe the government could net $1 trillion or more off of its investment of $700 billion.

Don't count me among this group, however. While I would concede that there may be some potential upside in this massive bailout program, we have to keep in mind that it's the government, after all, that will be running the enormous and complicated operation. The government is not known for making money, especially in complex financial dealings.

In any event, I do believe that if more Americans understood there is the potential to get most or maybe even all of the bailout money back, they might not be quite so angry about the deal. We'll talk about all of this as we go along this week.

The Latest $700 Billion Bailout Package

As discussed at length in last week's E-Letter, the massive rescue package floated by President Bush, Treasury Secretary Paulson and Fed Chairman Bernanke on September 19 was fraught with problems. That plan would have us turn over $700 billion to the Treasury Secretary with no oversight, no transparency, no accountability and no legal challenge in the courts.

There was no chance that package was going to pass, as I pointed out last week. Yet over the ensuing week, all parties rolled up their sleeves, put in very long hours, made compromises on both sides of the aisle and came up with a much better rescue plan by last Sunday. Whether we like it or not, here is an overview of the latest massive bailout plan as we now understand it.

Doling the money out: The $700 billion would be disbursed in stages, with $250 billion made available immediately for the Treasury's use. More would be made available as needed. Authority to use the money would expire on Dec. 31, 2009, unless Congress certifies a one-year extension.

Overseeing the program:The bill would establish two oversight boards. A new Financial Stability Oversight Board would be charged with ensuring that the policies implemented protect taxpayers and are in the economic interests of the United States. The oversight board would include the Federal Reserve Chairman, the Securities and Exchange Commission Chairman, the Federal Home Finance Agency Director, the Housing and Urban Development Secretary and the Treasury Secretary.

Second, a congressional oversight panel would be charged with reviewing the state of financial markets, the regulatory system and the Treasury's use of its authority under the rescue plan. Sitting on the panel would be five outside experts appointed by House and Senate leaders.

Insuring against losses:The Treasury would establish an insurance program - with risk-based premiums paid by the industry - to guarantee certain of the companies' troubled assets, including mortgage-backed securities purchased before March 14, 2008. The amount the Treasury would spend to cover losses minus company-paid premiums would come out of the $700 billion the Treasury is allowed to use for the rescue plan.

Protecting taxpayers: One provision requires the President to propose legislation to recoup losses from the financial industry if the rescue plan results in net losses to taxpayers five years after the plan is enacted. In addition, Treasury would be allowed to take ownership stakes in participating companies.

Limiting executive pay: Curbs would be placed on the compensation of executives at companies that sell mortgage assets to the Treasury. Among them, companies that participate will not be able to deduct the salary they pay to executives above $500,000. They also will not be allowed to write new contracts that allow for "golden parachutes" for their top five executives if they are fired or the company goes under. However, the executives' current contracts, which may include golden parachutes, would still stand.

Like it or not, these are the highlights of the latest proposed massive government bailout of troubled financial institutions which may yet be signed into law this week. While leaders of Congress praised themselves for acting quickly, it is indeed a very sad time for America.

What Could Go Wrong - Potentially A Lot

Let's be clear from the outset: this is the largest and most complex financial rescue plan in history. Given that fact, some argue that Treasury Secretary Hank Paulson is the right man for the job. Paulson was Chairman and CEO of investment banking giant Goldman Sachs from 1999 to June 2006 when be became Treasury Secretary. While Paulson may be very qualified to head-up this massive financial operation, we must keep in mind that the rescue plan will hardly be off the ground by January 20 when the new administration takes over.

Perhaps the new president will keep him on, but there's no guarantee. So, leadership of this massive, complex operation is a big, big question mark as we begin our summary of the possible risks and problems.

The next fundamental risk is this: the banks, brokerages and others will be trying to unload the worst of the worst of their mortgage-backed securities on the government for the best possible price. The question is, will the government pay too much?

The mortgage-backed securities (MBSs) that the Treasury will buy from the various financial institutions that hold them are in many cases very complicated instruments. Space does not permit a discussion of all the intricacies and the various combinations and mutations of these complex packages of MBSs (not to mention that I don't fully understand them all myself).

Suffice it to say that even the supposedly brilliant minds of Wall Street cannot determine how to value many of these securities today, so why should we think that government bureaucrats will know how to value them correctly? Why would we not assume that the Wall Street banks and brokers will convince Treasury to pay more than the securities are really worth?

And as I discussed briefly last week, the government has some incentive to pay more than these assets are really worth. After all, the supposed purpose of this massive bailout is to allow the banks and other financial institutions to recapitalize and resume lending and unfreeze the credit markets. If the government buys these MBSs at even further discounted prices, the banks would have to book even more losses, and more banks would fail.

The thinking is that since Uncle Sam has the deep pockets and the ability to hold these securities for a long time, it can pay the banks somewhat more than today's crisis values, thus allowing them to recapitalize. Presumably, the government can hold the mortgage securities long enough for them to recover and make at least a decent profit on some of them. That remains to be seen, of course.

I think we can all agree that the government has the deep pockets, at least as long as the world is willing to buy our Treasury bills, notes and bonds. But my question is whether the Treasury, the Congress (and the public for that matter) will have the patience to hold these distressed securities, potentially for years for them to recover. Or will there be pressure on the Treasury to dump these securities prematurely?

Patience is not a commodity that is in heavy supply in today's debt-laden, entitlement-oriented society in America. Baby Boomers need a renewed bull market in stocks to fund their retirement, which may be postponed due to this massive pool of MBSs hanging over the market.

Bottom line: if the Treasury is pressured into unloading these mortgage-backed securities before the economy and the debt markets have recovered, then we should expect to incur potentially huge losses and possibly yet another credit crisis.

Next, there is the question of how will the Treasury determine which banks and other financial firms get to participate in the bailout, especially in the first $250 billion tranche (assuming that is the final deal). One possible mechanism that has been discussed by Paulson and others is a "reverse auction." However, a traditional reverse auction may not be effective in this situation where the government is not necessarily looking to purchase the MBSs at the lowest possible price. The objective of the enormous bailout is not to drive more financial firms out of business, but to help them recapitalize, stay in business and resume normal lending.

Another tricky part of determining which banks and financial firms get to unload their bad debt is as follows. As noted earlier, everyone will likely try to unload the worst of the worst MBSs on the government. Some firms that are in better shape and have limited MBSs may be in a position to take less for them just to get them off their books, whereas firms that have much higher exposure to MBSs could yet go out of business were they to unload their toxic positions at further discounted prices.

The bottom line is, the process for determining which firms get to unload these securities, and at what prices, will be extremely complicated and risky. A lot could go very wrong.

The discussion just above is by no means a comprehensive summary of the possible risks to this massive mortgage bailout. In fact, it is overly general, but I think you get the idea that we are far from out of the financial crisis, even if the massive bailout becomes law later this week.

What Could Go Right, If We Are Lucky

As noted in the Introduction, there are some very smart people that believe the government could actually make a profit on the bailout, perhaps a lot of money if managed effectively. Bill Gross is one of the most highly respected money managers and financial writers around. He is the portfolio manager for the largest bond mutual fund in the world, PIMCO's Total Return Fund. He is also the author of two very popular books on investing.

Last Wednesday, Bill penned an editorial in the Washington Post in which he made it known that he was in favor of some form of the government rescue plan that was being debated in Congress last week. Furthermore, he made it clear that he believes the government could make a lot of money on the mortgage-related assets the Treasury intends to buy. He said of the bailout plan:

"The extreme measures [needed] are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from ‘troubled financial institutions' to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent.

Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that…

Today, the purchase of junk mortgages, securitized credit card receivables and even student loans will be bought at prices significantly below ‘par' or cost, and prospectively at levels allowing for capital gains. This is a Wall Street-friendly package only to the extent that it frees up funds for future loans and economic growth… The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic."

So, Bill believes the government should be able to make 10-15% on average on the distressed mortgage and related securities it purchases – IF the massive operation is managed well. Interestingly, it was reported in the media late last week that Bill offered to manage the government-owned mortgage/securities portfolio himself for free. Who knows if this offer is for real, but PIMCO manages over $825 billion in assets now, an amount similar to the size of the proposed bailout, so…. Hank, are you listening?

The next example of a savvy market maven who thinks the government could make some serious dough on the bailout package is Andy Kessler. Andy is a former hedge fund manager who made his claim to fame by reportedly taking $100 million in his fund's assets in 1996 to $1 billion by 2001. He has since written several popular books on investing and business.

Andy believes the government could make far more money on this mortgage rescue package than Bill Gross envisions. Here are excerpts of what Andy offered up last Thursday in his latest Wall Street Journal editorial (emphasis added):

"There is a saying on Wall Street that goes, ‘The market can stay irrational longer than you can stay solvent.' Long Term Capital Management learned this lesson 10 years ago when it got its portfolio picked off by Wall Street as its short-term financing dried up. I had thought the opposite -- hedge funds picking off Wall Street -- would happen today. But in a weird twist, it's the government that is set up to win the prize.

Here's how: As short-term financing dried up, Fannie Mae and Freddie Mac's deteriorating financials threatened to trigger some $1.4 trillion in credit default swap payments that no one, including giant insurer AIG, had the capital to make good on. So Treasury Secretary Henry Paulson put Fannie and Freddie into conservatorship. This removed any short-term financing hassle. He also put up $85 billion in loan guarantees to AIG in exchange for 80% of the company.

Taxpayers will get their money back on AIG. My models suggest that Fannie and Freddie, on the other hand, are a gold mine. For $2 billion in cash up front and some $200 billion in loan guarantees so far, the U.S. government now controls $5.4 trillion in mortgages and mortgage guarantees.

Fannie and Freddie each own around $800 million in mortgage loans, some of them already at discounted values. They also guarantee the credit-worthiness of another $2.2 trillion and $1.6 trillion in mortgage-backed securities. Held to maturity, they may be worth a lot more than Mr. Paulson paid for them. They're called distressed securities for a reason.

Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs [Collateralized Debt Obligations] from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay. Better mortgages and CDOs are selling for 70 cents on the dollar. But many are seriously distressed (15-25 cents on the dollar) because they are the last to be paid in foreclosures. These are what Wall Street wants to unload the quickest.

Firms will haggle, but eventually cave -- they need the cash. I am figuring Mr. Paulson could wind up buying more than$2 trillion in notional value loans and home equity and CDOs for his $700 billion...

It's not without risk, but the Feds, with lots of levers, can and will pump capital into the U.S. economy to get it moving again. Future heads of Treasury and the Federal Reserve will be growth advocates… This is a huge change. Plus, a stronger U.S. economy, with its financial players having clean balance sheets,[the U.S.] will become a safe haven for capital...

You can slice the numbers a lot of different ways. My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion -- the greatest trade ever. Every hedge-fund manager will be jealous. Mr. Buffett is buying a small piece of the trade via his Goldman Sachs investment.

Over 10 years this could change the budget scenario in D.C., which can also strengthen the dollar. The next president gets a heck of a windfall. In the spirit of Secretary of State William Seward's purchase of Alaska for $7 million in 1867, this week may be remembered as Paulson's Folly."

What exactly does this mean? Kessler believes that the Treasury will recover at least $1 trillion off of the investment of $700 billion – even with some of the mortgage securities fetching zero – and quite possibly as much as $2.2 trillion. Only if the operation is bungled should the government lose a dime, so Kessler believes.

Finally, I'm seeing more and more analysts come to increasingly positive conclusions about how the government ought to be able to make money – and not lose money – on this massive mortgage rescue package.

As for me, I'm not drinking the kool-aid just yet, but then again, I'm willing to admit that there's potential if a lot of things happen right. But a lot could go wrong as well. We are talking about the government after all, and one that may well be controlled by a liberal Congress and a liberal president for the next four-to-eight years. So I would not bet a dime that this massive bailout will end up being profitable. On the other hand, I do hope that it will.

What Would Happen To The Profits, If Any?

No doubt we will all rejoice if the $700 billion bailout reaps some big profits in the next 5-10 years (not that I am convinced, of course). As thoughts of some sizeable profits have become the talk of the town in recent days, questions have arisen as to what the government would do with the windfall should it happen.

Would Uncle Sam issue checks directly to the taxpayers? Not hardly! That would be seen as a tax cut, when in fact the taxpayers never had to loan the government any money directly to fund this massive $700 billion bailout.

Some intelligent observers have suggested that the government could use the potential profits from the giant bailout to pay down the national debt. This is precisely what Andy Kessler refers to above when he writes: "Over 10 years this could change the budget scenario in D.C." He is suggesting that the government could use the profit he projects (up to $1.5 trillion) to pay down the national debt.

Others have suggested that the potential bailout windfall could be used to help shore-up Social Security and/or Medicare. A trillion dollars, they suggest, could go a long way toward keeping these giant entitlement programs solvent in the years ahead.

That's a nice idea, assuming such a windfall profit actually occurs. But even if you assume that there will be some large profits some years down the road on this huge bailout, which I don't, what do you think Congress and the Administration in power at the time will do with the money? Three guesses, and the first two don't count.

They will spend it and delight in doing so. They will not send us a check or even cut taxes. They will not pay down the national debt. They will see it as a green light to increase the budget and thus the size of government. Just keep this in mind in a few years – if there are any profits to be dealt with.

Thus, I would insist that there should be clear language in the bailout bill, assuming one passes, that specifies exactly what would be done with any profits that might result from it. Yet that is not likely to happen.

A "Main Street" Backlash To Come?

As noted earlier, some polls over the last two weeks suggested that two-thirds to three-fourths of Americans were opposed to the Wall Street bailout. Clearly, millions of Americans are downright angry about it. A few polls indicated that the numbers were not as negative as 65-75% opposed, but clearly there are far more Americans who oppose the bailout than are remotely in favor.

This indeed raises the question of whether there will be a Main Street backlash if the $700 billion bailout is voted into law. Clearly, millions of Americans see this massive bailout as nothing more than the government's willingness to spend historic amounts of taxpayer money to bail out the Fat Cats on Wall Street.

Along this line, let me remind you of something I wrote last week: "the current financial crisis and the enormous $700+ billion government bailout virtually assure that, if elected: 1) Obama will not be able to push through his aggressive spending plans; and 2) McCain will not be able to push through any tax cuts. Realistically, the money for either of these proposals is no longer there."

Let there be no mistake, millions of Americans have been counting on the promises made by these two candidates. Most of Obama's supporters have bought into his promises of wide sweeping social reform, including nationalized health care, lower taxes on the middle class, and higher taxes on those making $250,000 or more a year. Likewise, many McCain supporters are banking on him extending the Bush tax cuts and other tax cuts he has promised.

If sound fiscal minds prevail, in light of the latest $700 billion spending bailout, neither candidate will be able to pursue these campaign promises. If people are angry today, they are likely to get even angrier in the months and years ahead. Why?

Despite the dire warnings of financial calamity from the White House, the Treasury Secretary, the Fed Chairman and some high-profile business leaders, much of Middle America wasn't buying the story that their own livelihoods were linked to the fate of the rescue package. Instead, average workers read the plan as the big guys in Congress bailing out their friends on Wall Street.

A majority of Americans didn't want Congress to use taxpayer dollars to bail out financial institutions, even if their collapse meant a rocky ride for investors in the stock market. A few congressmen and women admitted publicly that their calls from constituents were running as high as 100-to-one against the bailout plan.

Never mind that the collapse of Wall Street will almost certainly result in a recession, or worse, that will affect virtually all Americans. Never mind that the credit markets have seized up, and that lending for such things as home mortgages had ground to a virtual halt. Never mind that credit card spending may actually be at risk next.

I am reminded of the 1970s the movie "Network" which featured a news anchor who lost control and exclaimed, "I'm mad as hell and I'm not going to take it any more." I think that many in our country today have similar feelings, and no one knows at this point exactly what the eventual consequences will be.

Will there be a major backlash against the big Wall Street banks, brokers and others? Will Americans opt to move their money and their business to local banks that never participated in subprime mortgages, CDOs and other complicated mortgage backed securities? Will they move their investments from the Merrill Lynches of the world to local investment firms?

In my opinion, this suggests that big banks, big brokerage firms and multi-million dollar executive big bonuses may be in big trouble. We may well see a return to local community banks, many of which are in fine shape and have no subprime/MBS exposure at all. Local investment firms, financial planners and the like may benefit from a migration from "big box" brokerage/investment firms that were big players in toxic mortgage securities and still paid their CEOs and top execs multi-million dollar bonuses.

Unfortunately, we'll also likely see a move toward populist political candidates, who are far less friendly to big business – that being the Democrats. For example, Senator Obama has seen a big bounce in the polls over the last two weeks as the credit crisis worsened and the massive bailout was concocted.

If there is a further trend toward populist politicians, that will mean more spending and higher taxes, which will be bad for our economy over the long-term. But then, that's a subject for another E-Letter.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

The Bailout Defeat: A Political Credibility Crisis
http://www.time.com/time/nation/article/0,8599,1845655,00.html

ACORN, Obama and the Mortgage Mess (what, you didn't hear about this?)
http://www.realclearpolitics.com/articles/2008/09/acorn_obama_and_the_mortgage_m.html

Congress lives up to its abysmal approval rating.
http://online.wsj.com/article/SB122273257698488295.html

What Goes Before a Fall? On Wall Street, Reassurance
http://www.nytimes.com/2008/09/30/business/30sorkin.html?_r=3&ref=business&oref=slogin&oref=slogin&oref=slogin

The Economy, The Electoral Map & The United Nations

Gary D. Halbert — Tue, 02 Sep 2008 20:04:45 GMT

IN THIS ISSUE:

The Economy Surges Above Expectations
Stocks - Have We Seen The Bottom?
The Electoral Map Remains Very Tight
The Scary Democratic Party Platform!!
Dems Endorse Expansion Of United Nations Power

Introduction

This week we hit a variety of topics. First, we'll look at the latest much stronger than expected economic numbers over the last couple of weeks. I believe it is now safe to say that the US economy will avoid a recession in 2008. But 2009 may be another story. Details to follow.

The Democratic National Convention came and went with a great deal of glitz, glamour and moving speeches, including the Clintons who surprised some political observers with rousing speeches for Barack Obama. It appears that Obama got a modest "convention bounce" in the polls, and it remains to be seen if McCain and the Republicans can answer with their convention, especially in light of Hurricane Gustav.

Whether Senator McCain gets his convention bounce or not, at the end of the day it still comes down to the Electoral Map which continues to show that this is a very tight race that could go either way based on the outcomes in just a handful of key swing states. I'll break it down and pinpoint the key states you need to watch over the next couple of months.

Finally, the details of the Democratic Party Platform are coming to light. While there are many things about the Dem's platform that I disagree with, there are several new developments that ought to trouble all Americans. First and foremost, the Democrats, and Obama in particular, want to strengthen the United Nations and commit more of our troops to UN-authorized military operations.

You need to know about this and several other very troubling intentions of the Democrats, especially if Obama wins in November. Cliff Kincaid of Accuracy In Media has chronicled the most troubling aspects of the Dem's platform, and I reprint that eye-opening article near the end below. Be sure to read it and pass it on.

The Economy Surges Above Expectations

The US economy surged in the 2Q, well above expectations, thereby dashing the notion that we're now in a recession. GDP rose a surprising 3.3% in the 2Q, up from just 1.9% in the advance estimate last month, and only 0.9% in the 1Q (details to follow).

The GDP surge in the 2Q was driven primarily by rising exports, consumer spending and government spending at all levels. Personal consumption spending (PCE) rose an unexpected 1.7% in the 2Q, and was no doubt helped along by the tax rebate checks doled out by the Treasury. Consumer spending accounts for apprx. 70% of GDP.

Early estimates suggest that the economy is growing at a rate of 1.8%-2.0% in the 3Q, which is also above earlier expectations for zero to negative growth in the current quarter. Several other economic reports of late look encouraging, but not all, as I will discuss below.

Given the much stronger than expected growth in the 2Q, and the strong likelihood that the 3Q will be positive as well, I think it's reasonable to conclude that the US will avoid a recession in 2008. How the economy holds up next year remains to be seen, but for now, the mainstream media, the Democrats and the gloom-and-doom crowd have been very wrong about the US economy. What else is new?

Several other recent economic reports were also encouraging. Consumer confidence finally rebounded strongly in August. Following a very modest improvement in July, the Consumer Confidence Index jumped from 51.3 to 56.9 last month. Obviously, the significant drop in oil and gasoline prices played a key role in boosting confidence.

On the manufacturing side, durable goods orders rose 1.3% in July for the second month in a row. Industrial production rose modestly in both June and July. Factory orders in June (latest data available) rose 1.7% following a gain of 0.9% in May. The ISM manufacturing index bottomed out in the 1Q and has now risen back slightly above 50.

There was even a bit of good news in the housing sector. New and existing home sales rose modestly in June. But there was also plenty of bad news as well. Housing starts and building permits continued to decline modestly in June. The inventory of unsold homes rose to 4.67 million in July, an 11.2 month supply. The median existing home sale price fell to $212,400, down 7.1% nationally from the same period last year.

The Index of Leading Economic Indicators (LEI) fell more than expected in July, down 0.7%. The LEI has been down in two of the last three months, which suggests that economic growth will slow in the current quarter (consistent with the 3Q forecasts noted above) and perhaps even more in the final quarter of this year. But as suggested above, I do not believe we will be in a recession by the end of this year.

Having said that, it will not surprise me if 4Q growth stalls to near zero or even dips slightly into negative territory. But at this point, I think it is 2009 that we have to worry about. The housing crunch will continue for all of 2009, and will the credit crunch most likely. Some of my trusted sources believe that a recession is most likely to unfold in the first half of 2009.

Stocks - Have We Seen The Bottom?

Stocks historically go up in presidential election years, but not so this year, what with oil prices soaring to near $150 per barrel and gas prices spiking above $4.00 across the country. As this is written, the S&P 500 and the Dow Jones indexes are down apprx. 13% for the year.

Clients have asked if I think we saw the bottom in July when the Dow fell below 11,000 and the S&P 500 touched 1,200. The answer is, I don't know. A big key will be whether oil and gas prices continue to fall this month with peak summer demand behind us. If energy prices continue to fall, then the July low may hold, but that remains to be seen.

On the other hand, it does appear that we are going to see the economy slow down even more over at least the next six to nine months. If we are headed for a recession in the first half of 2009, this will be bad news for stocks, and I would expect the July lows to be taken out later this year.

What I do believe strongly is that stock market volatility will remain sky-high for the rest of this year and probably well into 2009. Most investors are not well suited for this kind of volatility. I've heard from people who bailed out of the stock market over the last couple of months, and are now wondering if they should get back in.

My advice is still the same, especially with this kind of volatility. In my opinion, most investors would be well served to have a portion of their portfolio allocated to active money managers that have the flexibility to exit the market or hedge long positions as need be. There are some professional money managers that flourish during periods of high market volatility. See my June 10 E-Letter to see such an example. (Past results are no guarantee of future results.)

The Electoral Map Remains Very Tight

It appears that Barack Obama got a modest bump up in the national polls following his Hollywood style convention last week. It remains to be seen if John McCain will get a similar bounce later this week. Most analysts have felt like he will, but the hurricane has definitely toned down the GOP convention. So, maybe McCain gets a bounce, or maybe not.

Interestingly, McCain finally pulled to even or slightly above Obama in several of the national polls just as the Dem's convention started. Frankly, he's doing better than I expected, and that is a good thing - especially when you read the article below regarding the Democratic Party Platform. But as I have maintained all along, this presidential race is going to boil down to a handful of key states. Here's our latest analysis of the Electoral Map.

What a difference a month makes! The electoral map is coming into focus. The Obama-Biden ticket is very strong in states totaling 259 electoral votes, while the McCain-Palin ticket is strong in states totaling 227 electoral votes. That leaves 52 votes up for grabs.

Those 52 votes are Ohio (20), Virginia (13), Colorado (9), Nevada (5) and New Mexico (4). McCain is currently running slightly ahead in Ohio and Nevada, while Obama is running well ahead in New Mexico and slightly ahead in Colorado, with Virginia evenly split.

McCain MUST win Ohio and Virginia, losing either will cost him the election. Fortunately for McCain, that does not seem implausible, but you can be sure these states will be very hotly contested, with tens of millions spent in each coupled with numerous candidate appearances.

So, let's assume McCain manages to win both Ohio and Virginia, which will not be easy by any means, but both states historically vote Republican. If so, that brings him to 260 electoral votes, still 10 short of the 270 needed to win. McCain must therefore win Colorado and either Nevada or New Mexico.

Since New Mexico's wildly popular governor Bill Richardson is a big Obama backer, McCain will have to look to Nevada to put him over the top. This is his best bet as Nevada has gone Republican the last two elections and is trending slightly toward McCain as this is written.

But then that assumes he wins Colorado which is not a safe assumption at all. While CO went for Bush in 2004, it is currently a dead heat, and it's a must win state for McCain. McCain could be forced to spend so much time and money securing Ohio and Virginia that he simply can't pour the resources needed into the Western states and Colorado in particular.

Keep in mind that McCain will likely have to take federal matching funds, while Obama has chosen to forego federal campaign funds. McCain will be restricted to a maximum of $84 million in matching funds after the GOP convention, while Obama will have at least twice as much money as McCain to spend.

The Democrats are targeting Colorado, which is why the convention was in Denver, and the Obama campaign will spare no expense to secure the state as they see it as essential to victory, which it is. Colorado is perhaps THE most important swing state to both candidates. This looks to be one of the closest elections in history.

We will take another in depth look at the electoral map later this month and again in late October and make our final predictions on the outcome of the election then.

My Thoughts On The Sarah Palin Pick

My phone has been ringing off the hook with calls from friends and clients asking for my take on John McCain's selection of Sarah Palin, Republican Governor of Alaska, as his running mate. Here's what I think happened. When Obama passed over Hillary and took Joe Biden, this created an opening for McCain to select a woman in the hopes of courting Hillary's supporters.

Of the women candidates McCain was rumored to have considered, I think Senator McCain and his senior campaign aides decided that Sarah Palin was the one that could really catch on with voters. No doubt the selection of Governor Palin was a huge gamble, especially given her limited experience.

Mrs. Palin definitely helps McCain solidify the conservative base, and if she can handle herself well in the next few weeks, she might just catch on with some Hillary supporters and some swing voters. In that case, McCain's gamble might just pay off.

As a football coach for many years, I know that sometimes you have to "throw deep" to stretch the defense. Sarah Palin definitely qualifies as the long ball for McCain. I'm warming up to the pick, as McCain had to do something bold to have a chance against Obama.

The Scary Democratic Party Platform!!

I urge EVERY client and subscriber to this E-Letter to read the article that follows. The mainstream media is NOT talking about these issues. They don't want you to know!

According to the latest Democratic Party Platform, they would have us make a huge commitment of additional taxpayer money and US military forces to the United Nations. Obama and the Democrats would have American taxpayers spending additional billions to improve education worldwide via the U.N., while our own education system is in trouble.

Americans will be called upon to spend more on international abortion "services" and population control via the U.N. Under Obama, the military would be expanded - including open and active homosexuals - to carry out these new U.N. missions. There will also be new energy and emissions requirements on the US.

Last but not least, if Obama wins the Democrats vow to bring back the so-called "Fairness Doctrine" (albeit under a different name), which is designed to reduce conservative talk radio and restrict the ownership of broadcast outlets.

So read what follows from Accuracy In Media very carefully and help get the word out!

QUOTE:

Dems Endorse Expansion of U.N. Power

AIM Column | By Cliff Kincaid | August 21, 2008

Our media are running stories about the planks in the new 2008 Democratic Party platform but they've missed a big one―expansion of the power of the United Nations, and especially more U.S. involvement in U.N.-authorized military operations.

In another bow to the world organization, the platform indirectly endorses Senator Barack Obama's controversial pro-U.N. Global Poverty Act. "It is time to make the U.N. Millennium Development Goals, which aim to cut extreme poverty in half by 2015, America's goals as well," the document says. It leaves out the estimated cost―$845 billion over 13 years.

This plank is listed under the "Invest in Our Common Humanity" title of the platform. The word "invest" is as deceptive as the legislation. It means to spend taxpayer dollars.

While it may seem strange that the platform would not endorse the legislation by name, this reflects awareness of how controversial the Global Poverty Act (S. 2433) and its federal commitment to the U.N.'s Millennium Development Goals have become. Increased foreign aid spending is not popular with the hard-pressed American taxpayer. So the one piece of legislation actually introduced by Senator Barack Obama (which passed the House and Senator Joseph Biden's Foreign Relations committee by voice vote without hearings) is mentioned only indirectly.

A section titled, "Revitalize Global Institutions," is more direct. It declares the need for "stronger international institutions" on "issues from weapons proliferation to climate change." While admitting that the U.N. is in need of "reform," the organization is said to be "indispensable" and the U.S. must rededicate itself "to the organization and its mission." This inevitably means more money for the world body.

Even though the U.S. public school system is rotting from within because of unaccountability and incompetence, the platform calls for more spending on educational systems in other parts of the world. It urges a $2 billion Global Education Fund that will "bring the world together in eliminating the global education deficit with the goal of supporting a free, quality, basic education for every child in the world."

On another international matter, the Democrats declare that "We will repeal the global gag rule and reinstate funding to the United Nations Population Fund (UNFPA)." This means that Americans will be called upon to spend more on international abortion "services" and population control. In this context, the platform urges support for "Health Infrastructure 2020," which is described as "a global effort to work with developing countries to invest in the full range of infrastructure needed to improve and protect both American and global health." No cost is put on this effort.

Similarly, we are not told about how much it will cost to launch the "collective action" needed to confront the "global challenge" of climate change. But we are told that it will require a "Global Energy Forum that will lay the foundation for the next generation of climate protocols." It declares the need for a "global response to climate change that includes binding and enforceable commitments to reducing emissions…" This means more U.N. treaties impinging on our freedom and sovereignty.

It may surprise some "progressives" to learn that while Obama wants to withdraw U.S. forces from Iraq, he has no plan to reduce the size of the U.S. Armed Forces. Instead, "We support plans to increase the size of the Army by 65,000 troops and the Marines by 27,000 troops," it says.

If these troops are not going to be in Iraq, where will they be going? "We believe we must also be willing to consider using military force in circumstances beyond self-defense in order to provide for the common security that underpins global stability―to support friends, participate in stability and reconstruction operations, or confront mass atrocities."

Phrases such as "beyond self-defense" and "common security" constitute an endorsement of the U.N. doctrine of the "Responsibility to Protect." Since the platform declares that U.N. "peacekeeping" operations are "overextended," this means U.S. forces will have to be redeployed from Iraq and other areas to address civil wars and problems in other countries that pose no direct security threat to the U.S.

Meanwhile, the platform says the U.S. Armed Forces under President Obama will be expanded to include open and active homosexuals, despite its obvious negative impact on morale and recruitment. If normal heterosexuals leave the Armed Forces as a result of this policy, Obama may be forced to reinstitute the military draft to create the bigger military he seeks.

Thanks to conservative talk radio and other such outlets, the shocking facts about the Democratic Party platform will be provided to the American people. The conservative media have been a thorn in the side of the liberal establishment ever since President Reagan's Federal Communications Commission (FCC) began the deregulation of the media and new voices started emerging.

But the Democrats, whose base of support is in the old media, which are losing viewers and readers, want more, not less, regulation.

"We will encourage diversity in the ownership of broadcast media, promote the development of new media outlets for expression of diverse viewpoints, and clarify the public interest obligations of broadcasters who occupy the nation's spectrum," the Democratic platform says.

While this may sound appealing, terms like "diversity" and "diverse viewpoints" are liberal code words for using the power of the federal government to muzzle conservative talk radio and turning over broadcast properties and airtime to "progressives." This is the goal of George Soros-funded groups like the Free Press, which puts on an annual National Conference for Media Reform. As I reported in June, at this year's event, the conference turned into an Obama for president rally.

Translated into ordinary language, the term "we" in the context of the Democratic platform plank on the media means more federal government interference.

As explained by Tim Wu, a Columbia Law School Professor and chairman of Free Press, the U.S. Constitution is flawed because the founders did not anticipate the problem of "the abuse of private power." The Bill of Rights was merely designed to protect people against government and the founders were concerned about the exercise of "public power," he explained to the National Conference for Media Reform.

In direct contradiction to the intent and precise wording of the First Amendment to the Constitution, in terms of prohibiting Congressional abridgement of freedom of speech, this grant of massive authority to Congress and the federal government means that the FCC will decide what constitutes "diversity" and the "public interest" in broadcasting. Hence, the FCC, rather than market forces and the people, will decide who gets on the air, who can own media properties, and even who gets Internet access.

Meanwhile, the Democratic Congress can be counted on to increase U.S. taxpayer support for public TV and radio.

Conservative FCC Commissioner Robert McDowell recently warned that the Fairness Doctrine, which allows federal bureaucrats to monitor and dictate broadcast editorial content, may be brought back under a different name. "I think it won't be called the Fairness Doctrine by folks who are promoting it. I think it will be called something else and I think it'll be intertwined into the net neutrality debate," he told the Media Research Center. The term "net neutrality," as defined by George Soros-funded "progressive" organizations, means that federal authorities will monitor and regulate Internet networks, rather than letting private competitive forces operate on their own without governmental interference.

But other powerful "progressive" individuals and groups want the Fairness Doctrine back directly and immediately. The public should know that Democratic control of the White House would result in a 3-2 liberal majority in the FCC and the possible return of the Fairness Doctrine through administrative and executive action without any congressional approval required. House Speaker Nancy Pelosi has already declared she is in favor of it. That's why she refuses to bring the Broadcaster Freedom Act to a vote in the House. The Broadcaster Freedom Act (H.R. 2905) would prevent the FCC from unilaterally imposing the Fairness Doctrine on broadcasters.

The Democratic platform, in short, calls for more and bigger government on the domestic and international levels. This is the real story that the mainstream media won't tell.
END QUOTE

Here is the direct link to the story above:

http://www.aim.org/aim-column/dems-endorse-expansion-of-un-power/

I would encourage readers to forward this around to as many people as possible to get the word out.

There are apparently plenty of readers of this E-Letter that are leaning toward or committed to voting for Barack Obama. Obviously, millions of Americans don't mind Obama's liberal policies and/or intentions on such things as taxes, abortion, nationalized health care, protectionism, Supreme Court judges, gun control, etc., etc.

They apparently also don't mind that he not only opposes offshore drilling, but also that he opposes exploration that would finally quantify just how much oil and natural gas that is in the ground offshore. What, you haven't heard that? Then read this:

http://www.ibdeditorial.com/IBDArticles.aspx?id=303344360938478

Unfortunately, I doubt if many of Obama's supporters know what he and the Democrats have in mind for the United Nations, our military and our taxpayer dollars. Obama is spearheading this effort!

Ditto for the return of the Fairness Doctrine. Liberals complain that conservatives like Rush Limbaugh dominate the airwaves. Yet liberal talk radio programs have fallen flat on their faces time after time. Obviously, tens of millions of Americans PREFER conservative programs.

It's called the FREE MARKET. But since liberal programming can't compete, the Democrats would like to not only restrict conservative programming, but also restrict who can own the various broadcast outlets.

Let's get the word out fast.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Why McCain Still Has a Chance To Win
http://online.wsj.com/article/SB122031196249888759.html?mod=opinion_main_commentaries

Palin - What the Heck is McCain Up to?
http://www.realclearpolitics.com/horseraceblog/2008/09/what_the_heck_is_mccain_up_to.html

Dems Shouldn't Underestimate Palin (written by a Democrat)
http://www.realclearpolitics.com/articles/2008/09/dems_shouldnt_underestimate_pa.html

Thoughts On China, The Olympics & Investing

Gary D. Halbert — Tue, 05 Aug 2008 19:02:06 GMT

IN THIS ISSUE:

The Latest Good & Not So Good Economic News
Stratfor: "Economic Crisis Brewing In China?"
Conclusions - Maybe Lighten Up On China
Keep Your Comments Coming - Thanks

Introduction

As you are well aware, this year's Summer Olympics will be held in China beginning this Friday, August 8 and running through the closing ceremonies on August 24, assuming all goes as planned. China has long been a mystery to the rest of the developed world, and the Olympics will no doubt shed much light on China, its communist government and its culture.

I did not agree with the International Olympic Committee's (IOC) decision to award the 2008 summer games to China back in 2001. But who am I to say? China made many promises to the IOC in 2001 regarding human rights improvements and international media access to the Olympic games this summer. But since 2001, China has failed on several of its human rights promises. I, for one, am not the least bit surprised.

Since we will be barraged with media coverage of the Olympic games from China over the next three weeks, I thought it would be appropriate to give you some insight as to what has been going on within the Communist hierarchy in China in recent years. And who better to bring us that insight than our friends at Stratfor.com who are one of the leaders in geopolitical analysis. I think it will give you a good perspective on China as we watch the Olympic coverage just ahead.

One more thought before we get going. I am very worried about the Olympics in China. I worry that there could be a terrorist attack during the games. I also worry that planned, and unplanned, demonstrations in China during the Olympics could end very ugly, given the regime's past of violently suppressing opposition. I certainly hope not. I sincerely hope that the 2008 Summer Olympics go off without a hitch, and that China comes out a big winner, despite all their deceptions about being a "free" society.

What follows is Stratfor's latest insightful analysis of what is going on in China's government today, in light of the Olympics, and a brief history of how the Chinese leadership has gotten to this point. I will have some of my own comments at the end.

But first there is some good (and bad) economic news to report. We will get to that first and then jump into Stratfor's latest analysis on China and the implications for the Olympics.

The Latest Economic Reports

The Commerce Department reported last Thursday that 2Q GDP rose 1.9%, as compared to 0.9% in the 1Q. This is the government's "advance" report, so it is subject to change two more times in the weeks ahead. However, the advance report was quite positive, especially in light of the plunge in consumer confidence this year. The government noted that 2Q growth in GDP was highlighted (in order) by stronger exports, consumer spending, non-residential building and government spending.

The media generally characterized the latest GDP report as "disappointing" since the pre-report consensus was suggesting a rise of 2.0+%, not the 1.9% as reported. However, I will tell you that as recently as a month or two ago, most analysts (including your editor) were expecting 2Q GDP to be on the negative side. The US economy continues to surprise on the upside, although modestly, and we may well side-step a recession this year.

There was one surprise in last Thursday's GDP report. The Commerce Department revised its estimate of 4Q 2007 GDP from +0.6% to -0.2%. So, the economy did fall very slightly into negative territory in the last quarter of last year, before rebounding to +0.9% in the 1Q of this year. Thus, we did have a quarter of marginally negative growth at the end of last year.

On the inflation front, the latest GDP report noted that the price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 4.2% year-over-year in the 2Q, compared with an increase of 3.5% in the 1Q. But excluding food and energy prices, the core price index for gross domestic purchases increased 2.2% in the 2Q, the same as in the 1Q.

The other economic reports of note were the Consumer Confidence Index and the University of Michigan Consumer Sentiment Index for July, which were released over the last week. The Consumer Confidence Index actually rose to 51.9 in July, up from 51.0 in June, the first monthly rise in six months. The Michigan Consumer Sentiment Index rose from 56.6 in June to 61.2 in July. The pre-report consensus was for yet another monthly decline in both measures of consumer confidence.

While the above noted reports are encouraging on balance, they still indicate a sluggish economy that is likely to remain below trend for some time to come, and inflation continues to rise at least marginally. But given that many analysts and most in the media predicted a recession in 2008, the latest data are certainly welcome.

Now we move on to Stratfor and China and the Olympics.

QUOTE:
"Economic Crisis Brewing In China?

Something extraordinary is happening in China, and we are not talking about the Olympics. Rather, Chinese officials have been clamping down on visa applications and implementing bureaucratic impediments to new and renewed visa applications under the guise of pre-Olympic security.

In some ways, Beijing's plan for a safe and secure Olympics appears based on the premise that if no one shows up, there can be no trouble. But placing restrictions on the movement of managers and employees of foreign businesses operating in China, even if for a limited time as Chinese officials have been at pains to reassure, makes little sense from the standpoint of gaining political and economic benefits from hosting the Olympics. Something just isn't right.

The Post-'70s Economic Framework

Since China's economic reform and opening in the late 1970s, China's economic policy — and thus the basis for the overall development of the nation — has been based on a simple two-part framework. First, draw in as much foreign investment as possible and use the money and technology to strengthen China while using the subsequent economic leverage to secure China. And second, encourage growth for growth's sake to ensure an ever-increasing flow of money through the system to provide employment and social services to a massive and urbanizing population.

Key to this policy has been creating a very open environment for foreign businesses, which bring money, technology and expertise and use their influence with their own governments to keep stable international relations with China — hence reducing international and economic frictions and increasing the efficiency of the supply chain. For more than two decades, Chinese national strategy has thus revolved around the principle of encouraging investment, joint ventures and wholly-owned foreign enterprises in China. There have been two foundations for this strategy: the evolution of financial facilities for transferring and controlling foreign money with a level of transparency nearing international standards, and the ease of movement of personnel in and out of China.

It is this latter point that recently has been hit the hardest. Over the past several months as the Beijing Olympics drew nearer, the Chinese government has effectively frozen up most financial reform plans. It also has issued a raft of new security measures not entirely unlike other host cities in the post 9/11 security environment. But China has gone several steps further than its predecessor hosts, placing official and bureaucratic impediments on visa applications. This not only has targeted potential "troublemaking" rights advocates, it has also impacted foreign businesses ranging from invited guests to the Olympic games to managers and employees of foreign companies in China.

Business and the New Visa Hassles

The visa restrictions in particular have been a source of angst for foreign businesses and business associations. Many smaller operations may circumvent Chinese regulations and travel on tourist visas (provided they can still obtain them). And there are ways around the tighter regulations or bureaucratic hurdles if one has the right connections or the willingness to apply several times or from different locations. But multinational corporations are less willing to jeopardize their operations by skirting the laws. Instead, they are making their concerns known to Beijing and hoping that restrictions are eased in September, as Beijing has rumored and hinted will occur.

In general, these visa restrictions have been brushed aside by foreign observers as simply paranoia on China's part regarding protests or terrorist attacks during the Olympics. In many ways, however, this makes little sense. First and most obvious, the Olympics were supposed to highlight the opening of China — not restrict the very people who have made China a key part of the global economy. Second, imposing tight restrictions in Shanghai, the center of the Chinese foreign-domestic economic nexus, makes little sense on grounds of Olympic security since Shanghai is playing only a minor role in the games compared to Beijing and Qingdao. (Think shutting down visas to New York during the Atlanta games in the name of security, though Shanghai admittedly is hosting some soccer matches.)

Shutting down business visas to keep terrorists out makes little sense anyway — it is hard to imagine Uighur militants traveling on business visas as representatives of foreign multinationals. Furthermore, by restricting business visas — even if not across the board in a coherent fashion — China is putting a massive strain not only on the ability of businesses to trust Chinese regulations and business relations with the government, but also on the fluidity of the global supply chain. Shutting down or impeding visas affects much more than delaying the movement of a single individual into China; it impacts the ability of multinational corporations to move, replace or supplement managers and dealmakers in China. A delayed visa applications of just three months still represents an entire quarter that multinational corporations cannot reliably manage their businesses operations in China, and that doesn't take into account the visa backlog when restrictions are loosened or lifted.

Disrupting an integral part of the global economy for a full quarter because of an international exposition makes little sense. The Germans in 1936 didn't do it, the Russians in 1980 didn't — no one has. One doesn't simply shut down international business transactions for three months or more to stop a terrorist — and particularly not China, which depends on foreign direct investment. This is not simply an inconvenience for some people: It is the imposition of friction on a part of the system that is supposed to be frictionless. And it is not merely individuals who are affected, but the relations between mammoth companies.

A Period of Erratic Policies

China's behavior has been erratic for several months now, if not for the past few years, with the implementation of new and often contradictory security and economic policies. These have all been brushed aside as somehow related to preparation for the Olympics. But they are in fact anomalous. China's behavior is not that of a country trying to show its best side for the international community, nor that of a nation simply concerned about potential terrorist or public relations threats to the Olympic games. In another two months, after the Olympics and Paralympics have ended, it will become clearer whether this was a spate of excessive paranoia or a reflection of a much more significant crisis facing the Chinese leadership — and the evidence increasingly points toward the latter.

As mentioned, China's economic policies in the reform and opening era have been based on the idea of growth. This in many ways simply reflects the Asian economic model of maintaining cheap lending policies at home, subsidizing exports, flowing money through the system and focusing on revenue rather than profits. In essence, it is growth for the sake of growth. This was the policy of Japan, South Korea, Indonesia, Malaysia and Thailand. And it led each of those countries to a final crisis point, striking Japan first in the early 1990s and the rest of the Asian tigers a few years later. But China managed to avoid each of the previous Asian economic crises points, as it was on the lagging end of growth and investment curves.

Following the Asian economic crisis, China fully recovered from the international stigma of Tiananmen Square and became the global economic darling. By the time the 21st century rolled around, China was already taking on the mantle of the Japanese and other Asians. It began to be labeled both an economic miracle and a rising power; a future challenge to U.S. economic dominance with all the political ramifications that brought. Were it not for 9/11, Washington would have squared off with Beijing to prevent the so-called China rise. The reprieve of international pressure that came when U.S. attention turned squarely toward Afghanistan and then Iraq freed China's leaders from an external stress that could have brought about a very different set of economic and political decisions.

With the United States preoccupied, and no other major power really challenging China, Beijing shifted its attention to domestic issues, and its review quickly revealed the stresses to the system. These did not primarily come from "splittist" forces like the Tibetans or the Falun Gong, but rather from the economic policies that had brought China from the Third World to the center of the global economic system. Beijing is well-aware that should it continue with its current economic policies, it will face the same risk of crisis as Japan, South Korea and the rest of Asia. It is also aware that growing internal challenges — from the spread and invasiveness of corruption to geographic economic imbalances, from rising social unrest to massive dislocation of populations — are causing immediate problems.

Economics from Mao to Hu

Mao Zedong built a China designed to be self-sufficient and massively redundant. Every province, every city, every factory was supposed to be a self-contained unit, making the country capable of weathering nearly any military attack. Deng Xiaoping didn't get rid of these redundancies when he opened the economy to foreign investment. Instead, he and his successors encouraged local officials to work to attract foreign investment and technology so as to raise China's economic standard more rapidly. By the time Jiang Zemin was in power it had become clear that the regionally and locally driven economic policies threatened to throw China back into its old cycle of decentralization — and, ultimately, competing centers of power. Attempts by Jiang to correct this through the Go West program, for example, came to naught after meeting massive resistance in the wealthy coastal provinces. The central government accordingly backed off, shifting its attention to reclaiming centralized authority over the military.

Hu Jintao has sought once again to try to address the problem of the concentration of economic power in China's coastal provinces and cities through his Harmonious Society initiative. The idea is to redistribute wealth and economic power, regain central authority over the economy, and at the same time reduce redundancies and inefficiencies in the Chinese economy. With minimal external interference, Hu was able to test policies that by their very nature were going to sacrifice short-term social stability in the name of long-term economic stability. Growth was replaced by sustainability as the target; longer-term redistribution of economic growth engines would replace short-term employment and social stability.

This was a risky proposition, and one that met strong resistance in China. But the alternative was to sit back and wait for the inevitable economic crisis and the social repercussions thereto. In some ways, Hu was suggesting that China risk stability in the short term to preserve stability in the long run. But Hu didn't anticipate the massive surge in global commodity prices, particularly of food and oil. This was compounded by increased international scrutiny over China's human rights record ahead of the Olympics, natural disasters hitting at the availability and distribution of goods, a rise in domestic social unrest triggered by local government policies and economic corruption, several attempted and successful attacks against China's transportation infrastructure, and the uprising in Tibet. Thus, the already-risky policies the central government was pursuing suddenly looked more destructive than constructive from the point of view of continued rule by the Communist Party of China (CPC).

The global economic slowdown was the external impetus China feared — something that could undermine the flow of capital and leave Beijing unable to control the outcome of a reduction in the inflow of capital. At the same time, the internal social tensions triggered both by Hu's attempts to reshape the Chinese economy and by the slow pace of those changes created a crisis for the Chinese leadership. It was hard enough internally to control a measured economic slowdown to reshape the economic structure of China, but quite another thing altogether to have such a slowdown imposed on China from outside at the very moment social stability was in a critical state at home.

A Government in Crisis

China's rapid and contradictory economic and security policies, rising social tensions, and seemingly counterproductive visa regulations appear to be signs of a government in crisis. They are the reactionary policies of a central leadership trying to preserve its authority, stabilize social stability and postpone an economic crisis. At the same time, we see signs that the local governments, and even organs of the central government, are putting up steady resistance to the announcements coming from Beijing. Slapping restrictions on foreign businessmen may make little sense from a broader business continuity sense, but if the point is to begin breaking the backs of the local governments — whose strength lies in their relations with foreign businesses — then the moves may make more sense.

If the central government has reached the point that it is willing to risk its international business role to rein in wayward local officials, however, then the Chinese leadership sees a major crisis looming or already under way. It is one thing to toss out a few local leaders and replace them, quite another to undermine the structure of the Chinese economy for the sake of regaining control over local officials. But if Chinese history since 1949 (and really quite a ways before) is any guide, the core of the CPC leadership is willing to sacrifice social and economic stability to preserve power. One need only look at the Great Leap Forward, the Cultural Revolution or the crackdown at Tiananmen Square for evidence of this. Revolution is not, after all, a dinner party, and maintaining CPC control is paramount to the government.

After each major revolution or crisis, China eventually has recovered. The Cultural Revolution was followed by diplomatic relations with the United States, Tiananmen Square was put aside as China joined the World Trade Organization and surged ahead in gross domestic product (GDP). Certainly, there was change among the leadership and in the way the party dealt with policies at home and abroad. But if there is the likelihood of loss of control due to an impending economic crisis, better to have some role in shaping the crisis to preserve the chance of maintaining a role in the future political structure than to sit by and try to clean up as things fall apart. The Party in fact has a long history of taking a self-generated crisis/revolution over an externally or domestically initiated one.

It may be that the contradictory policies Beijing is tossing around these days will simply fade away after September and things will get back to "normal." But already, Chinese officials are downplaying the previously hyped political and economic benefits of the Olympic games. They are now warning that economic conditions may not be so strong in the future, and at least internally discussing the distinct possibility that at least certain regions of China are facing the same economic crises faced by their mentors Japan, South Korea and the Asian tigers.

Internal Crises vs. the Economy

A recent article in the Global Times, a paper that addresses myriad topics of domestic and international significance and is read among China's leaders, discussed how economics is not the best measure of strength. It referred to the overall comparative GDP and the size of China's military in the late 1800s. Then, China was considered at its weakest, but from an economic or military perspective it could have been considered comparable to the global powers of the day. This hints at the deeper internal debate in Beijing, where true national strength and the role of the economy is under discussion. Assumptions that China is only focused on continued good economic ties with the world shouldn't be taken as gospel — China has a track record of shutting down external connections when internal crises brew.

Numerous polices are being thrown around in firefighting fashion, including blocking or at least hindering foreign business movement in and out of the country and tightening the flow of foreign capital in both directions. They are coming in reaction to flare-ups in economic, environmental, public relations and social arenas. Energy policies are making less sense, imbalances in supply and demand are growing and seemingly contradictory policies are being issued. Social unrest, or at least local media coverage of such unrest, seems to be increasing; either is a sign of weakening control. Local officials are still failing to fall in line with central government edicts. Strategic state enterprises like China National Petroleum Corp., China Petroleum & Chemical Corp. and the China Development Bank are all defying state-council orders — and the State Council itself is apparently going head-to-head with major policy bodies long given control over economic policies.

Something extraordinary is happening in China. And while not everyone may want that to be the case, and so have sought to use the Olympics to explain things away, the easy explanation simply doesn't make enough sense." END QUOTE

Conclusions

It really shouldn't surprise anyone that China is reneging on its promises of media openness and unrestricted media coverage of the Olympics. It is a Communist country after all. Those in the media who believed China's promises have been very naïve. China has been a very controlled, dictatorial society for hundreds of years. Why should we expect them to change now, just because they got the Olympics, rightly or wrongly?

China has been a red-hot sector for investment over the last 5-10 years, and with the meteoric surge in its economy over the same period, why not? And with the Olympics starting this weekend, some investors are pondering whether to jump in now?

My advice, especially in light of Stratfor's analysis above, is that now is not a good time to be investing in China. Not only is its economy in a questionable state at present, it certainly appears that the current regime is willing to make some anti-market decisions to maintain its power and control, especially as the Olympics play out.

Certainly, if you are overweight in China, I would suggest taking some profits ahead of the Olympics. As noted in the Introduction, I will not be surprised if there is some sort of terrorist attack, or attempted attack, during the Olympics.

Likewise, I will not be surprised if there are some ugly actions by the Chinese government against the demonstrations that are reportedly planned during the Olympics. It will not surprise me if the Chinese authorities enact some draconian measures on their own people during the Olympics.

I have no hard intelligence to support these fears, it's just a concern I have. Better safe than sorry.

I Appreciate Your Input - Keep It Coming

It is an interesting challenge for me to write 7-8-9 pages of helpful content on various subjects week in and week out, year after year. I readily admit that some weeks are better than others. But I mix it up as best as I can. More often than not, I write about what interests me most, and I hope that agrees with you as well. Most times it does, based on the comments I get back from you, but not always.

Such was the case last week when I offered my thoughts on the presidential race between Senators John McCain and Barack Obama. What I did was present Obama's own positions on the issues; I did not fabricate any of them; and you can easily find them on his website. Yet the readers' reactions to my stating Obama's own positions were overwhelmingly negative.

As always, I appreciate all reader responses (as long as they are coherent and not vulgar). But I was surprised at the number of negative responses to my article last week, which merely pointed out Obama's public positions and some of his baggage that the media chooses to ignore. It makes me wonder, sincerely, if his many supporters really know what he stands for. Or worse, they don't want to know what he stands for.

Obama is liked by many, including some conservatives. Yet what is clear to me in this election cycle is that many conservatives are so fed-up with George W. Bush that they will vote in a backlash against any GOP candidate. This is sad, but it's where we are today after eight years of Bush.

Some newer readers have no knowledge that I have criticized George W. Bush for his policy decisions on numerous issues in these pages over the last seven years. President Bush has been such a disappointment for me as well as many conservative on so many issues and policies. He will not have a favorable legacy, in my opinion, regardless how the Iraq war ends up.

Barring some surprise, I think Barack will be our next president. I hope I am wrong. We believe that most readers of this E-Letter are high net worth individuals. We will be the bulls-eye for Obama's tax increases. Also keep in mind that doubling the capital gains tax will not be bullish for the stock markets.

Lastly, I always appreciate your comments and feedback, agree or disagree. So, keep your comments and suggestions coming in, and I will continue to read them and try to accommodate them as best I can. Thanks in advance!

Finally, on a personal note, my oldest child goes away to college in less than two weeks, and I will no doubt go through some withdrawal symptoms. Hopefully, that will not affect my writing. As I have written over the years, I have coached my son in year-round sports since he was five years old, so this will be a real adjustment for me.

Fortunately, he will only be 2½ hours from home, and my friends with kids already out of the house and in college tell me I will get over it. I hope so!

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

A highly political Olympic games
http://www.ft.com/cms/s/0/dcc1e390-617f-11dd-af94-000077b07658.html?nclick_check=1

The Economist on China & the Olympics (a long but interesting read)
http://www.economist.com/printedition/displayStory.cfm?Story_ID=11841531

Mr. Obama, Welcome to the NFL!
http://www.realclearpolitics.com/articles/2008/08/mr_obama_welcome_to_the_nfl.html

Obama, the postmodernist (good read)
http://blogs.usatoday.com/oped/2008/08/obama-the-postm.html

Liberal Press Circles Wagons Around Obama
http://www.newsmax.com/limbaugh/liberal_press_bias_obama/2008/08/05/119108.html

On The Economy, The Fed & President Obama

Gary D. Halbert — Wed, 30 Jul 2008 14:30:41 GMT

IN THIS ISSUE:

Economy Holding Up Better Than Expected
Consumer Spending Remains Strong
The Fed In A Policy Box
Obama Acts As If He's Already The President
John McCain's Electoral Mountain
The Vice Presidential Sweepstakes

Introduction

If you talk to people on the street just about anywhere in the US, you find there is a broad consensus that the US economy is well into a recession at this point. Yet the US economy is holding up better than expected. 1Q GDP was revised upward once again in the final report at the end of June. This Thursday, we get the Commerce Department's first estimate of 2Q GDP, and the pre-report consensus may surprise you. We will look at this and more economic indicators below.

Meanwhile, the Federal Reserve finds itself in an increasingly uncomfortable position. It has repeatedly lowered short-term interest rates over the last 12-18 months in an effort to combat the negative consequences of the housing slump, the sub-prime mortgage crisis and the resulting credit crunch. In recent months, however, even with the economy slowing down, inflation is on the rise. Now the Fed is in a dilemma – keep rates low to help the economy or raise rates to head off inflation and risk a potentially serious recession later on. We will discuss this in detail below.

Finally, we take a look at the presidential race and my latest thoughts about Barack Obama who is acting like he is already the president-elect, just waiting to occupy the White House in January. This man has to be the most arrogant presidential candidate in my adult lifetime. This would seem surprising given that his political and policy positions are extremely liberal and his background is suspect. Despite that, he may well be our next president.

My Obama misgivings aside, we will look at the political landscape as it seems to stand now – which states are likely to go to Obama and which are likely to go to McCain – and most importantly, the “battleground states” that could still tip either way. This should be a lively discussion all the way around, so let's jump in.

Economy Holding Up Better Than Expected

Whether you are a conservative, a liberal or somewhere in between, I trust you realize that the Democrats and their accomplices in the media want you to believe that the US economy is in a serious recession and, of course, it is all the fault of President Bush. Likewise, they want you to believe that soaring oil, gasoline and energy prices are the direct result of Bush and Cheney and Big Oil lining their pockets at our expense.

There is no debate on whether the US economy is in a slump – we can all agree on that. Yet the US economy is holding up better than even I have expected in light of the housing slump and the credit crisis. But you will not hear this in the mainstream media. They want the American people in a foul mood, at least until after the election. Despite that, let's look at the latest economic reports, and you can decide for yourself. Here we go.

We start with the latest figures on Gross Domestic Product, the bellwether indicator of the trend in the economy. In its advance report, the Commerce Department estimated 1Q GDP at an anemic +0.6% annual rate of growth. In its second report, the government raised its GDP estimate to +0.9% for the 1Q. And in its final report in late June, the Commerce Department raised its final 1Q GDP number to +1.0%.

What, you didn't hear this reported in the media? Not surprising. +1.0% is nowhere near recession levels. So, what is likely in store for the 2Q? The Commerce Department's first estimate of 2Q GDP will be released this Thursday (July 31). Remember that most analysts, your editor included, have previously predicted that GDP would fall into negative growth territory in the 2Q of this year.

But the pre-report estimates suggest yet another surprise – GDP may have outperformed yet again in the 2Q ended June 30. The consensus estimate is that 2Q GDP rose 1.8%. Where is that recession, may I ask? Here are some of the pre-report estimates on 2Q GDP. Morgan Stanley estimates that 2Q GDP rose 2.2%, well above the consensus estimate. Another source I follow, Macroeconomic Advisers (www.macroadvisers.com), now predicts that 2Q GDP will come in at a surprising +2.6%. If so, that will be another big surprise.

Macroeconomic Advisors also predicts that the US economy will grow by 1.4% in the 3Q. I don't know if they will be correct, but if they are remotely in the ballpark, the media's predictions of a recession this year are out the window.

The point is, we are not in a recession now, as defined by two consecutive quarters of negative GDP. Certainly, there are parts of the US that are experiencing a recession in terms of job losses and the drop in home values. Yet there are other parts of the country where the economy remains strong and home prices and sales remain vibrant, such as where I live in Austin, Texas.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Consumer Spending Remains Strong

The GDP numbers simply do not support arguments that we are in a recession. But what about other reports? Let's quickly go through the list of recent economic reports. Let me warn you in advance that more of the recent reports have been positive than negative. I'm sure this will come as a surprise, based on what you hear in the media.

The Index of Leading Economic Indicators (LEI), one of my favorite reports, was down –0.1% for June, following rises of a similar amount in April and May. FYI, the LEI has not moved more than 0.2% either way since the first of the year, which is an indication of an economy that is essentially directionless, but not headed into a recession.

It is widely agreed that consumer spending makes up apprx. 70% of GDP. Admittedly, continued strong consumer spending has astounded not only me but most other analysts in the marketplace for quite a while now. The latest data bear this out. Retail sales were up 0.1% in June, following a rise of 0.8% in May. These gains over the last two months came despite a continued drop in consumer confidence.

As I have pointed out often over the last year, US consumers continue to spend despite the drop in confidence and rising consumer debt levels. Several readers have asked me to explain this phenomenon. I have several theories I could advance, but space does not permit, so here is my short answer.

The media has blatantly contributed to the plunge in consumer confidence, but that has not translated into a nationwide plunge in jobs. The labor markets continue to be relatively firm. The unemployment rate remains historically low at 5.5%, although I expect it to rise to 5.6-5.7% for July. Meanwhile, personal income has continued to go up month after month. So most Americans are doing OK in their jobs, and they continue to spend on the things we all spend our money on, which keeps the economy from falling into a recession.

Other Economic Indicators Are Mixed

Here we go with the other recent reports. First and foremost, consumer confidence continues to plunge month after month. Yet consumer spending remains firm as discussed above. Take retail sales, for example. Retail sales rose 0.1% in June following a surprising rise of 0.8% in May. According to the Commerce Department, personal consumption expenditures rose 1.1% in the 1Q, to the surprise of many. Personal spending rose another 0.8% in May according to the latest report. Translation: the economy is in a slump, but it is a minor one and most consumers have not substantially changed their lifestyles – at least not yet.

The latest durable goods orders report for June released last Friday was significantly stronger than expected, rising 0.8% when the consensus was for a decline of 0.3%. The Commerce Department also revised its May durable goods report from a negative to +0.1%. Durable goods are generally long-lasting, higher priced items.

In other reports, industrial production rose 0.5% in June, following a decline of 0.2% in May. The ISM manufacturing index rose modestly to 50.2 in June from 49.6 in May. On the other side, the unemployment rate remained at 5.5% in June. Advance reports suggest the unemployment rate may rise to near 6% by the end of this year.

On the housing front, most reports remain negative, although a few indicators suggest the worst may be over. For example, housing starts and new building permits actually rose modestly in June. Yet sales of new and existing homes continued to fall. Pending home sales fell in May (latest data available), which is good, but is hardly a trend. It remains to be seen what happens just ahead with home prices, but it would seem that a bottom on the national level may finally be in sight by the end of this year.

On the inflation front, indicators are turning higher, or so it would seem. The Consumer Price Index for June was up 1.1% year over year, and the “core” rate was up 0.3%. The Producer Price Index (wholesale prices) was up for June 1.8%, and the core rate was up 0.2%, minus food and energy.

It is increasingly hard to separate the headline inflation rates from the ‘core' rates which exclude food and energy. It will be interesting to see how the government adapts its inflation reports in coming months to reflect this changing dynamic, if in fact they do.

The Fed In A Policy Box

Fed Chairman Ben Bernanke and his fellow members of the Fed Open Market Committee (FOMC) that sets interest rates are becoming increasingly concerned about rising inflation rates. Although the Fed has long been believed to focus on the core rate of inflation (minus food and energy), there is no doubt that Bernanke & Company are closely monitoring headline inflation as well. Bernanke made the following remarks in a speech on June 3:

“The possibility that commodity prices will continue to rise is an important risk to the inflation forecast. Another significant upside risk to inflation is that high headline inflation, if sustained, might lead the public to expect higher long-term inflation rates, an expectation that could ultimately become self-confirming. The Federal Reserve's mandate is to foster maximum sustainable employment and price stability. To achieve these goals, we must also support the return of financial markets to more normal functioning… For now, policy seems well positioned to promote moderate growth and price stability over time. We will, of course, be watching the evolving situation closely and are prepared to act as needed to meet our dual mandate.”

Those remarks delivered at an international monetary conference seemed to suggest that Bernanke is content to keep the Fed Funds rate at 2%, at least for the time being. However, there is believed to be a growing dissent among certain other members of the FOMC. The last FOMC meeting was on June 24-25 when the Fed once again elected to leave the Fed Funds rate at 2%. The FOMC policy statement included the following language:

“The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high…

Although downside risks to [economic] growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.”

These policy statements are carefully scrutinized, and there is little doubt that the Fed is increasingly concerned about inflation. The question is, will the Fed raise short-term rates at a time when the economy is struggling and the credit crunch is still far from over? The interest rate futures markets believe the Fed will raise rates at least once before the end of the year. My best sources, however, believe the Fed will not raise rates before the end of the year.

The next FOMC policy meeting will be held on August 5.

Do Most Americans Really Know Barack Obama?

To the surprise of most conservatives, Senator Barack Obama continues to hold a lead over Senator John McCain in most of the national tracking polls, although McCain has made some gains over the last week or two as Obama went on his global “fact-finding” tour. Most conservatives are astonished at how many Americans have jumped on the Obama bandwagon, especially given his liberal positions on so many issues, his lack of experience and his questionable background.

Let's start with the questionable background. We are told that Obama served as a “community organizer” in Chicago for ACORN (the Association of Community Organizations for Reform Now), which is one of the largest radical groups in America. You can easily check this out on the Internet. Next, there are Obama's ties to now-convicted felon, Tony Rezko. Rezko, a Chicago mover and shaker, was one of Obama's earliest supporters. After Obama was elected to the Senate in 2006, he and Rezko were involved in a questionable real estate transaction involving the purchase of Obama's mansion in Chicago. Obama has since admitted it was a mistake.

Then there is the issue of Obama's former minister of 20 years, Jeremiah Wright, who hit the national spotlight recently with his outrageous sermons. Wright also has a close relationship with and has praised Louis Farrakhan, who is the Supreme Minister of the Nation of Islam and an outspoken anti-Semite.

In addition to his questionable background, there are his various liberal policy positions and votes. Obama has been rated “the most liberal Senator in Congress” by National Review, a prominent conservative think tank in Washington. Obama is pro-abortion and pro-gun control. He will raise income taxes, especially on those making $250,000 or more a year, and he says he will increase the capital gains tax (not good for the stock markets).

He vows to nationalize health care, which in my view is one of the scariest things about Obama. He is opposed to increased offshore drilling for oil and natural gas – ANWR would definitely not be allowed. He is a global warming enthusiast. He opposed the war in Iraq. He refuses to admit that the “surge” in Iraq has worked, even after his latest visit there. And the list goes on.

Then there is the critical question of the Supreme Court. With the advanced ages of several current Justices, it is very likely that Obama will get to nominate at least two Supreme Court justices in his first term should he be elected. He could well nominate another one or two should he win a second term.

As discussed at length in my July 1, 2008 E-Letter, the Supreme Court is fairly balanced at present with four generally conservative Justices and four generally liberal ones, with one swing vote in Anthony Kennedy. Depending on which Justices retire in the next 4-8 years, Obama could swing the court significantly to the liberal side. And with the Democrats firmly in control of the Senate, you can bet Obama's Supreme Court nominees will be approved quickly.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Obama Acts As If He's Already The President

Despite the negatives noted above, the mainstream media fawns over Obama's every word and refuses, for the most part, to write anything negative about the man – past or present. The ultimate proof of this was his latest overseas trip in which the evening news anchors from ABC, CBS and NBC all jumped at the chance to accompany Obama on his global junket.

Actually, I think Obama hurt himself on his foreign trip by talking and negotiating with foreign leaders as if he is already the President-elect. Excuse me, but we haven't voted yet! Not that I care to admit it, but I have marveled at Obama's confidence (at least when he has a teleprompter). However, his ill-advised discussions with foreign leaders now make me believe that he is one of the most arrogant politicians I have ever seen.

Given all of the above, why is Obama leading in the polls to become our next Commander-In-Chief? Much of it, I believe, is “Bush Fatigue.” Liberals and the media always hated Bush. Everything in the world that is wrong is Bush's fault. Many conservatives have turned against President Bush as well – he has disappointed us on many occasions. Unfortunately, many conservatives don't like McCain and may simply sit out this election, which is effectively a vote for Obama.

It is my belief that many Obama supporters are really just anti-Bush voters who simply want someone in the White House that is not the GOP candidate. That, in my view, is why many Obama supporters have dismissed (or failed to investigate) his questionable past and his liberal policy positions.

I have no doubt that I will receive many scathing e-mails in response to the analysis above from our more liberal readers. But take heart, Obama supporters! The following state-by-state electoral analysis will be sure to warm your hearts. I've asked my associate Spencer Wright to review the latest state polls and crunch the electoral numbers. Unfortunately, it does not look very good for John McCain. Take it away Spencer.

John McCain's Electoral Mountain

National tracking polls have recently narrowed, thus putting the contest between McCain and Obama close to the margin of error as of last week. In fact McCain is enjoying a rather healthy rise in public opinion. In the face of the Obama World Tour 2008, this is very encouraging news. To say nothing of a very real dose of Bush Fatigue throughout the country combined with rising energy prices and the poor economy. So, all things considered, the McCain campaign should be thrilled with the week they have had. Indeed, ANY Republican candidate would struggle in this environment, although it does not help matters that McCain is viewed by many as a weak candidate.

It is important to keep in mind that at this stage most polls are reflecting the views of partisans who do not pick the president. It has been the soft middle of American politics – the so-called “swing voters” - that have determined our president since 1988. And those that comprise the middle generally are tuned out until the party conventions, which is why the conventions have become glitzy five-day infomercials that normally give each candidate a nice bounce in the polls just afterward.

That is why, at this pre-convention stage, the national tracking polls are of marginal value, whereas looking at the individual state polling numbers is a much better way to get a read on the potential outcome. I am not going to bother looking at states that are solidly for McCain or Obama as there is no point. Instead, let's look at the handful of “battleground” states that will determine the outcome of the election.

The battleground states currently are: FL, OH, MI, NC, VA, IN, MO, CO, NM, NV and NH. This leaves Obama with a solid 238 electoral votes and McCain with a solid 163 electoral votes, leaving the 11 battlegrounds to account for a total of 137 electoral votes. Already you can see the path to 270 is much easier for Obama than McCain, as he holds a 75 electoral vote lead in solid states.

Here's my list of where the battleground states stand based on the RealClearPolitics averages. This may differ slightly from some that you see on TV, but I think this is where the race is now. (Note that “EV” stands for Electoral Votes.)

FL (27 EV): Florida was looking like a McCain stronghold until recently. Obama has made substantial gains in the state over the last month. Current Standing: Obama 45.8% / McCain 45.8%. FL is a definite ‘must win' for McCain.

OH (20 EV): Ohio is the battleground of battlegrounds, and it has been hard hit by the recent economic downturn. Bush won the state by thin margins in 2000 and 2004. Current Standing: Obama 46% / McCain 45%. Ohio is a ‘must win' for McCain.

MI (17 EV): Like Ohio, Michigan has been hard hit by the recent economic slump. Add to that its history of voting Democrat across the board from 1992 on and you get a tough landscape for McCain, although recent Democrat victories in the state have been narrow. Current Standing: Obama 46% / McCain 42%. This is a ‘must win' state for Obama.

NC (15 EV): North Carolina is yet another state that leans Republican and should not be this close, another indication of how McCain is doing poorly with the base. Current Standing: Obama 43% / McCain 47%. NC is another ‘must win' for McCain.

VA (13 EV): Virginia is another state that really should not be in contention. While VA went for George Bush in 2000 and 2004, it has been trending Democrat over the past 12 years. Current Standing: Obama 47% / McCain 46%. VA is ‘must win' for McCain.

IN (11 EV): Indiana should not be a battleground state since this state hasn't voted for a Democrat in almost 40 years. This is a sign of McCain's weakness with the GOP base. Current Standing: Obama 47% / McCain 46.5%. IN is a ‘must win' for McCain.

MO (11 EV): Missouri has been in the GOP portfolio more often than not over the last 40 years, voting for a Democrat only three times over the last 10 cycles. Yet the polls are currently very tight in this Midwest bellwether state. Current Standing: Obama 45% / McCain 47%. MO is a ‘must win' for McCain.

CO (9 EV): Colorado voted for Bush twice but by fairly small margins. The Democrats are convinced that it can be flipped. Look for lots of action in this state. Current Standing: Obama 47% / McCain 45%. CO is a ‘must win' for Obama. More on Colorado below.

NM (5 EV): New Mexico split over the last two general elections going narrowly for Gore and then narrowly for Bush. This is another western state that the Democrats believe they can take. Democratic Governor Bill Richardson is very popular and has endorsed Obama and may be in the running for the VP nod. Current Standing: Obama 49% / McCain 43%. NM is a ‘must win' for Obama.

NV (5 EV): Nevada voted for Clinton twice and Bush twice, but never by large margins. Mark this as the third western state the Democrats think they can capture. The YuccaMountain nuclear waste disposal area is a big hot button issue. Current Standing: Obama 45% / McCain 43%. NV is a ‘must win' for Obama.

NH (4 EV): New Hampshire is the rare New England state that does actually vote for a Republican now and then. It voted for Bush in 2000. McCain is very popular in the state, which is why the polls remain close. Current Standing: Obama 44% / McCain 43%. NH is a ‘must win' for Obama.

As noted at the beginning of this state-by-state analysis, Obama has a large lead over McCain in the electoral vote based on the current polls. Thus, you may be wondering why, if Obama already has a built in 75 EV lead, does he need to win any of the “must win” states marked for him? Well, those states represent Obama's path of least resistance to the magic 270 EV total needed to win.

Let's say, for example, that McCain manages to poach MI and salvage OH, VA, MO, NC and FL – states that Republicans normally have a good chance in. Based on current polls, that would be a good showing for McCain. However, Obama can still win by carrying NH, NM, CO and NV. That would give him 272 EV vs. 266 EV for McCain.

Fortunately, I have it from a good source on the ground that McCain is surging in Colorado, with its nine electoral votes, and has pulled to even with Obama in the last week. Assuming McCain carries the states he is expected to – which is a huge assumption – this race could ultimately come down to only one or two key states. We will revisit the standings after the Democratic convention, and again after the GOP convention.

The Vice Presidential Sweepstakes

McCain's biggest problem of late is that he can't get in the news. Obama, with his World Tour, has dominated the news cycles. Yet despite Obama sucking all of the oxygen out of the room, McCain has closed the gap in the national tracking polls to close to the margin of error. But for McCain to get back in the news, he has to do something big.

There is rampant speculation that McCain is on the verge of making his VP announcement to get back into the spotlight. Some believe this would be a good idea as it would not only build upon recent gains, but would shift the media attention from Obama to McCain, at least for a few days. Others like Karl Rove advise McCain to announce his VP choice only after Obama announces his. We'll see.

Of course the size of the McCain VP bounce will depend on who he picks. In my opinion he has three basic options for his running-mate: 1) base; 2) buzz; and 3) boring. He could select Mitt Romney to shore up the GOP base; he could pick Louisiana governor Bobby Jindahl, a young rising star in the GOP, which would create a real buzz; or he can pick someone boring like his old friend Tim Pawlenty, the governor of Minnesota.

Gary and I firmly believe that Mitt Romney is the best choice if McCain is to have any chance to win. Romney could solidify the GOP base and would certainly help McCain in states like Virginia, North Carolina, Ohio, Indiana, Florida and certainly Michigan where his father was a very popular governor. The problem is, McCain doesn't like Romney. Hopefully, his advisors are urging him to pick Romney anyway. We feel that if he picks Jindahl or Pawlenty or some other lightweight, it will be a sign that McCain doesn't think he can win.

And what about Obama? Rumor has it he will also announce any day now. The Democratic National Convention begins on August 25, and Obama should make his choice very soon. Unlike McCain, Obama will likely make his VP pick based purely on two factors: experience and gravitas. Obama is believed to be considering three possible VP choices (in no particular order): 1) former Georgia Senator Sam Nunn; 2) Virginia Governor Tim Kaine; and 3) NM Governor Bill Richardson, who we consider a distant third.

What about Hillary? Gary and I believe that Obama would only choose Hillary if he was falling down in the polls. We could be wrong, of course, but we don't see Obama opting to take on the Clintons' baggage, and the chance that he could be upstaged by either Bill or Hillary. As noted above, Obama still has a lead in the polls. Thus, assuming Obama announces his VP choice before the convention, we do not expect it to be Hillary.

Sam Nunn would seem an unlikely pick because he is a conservative Democrat. However, Nunn is a political heavyweight, even though he retired from the Senate in 1996. On the one hand, conservatives might hope that Obama picks Nunn who might temper Obama's liberalism. On the other hand, I think an Obama-Nunn ticket would be virtually unbeatable.

That's it for the state electoral analysis and my take on the VP sweepstakes. Back to you, Gary.

Conclusions – Pass This Along

Thanks, Spencer. As noted previously, this is one of the more interesting presidential elections in some time. This is one of the most important presidential elections, in that more is at stake than in a long time. Obama is arguably the most liberal presidential candidate to get the Democratic nomination in a generation or more, yet many Americans who are going to vote for him do not know this. Unfortunately, for many, it is simply “anyone but Bush and the GOP.”

Feel free to forward this E-Letter to as many people as you wish, in whole or in part. Investors in particular need to know where Obama stands, because I do not think he will be good for the markets. Senator McCain was not my choice for the GOP nominee, but conservatives need to come out and support him.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Obama's audacity of hubris
http://www.theglobeandmail.com/servlet/story/RTGAM.20080726.wxcorex26/BNStory/specialComment/home

Can McCain Back In Again?
http://www.realclearpolitics.com/articles/2008/07/can_mccain_back_in_again.html

Obama's communist connections?
http://www.aim.org/aim-column/special-report-red-faces-over-obamas-red-mentor/

Election '08 - Supreme Court In The Balance

Gary D. Halbert — Tue, 01 Jul 2008 17:20:00 GMT

IN THIS ISSUE:

Presidential Candidates Finally Settled
Is The Supreme Court A “Litmus Test”? Yes!
The Current Make-up Of The Supreme Court
Supreme Court Justices Likely To Retire Soon
What Would McCain Do To The Supreme Court?
Why It Is Still Important For McCain To Win
Recent Landmark 5-4 Supreme Court Decisions
Court Gets It Right On Gun Control, Barely
McCain & Obama’s Reaction To The Gun Decision
A 5-4 Supreme Court Is Better Than 6-3 Or 7-2

Introduction

The next president will likely have the opportunity to nominate 2-3 Supreme Court justices, especially given the ages of the two oldest justices – John Paul Stevens and Ruth Bader Ginsburg. This week, we will discuss the current make-up of the Supreme Court and the deep divide among the liberal and conservative wings of the High Court.

We will also consider what kind of judges Senators McCain and Obama would likely nominate if they are president for the next four years. We will also look at some of the recent landmark decisions from the Supreme Court, and how the votes of Justice Anthony Kennedy are often critical.

I last wrote about the Supreme Court in October 2004, just before the presidential election with President Bush and Senator John Kerry. In that E-Letter, I suggested that some landmark decisions would likely occur during the following four years, and some of those key cases have been decided in the last month alone.

I stressed the importance of having conservative judges on the Supreme Court. It is just as important today, especially with Barack Obama being one of the most liberal Senators in history. So, this suggests we take another lose look at the Supreme Court in light of the upcoming presidential election.

Presidential Candidates Finally Settled

Following the end of the Democratic primaries, our presidential rivals are John McCain and Barack Obama, and not surprisingly Obama has proven to be the early frontrunner in the polls. Obama’s popularity among younger voters ages 18-30 will mean that millions of Americans who have never, or rarely, cast their votes will do so on November 4 for the Illinois freshman Senator.

John McCain, on the other hand, has multiple challenges to deal with if he is to have a chance to become president. McCain, age 72, is a career politician and a self-described “maverick,” meaning that he has not always voted with conservatives on key issues. Yet Obama has skillfully characterized McCain as a “third term for George W. Bush,” and President Bush is one of the most unpopular presidents of the last century.

McCain faces two difficult challenges if he is to have any chance of defeating Obama in November. First, he must somehow solidify the Republican base and get conservative voters behind him, which will be a daunting challenge. Second, McCain must somehow reach out to Democrat moderates and convince them that he is a viable alternative to Obama.

As for solidifying the Republican base, McCain faces several problems. Many conservatives may not be able to bring themselves to vote for McCain given his history of taking positions they disdain. As a result, McCain has been tracking to the right on certain issues, including reversing some of his previous positions, in an effort to solidify the GOP base.

At the same time, McCain is moving to the center-left on certain other issues in the hopes of enlightening many Hillary supporters who are having trouble getting onboard the Obama bandwagon. McCain’s centerpiece for attracting these voters is his position on the environment and global warming.

So, as you can see, McCain faces an uphill battle on several fronts, trying on the one hand to convince conservatives that he is their man, while at the same time trying to woo moderate Democrats. Obama, on the other hand, seems to have the wind at his back.

McCain’s greatest worry is that many conservatives are so disgusted that they may choose to simply sit this election out and not vote at all. Some conservatives don’t realize that a decision not to vote is, in effect, a vote for Senator Obama. Even worse, some conservatives are so upset that they have decided that the best course is to actually hold their noses and vote for Obama in November to ‘teach the Republicans a lesson.’

For conservatives who may be considering not voting at all, or voting for Obama to send a message of disgust to the GOP, I would strongly suggest that we focus our sights on the Supreme Court, and the strong likelihood that the next president will get to select at least two Supreme Court justices.

Maybe this will help get some priorities in order. Let’s start with the current make-up of the Supreme Court to see which justices are likely to retire (or die) in the next four years. Next, we will look at the latest razor-thin 5-4 Supreme Court landmark decisions which could have gone either way. And finally, let’s consider whether, in reality, it makes much difference who is in the White House for the next four years, in terms of the Supreme Court. I will argue that it does matter, and that should help clarify who conservatives should vote for in November. Let’s get started.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Is The Supreme Court A “Litmus Test”? Yes!

If you are a conservative, there are many things to fear about Barack Obama. He is arguably the most liberal Senator on Capitol Hill. He definitely will raise taxes; he plans to nationalize health care; he will pull our troops out of Iraq; he is soft on the military and national defense; he has no foreign policy experience; and he has ties to some very questionable characters.

If you are a liberal/moderate, there are things to fear about John McCain (although I would argue not as many as Obama, since McCain has a history of voting with the libs on certain issues). After opposing the Bush tax cuts, McCain now says he would push to make them permanent; McCain is strong on the military and is for winning the war in Iraq; McCain’s foreign policy would be more like President Bush’s, presumably; and McCain has consistently been anti-abortion.

There are plenty of reasons not to like either of these presidential candidates, regardless of your political persuasion – if both sides are intellectually honest. Obama is too liberal for some moderates, and McCain is too moderate for some conservatives.

If you are having a hard time deciding who to vote for, or whether to vote at all, might then the debate boil ultimately down to what type of judges each would appoint to the Supreme Court?

This question is certainly not a ‘litmus test’ for me, as there is no way I could vote for Obama, but perhaps it will be of help to those of you who are having trouble deciding.

The Current Makeup Of The Supreme Court

The US Supreme Court today consists of the Chief Justice and eight Associate Justices. They are currently as follows, with a brief description (listing the conservatives first):

John Roberts, Chief Justice – age 53, appointed by George W. Bush in 2005 and is generally considered to be a conservative.

Antonin Scalia, Associate Justice – age 72, appointed by Ronald Reagan in 1986 and is staunchly on the conservative side.

Clarence Thomas, Associate Justice – age 60, appointed by George H. W. Bush in 1991 and is consistently on the conservative side.

Samuel Alito, Associate Justice – age 58, appointed by George W. Bush in 2006 and is consistently on the conservative side.

The following four justices tend to rule on the liberal side of most issues.

John Paul Stevens, Associate Justice – age 88, appointed by Gerald Ford in 1975, initially thought to be a conservative, but was a moderate at best in his early years on the court and then swerved decidedly to the liberal side.

David Souter, Associate Justice – age 68, appointed by George H. W. Bush in 1990, a moderate and disappointment to conservatives, who has consistently voted on the liberal side.

Ruth Bader Ginsburg, Associate Justice – age 75, appointed by Bill Clinton in 1993, a liberal ideologue from the get-go.

Steven Breyer, Associate Justice – age 69, appointed by Bill Clinton in 1994, another liberal as we might expect coming from Clinton.

And the last Associate Justice is the usual “swing voter” on the High Court.

Anthony Kennedy, Associate Justice – age 71, appointed by Ronald Reagan in 1988, who was thought to be mildly conservative at the time, but most often leans to the liberal side as time has gone on.

So in the current Supreme Court we have four generally conservative judges - Roberts, Scalia, Thomas and Alito; four consistently liberal judges – Stevens, Souter, Ginsburg and Breyer; and one sometimes swing voter – Anthony Kennedy (often more on the liberal side).

Casual readers might tend to think it is a good idea to have the High Court so well balanced. Admittedly, there are arguments to support such a position. But as a conservative, I would argue to the contrary. I will explain more as we go along.

Supreme Court Justices Likely To Retire Soon

Supreme Court justices tend to keep their retirement thoughts and plans to themselves, so there is no way to know with certainty if any of the current justices are likely to retire over the next four years. However, it has long been believed that the justices prefer to retire when the sitting president is someone who shares their political ideology, and who is likely to appoint a like-minded replacement.

Should Barack Obama become president, it is widely believed that the two most likely justices to retire will be John Paul Stevens and Ruth Bader Ginsburg.

As noted above, Justice Stevens is now 88 years old, so it would come as no surprise if he chooses to retire next year (or certainly in the next four years) if Obama is president. Interestingly, Justice Stevens was thought to be a conservative judge when Richard Nixon appointed him to the 7th Circuit Court of Appeals in 1970, and when Gerald Ford appointed him to the Supreme Court in 1975. Yet Justice Stevens was at best a moderate on the High Court in his early years, and soon shifted to the liberal side on most issues.

Some believe that Justice Stevens is ready to retire but is waiting until President Bush is gone and someone more to the moderate/liberal side is in the White House.

The next most likely justice to retire is thought to be Ruth Bader Ginsburg, who is now 75 years old. Justice Ginsburg was diagnosed with colo-rectal cancer in 1999 and underwent surgery followed by chemotherapy and radiation treatments. While the surgery and treatments were deemed to be successful, it is unclear how long she wishes to remain on the High Court. Justice Ginsburg is widely considered to be the most liberal justice on the Court, and like Justice Stevens, she may simply be waiting until someone more liberal is in the White House.

Judging by age alone, the next most likely justices to retire over the next few years are Antonin Scalia (72) and Anthony Kennedy (71). There are those who believe that the make-up of the High Court won’t change much if Justices Stevens and Ginsburg retire (or die) during an Obama presidency, and I might agree. Obama would simply appoint two equally liberal judges.

However, if either Justice Scalia or Justice Kennedy should retire, Obama would have the opportunity to dramatically shift the balance on the High Court to the liberal side. Justice Scalia is widely considered to be the most conservative judge in the Supreme Court. If Justice Kennedy, who is considered the swing vote, is replaced with another liberal ideologue, that too would represent a significant shift on the Court.

What Would McCain Do To The Supreme Court?

Obviously, for McCain to have any significant impact on the Supreme Court, he must be elected president, which is not looking very likely at the moment. But let’s assume he wins. In order to assess his chances of changing the Supreme Court, we must first look at the Congressional landscape that is likely to be in place starting in January 2009.

Based on current polling data, the House of Representatives is likely to shift dramatically in favor of the Democrats in this year’s elections. Estimates vary, but it is expected that the Democrats will gain 12-20 seats in the House in November. If so, that will put the House make-up at something like 256 Democrats to 179 Republicans. That will be a huge shift in an already Democrat-controlled House of Representatives.

Of course, it is the Senate that approves and confirms Supreme Court nominees. There, too, the numbers don’t look good for conservatives. Based on current polling data, the Democrats are likely to gain 12-14 seats in the Senate. In that case, the Senate make-up would be something like 63 Democrats to 35 Republicans (and two Independents) starting in 2009.

Given that the Democrats will have such overpowering control of the Senate starting next year, it is unlikely that John McCain will be allowed to get any truly conservative judges on the High Court. At best, McCain might get a moderate or two on the Supreme Court.

It is not clear in the first place what kind of judges that McCain would nominate if he were president. Most would agree that McCain is not a true conservative along the lines of Ronald Reagan, so we don’t know what he would naturally want to do with regard to High Court selections. But that doesn’t matter much. In light of the Senate make-up next year, McCain won’t have many choices if he wished to get his nominees confirmed.

And it likely gets even worse. Let’s say that Justices Stevens and Ginsburg do decide to retire, even if McCain is president. With a 60+ vote control of the Senate, I can almost guarantee you that the liberals are going to demand that any liberal justices who retire must be replaced by a judge with a similar ideology. Of course, that won’t be the standard if a conservative justice retires or passes away. This is sad.

Why It Is Still Important For McCain To Win

As discussed in the Introduction, there are many reasons why conservatives should fear an Obama presidency, but none more important than the future of the Supreme Court. Given the huge shift toward the Democrats in the Senate, Obama will have carte-blanch to nominate the most liberal judges to the High Court.

Again, one might argue that if only liberal Justices Stevens and Ginsburg retire in the next few years, how much damage could Obama do? Yet there is no guarantee that only Stevens and Ginsburg will retire in the next few years. Scalia and/or Kennedy could retire or become ill or die and thus their seats would be on the table. Likewise, none of the Supreme Court justices are immune from accidents or illnesses that could incapacitate them.

Thus, I believe it is quite naïve to believe that Obama won’t be able to significantly upset the balance in the Supreme Court. And then there’s an even more chilling thought: What if Obama wins a second term as president and is in the White House until the end of 2016? In that scenario, Obama might well have the chance to nominate 4-5 Supreme Court judges!

Even if McCain is hamstrung by the liberal Senate, we would be far better off, in my opinion, with his choices for the High Court – even if they are not as conservative as we would like – than those that Obama is sure to nominate and get confirmed easily.

Recent Landmark 5-4 Supreme Court Decisions

As discussed above, the current Supreme Court often comes down to a 5-4 vote, with Justice Kennedy tipping the decisions one way or the other. In just the last month, we have seen two landmark Supreme Court decisions which are most instructive.

In a stinging rebuke to President Bush’s anti-terror policies, a deeply divided Supreme Court ruled on June 12 that foreign detainees held for years at GuantanamoBay in Cuba have the right to appeal to US civilian courts to challenge their indefinite imprisonment without charges.

Justice Anthony Kennedy was, once again, the deciding vote in the 5-4 landmark decision. Kennedy, in writing for the 5-4 High Court majority, acknowledged the terrorism threat the US faces, and the Bush administration’s justification for the detentions, but he opined: “The laws and Constitution are designed to survive, and remain in force, in extraordinary times.”

Conservatives were outraged that the Supreme Court would essentially open up the US court system to alleged terrorists and known enemy combatants – who are NOT US citizens! Imagine the message this decision sends to terrorists around the world. Justice Kennedy was roundly criticized for his swing vote.

President Bush said he strongly disagreed with the decision - the third time the court has repudiated him on the detainees - and suggested he might seek yet another law to keep terror suspects locked up at the prison camp, even as his presidency winds down. But this is not very likely. The Supreme Court is the final arbiter and cannot be over-ruled by the president.

Then on June 25, the Supreme Court made another bone-head decision in my opinion and that of most conservatives. Last Wednesday, in yet another 5-4 decision, the Court outlawed executions for child rapists. The State of Louisiana had sentenced Patrick Kennedy to die for brutally raping his 8-year-old step-daughter. (One expert in pediatric forensic medicine said the victim’s injuries were the most severe he had ever seen from a sexual assault. They even required emergency surgery.)

Once again, Justice Kennedy joined the liberals on the Court who ruled that despite the brutality of the crime, the death sentence violated the Eighth Amendment ban against “cruel and unusual punishment.” In its ruling, the Court suggested its decision reflected “evolving standards of decency that mark the progress of a maturing society.”

Give me a break!! In terms of naked judicial activism, one can cite few better examples than this one. How could any judge advocate leniency for a child rapist and spin it as both “decent” and “mature?” FYI, this decision was criticized by both Senator McCain and Senator Obama.

Justice Alito, noting the sweeping impact of the Court’s decision, wrote in his dissent: “The Court today holds that the Eighth Amendment categorically prohibits the imposition of the death penalty for the crime of raping a child. This is so, according to the Court, no matter how young the child, no matter how many times the child is raped, no matter how many children the perpetrator rapes, no matter how sadistic the crime, no matter how much physical or psychological trauma is inflicted, and no matter how heinous the perpetrator's prior criminal record may be.”

Before the ruling, six states allowed the death penalty for convicted child rapists. Now there are none. You can thank the liberal activists on the Court, and Justice Kennedy, for that.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Court Gets It Right On Gun Control, Barely

While conservatives were outraged by the Supreme Court decision on the detainees and child rapists, there are also times when Supreme Court decisions outrage liberals as well. Such a landmark decision was handed down by the High Court just last week.

On June 26, the Supreme Court ruled 5-4 in favor of gun rights. Thursday’s ruling by the High Court declared that the Second Amendment to the US Constitution provides an individual right to gun ownership. Once again, it was Justice Kennedy who delivered the deciding swing vote, this time ruling on the conservative side.

The Second Amendment, part of the Bill of the Rights, reads: “A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms shall not be infringed.”

The District of Columbia passed a law in 1976 effectively banning handgun ownership in city limits. Dick Heller, an armed security guard and D.C. resident, challenged the law after his handgun application was rejected. An appellate court sided with Heller, ruling that the D.C. ban on handguns was not compatible with the Second Amendment.

The issue for the Supreme Court was simply this: Does an individual U.S. citizen have a right to own a gun, or is this right only somehow linked to membership in a state militia. That issue has been settled, albeit with a dangerously slim margin.

The majority opinion in the case District of Columbia v. Heller was written by Justice Antonin Scalia, joined in by the other three most conservative justices, along with Justice Kennedy in this case. The four more liberal justices endorsed two dissents, one written by John Paul Stevens, and the other by Stephen Breyer.

This decision outraged liberals and even many moderates. Opponents argue that the right to keep and bear arms was only intended to pertain to “militias,” that the days of militias are long gone, and that the Court was vehemently wrong in its decision.

For the record, I happen to staunchly agree with the decision and must admit that Justice Kennedy’s vote surprised me, pleasantly I might add.

McCain & Obama’s Reaction To The Gun Decision

John McCain immediately praised the Supreme Court’s decision which invalidated a District of Columbia ban on handguns. The Republican presidential nominee heralded the justices’ action as “a landmark victory for Second Amendment freedom.”

Voicing a stance that could help him with both conservatives and libertarians, McCain said, “This ruling does not mark the end of our struggle against those who seek to limit the rights of law-abiding citizens. We must always remain vigilant in defense of our freedoms.”

Barack Obama, on the other hand, did another flip-flop. Obama has long advocated that local governments should be able to regulate guns (read: “gun control”). Yet in his official statement on the Supreme Court’s decision, Obama said that he “favors an individual’s right to bear arms,” but also believes the government should have the right to regulate them. Say what?

Obama issued a carefully worded statement apparently aimed at both moderate voters and his liberal base. The statement did not specifically say whether Obama agreed with overturning the specific D.C. gun ban. But he said Thursday’s ruling “will provide much-needed guidance to local jurisdictions across the country.” What is that supposed to mean? Nothing, actually.

A 5-4 Supreme Court Is Better Than 6-3 Or 7-2

In the span of just two weeks, the current Supreme Court has outraged both conservatives and liberals, with Justice Kennedy earning the ire, and praise, of both camps. Both conservatives and liberals railed against the current make-up of the High Court and the fact that landmark decisions often come down to nothing more than Justice Kennedy’s position on the issue.

While I am definitely among those conservatives that were outraged over the detainee rights decision, I would much prefer the current make-up of the Court to that which I believe we will see if Barack Obama becomes president. Perhaps the Supreme Court make-up won’t change significantly if Obama only gets to replace Justices Stevens and Ginsburg with two more liberal judges. However, if Obama gets more opportunities, the High Court could easily shift to a lop-sided 6-3 or 7-2 liberal bias, especially if any of the more conservative justices, or even Justice Kennedy, retire, fall ill, die or otherwise become incapacitated.

In closing, if you are undecided about who to vote for in the presidential election, I suggest that you focus on the implications for the Supreme Court, if nothing else. John McCain was not my choice for the GOP nominee. I don’t agree with him on several important issues. But when I consider the implications for the Supreme Court, John McCain will get my vote in November.

Please let me know if this week’s article has been helpful for you.

All the best,

Gary D. Halbert

SPECIAL ARTICLES

Obama's (& the Democrats') Dry Hole (Must Read)
http://online.wsj.com/article/SB121478199392114387.html?mod=opinion_main_review_and_outlooks

Where does Obama really stand on gun control? (Very interesting)
http://www.realclearpolitics.com/articles/2008/06/scalia_saves_obama.html

Recent Court rulings spotlight election's 'supreme' stakes.
http://www.boston.com/news/nation/articles/2008/06/27/recent_rulings_spotlight_elections_supreme_stakes/

New York Times Perspective On Justice Kennedy (Good, but I don't totally agree)
http://www.nytimes.com/2008/06/29/washington/29scotus.html?_r=2&hp=&adxnnl=1&oref=slogin&adxnnlx=1214741769-RlZ9jRqY23h6QoFs2FcZ+w&oref=slogin

The Corn Ethanol Myth & My Retirement

Gary D. Halbert — Tue, 03 Jun 2008 21:46:16 GMT

IN THIS ISSUE:

Ethanol: A Feel-Good Political Ploy
No Solution To Current Fuel Woes
Potential Negative Economic Impact
No Benefit From Existing Infrastructure
Other Types Of Ethanol Show Promise
Conclusions – Ethanol Is Not The Silver Bullet

Pondering My Retirement

Introduction

You don’t need me to tell you that oil and gas prices are at record levels. It seems like folks talk about little else these days and rightly so. The massive increase in oil and gas prices has stunned the consumer. How far have prices risen over the past year? On May 22, 2007 crude hit a high of $66.35 and one year later on May 22, 2008 it hit an all-time high of $135.08; a 104% increase! Gasoline prices over the same time frame have gone from $3.22 a gallon to $3.93 a gallon on average nationwide. And if you are thinking that gas still has room to the upside, you are exactly right.

With that unpleasant news on all of our minds, we want to take a look this week at what many politicians are pushing as the key to our energy independence - corn ethanol. Corn ethanol is being promoted by politicians as the “silver bullet” to our energy problems, and farmers are racing to plant as much corn as they can everywhere that they can. But is corn ethanol really the answer? This week, we argue that the answer is probably not.

In the discussion below, Spencer Wright will walk us through the pros and cons of corn ethanol. Together, we will point out that corn ethanol is likely no more energy or cost effective than fossil fuels. Some experts argue that a gallon of corn ethanol requires more energy than it produces. We believe that corn ethanol is not the promised answer to US energy independence, and that the widespread promotion of ethanol, should it continue, will cause food prices to continue to ratchet higher in the years to come.

This is why we entitled this article “The Ethanol Myth.” What follows is a good deal of information you are not likely to hear in the mainstream press and certainly not from the politicians in Washington who have bought hook-line-and-sinker into the ethanol story for their own political gain.

And finally, as much as I hate to admit it, I am having thoughts of retirement even at the ripe old/young age of 56. I will share my thoughts with you at the end of this week’s E-Letter. Let’s get started.

THE ETHANOL MYTH

by Spencer Wright

Ethanol: A Feel-Good Political Ploy

Corn-based ethanol was first championed by US agribusiness during the 1970’s gasoline crisis and has now returned with a vengeance. This time it has been totally and completely embraced by politicians on both sides of the aisle in Congress. Why? Simple, it is green, it is economical and it will help us reduce our dependence on foreign oil, or so the politicians in Washington tell us. Yet as you will see below, corn ethanol is likely none of these things. By embracing corn-based ethanol, politicians can claim that they are environmentally friendly and that they are doing something about rising fuel costs all at the same time.

Of course it is no coincidence that massive agribusiness combines like Archer Daniels Midland have been promoting (read: lobbying for) corn ethanol in Washington since the 1970s. And they have been very, very successful. So successful, in fact, that ethanol receives a government price subsidy of apprx. $1.90 per gallon! And that is only part of the massive government perks for ethanol producers.

ADM is one of the largest grain producers in the world, possessing the capacity to produce over 1.1 billion gallons of corn ethanol per year for which it receives nearly $526,000,000 in total subsidies from the government. As a result ADM and other agribusiness combines are big time lobbyists for corn ethanol.

It is also important to remember that Iowa is a major corn and ethanol producer. Why is this important? Well, Iowa holds the first in the nation presidential caucus to launch each general election season. Prospective presidents can’t come through Iowa and bash corn-based ethanol. Those that do tend to lose.

So agribusiness lobbyists convince the politicians that corn ethanol is actually a viable alternative to petroleum; the politicians, in turn, redirect federal tax dollars to support the ethanol industry and agribusiness through subsidies and tax credits ($5.7 billion in federal tax credits over the next five years alone); and then they return to their constituencies where they tell us how green they are, and that they are working hard for a solution to high gas prices and are also making America more secure as we wean ourselves off of foreign oil.

I am sorry folks, but this is nothing but a “feel-good” political ploy that is terribly wrong.

No Solution To Current Fuel Woes

At this point, I want to clarify that most of my comments are related to ethanol made from corn, and not other sources such as sugar cane. While corn is something that America has in abundance, it is among the least efficient raw materials for making ethanol, as I will discuss in more detail below. All of the abundance and lobbying can’t change this fact.

Corn ethanol is very expensive to produce and would never make it in a free market without its massive federal subsidies. Even at $3.93 on average for gasoline? Yes. The current average price at the pump for E85 ethanol is $3.12. If we add on the $1.90 government subsidy, you get a per gallon price of $5.02. There are some who price E85’s real cost to the consumer at $6.89 per gallon after a number of other government subsidies and perks are added in. While I would not go that far, clearly corn ethanol cannot stand on its own.

Of course, it isn’t only the cost that weighs on corn ethanol. It is also highly inefficient. Ethanol from any source is 20-30% less efficient than gasoline, making it more expensive per highway mile. It takes about 450 pounds of corn to produce the ethanol to fill one SUV tank, or enough corn to feed the average person for a year.

But wait, it gets worse: some studies show that more than one gallon of combined fossil fuels is required to produce one gallon of corn ethanol. How can this be? Well, fields must be plowed, corn must be planted and grown, fertilized, harvested and trucked to ethanol producers - and all that uses fossil fuels. As a result, the energy production to energy output ratio of ethanol is very nearly 1:1. Not exactly an energy saving proposition, is it?

In addition, the process of making corn ethanol requires an estimated four gallons of water to produce one gallon of ethanol, and some studies show an even higher water-to-ethanol ratio. The pro-ethanol lobby disputes this assertion with some claiming that there is actually a gain of clean water from the process. Reading the pro-ethanol material, however, reveals that they do not consider the approximately 80% of the water used which evaporates during the cooling process as “lost.”

Here, I guess you have to think like an ecologist. While most of us think that alternative uses for water pulled from aquifers as being for irrigating other crops, drinking or other industrial uses, the pro-ethanol forces feel it’s just as valuable released as water vapor to return to the earth as rain at some point, eventually making it into reservoirs and the underground water table. To say the least, this is going to take quite a bit of time.

To an extent, they may be correct, but the question is how long are you willing to wait? Depleting scarce Midwest water resources now and then waiting for the water to return in the form of rain at some point is not an exact science. The Ogallala Aquifer below much of the Midwest is currently being depleted faster than it can be recharged, and cranking up more ethanol plants will accelerate this process.

Of course, that doesn’t seem to deter the corn ethanol faithful. 147 corn ethanol refineries have been built over the past 30 years, and hundreds more are under construction to be completed over the next decade. The Bush Administration has championed an increase in corn ethanol production over the next decade, seeking to create nearly 11.5 billion gallons a year of ethanol by 2017. Never mind that this level of ethanol production would require the usage of an estimated 50% of the nation’s corn crop each year.

Even IF this goal is accomplished, it will only replace approximately 10% or less of the nation’s fossil fuel usage. Currently ethanol represents only about 3% of total fuel consumption, hardly amounting to energy independence

Potential Negative Economic Impact

The government’s plan to drastically ramp up corn ethanol production to its 2017 goal is, to say the least, problematic. Diverting half of the nation’s corn crop to ethanol will create alarming repercussions in other areas – all of which will be felt in our pocketbooks. Consider this from the EPA:

According to the National Corn Growers Association, about eighty percent of all corn grown in the U.S. is consumed by domestic and overseas livestock, poultry, and fish production. The crop is fed as ground grain, silage, high-moisture, and high-oil corn. About 12% of the U.S. corn crop ends up in foods that are either consumed directly (e.g. corn chips) or indirectly (e.g. high fructose corn syrup).

So if 80% of the crop is used as feed, 12% as food and the remaining 8% or so is used for ethanol, what happens to the equation when ethanol skyrockets to 50% of total crop usage? It doesn’t take a genius to realize that prices will rise! As I write this, corn has just hit an all-time high of $6.00 per bushel. Just imagine where we go from here! Food costs are rising rapidly and will likely continue to do so. It is basic economics that all costs are passed along.

The US is currently experiencing the worst food price inflation in 17 years. Food prices rose 4% in 2007 and could rise as much as 4.5% or more in 2008 according to the Department of Agriculture. The April CPI summary from the Bureau of Labor Statistics has food and beverages increasing at an estimated annual rate of 6.1%! Compare this to an average annual rise of only 2.5% over the last 15 years.

Is corn ethanol solely to blame for these increases? No, at least not yet. But if the government’s plans to ramp up corn ethanol production to 11.5 billion gallons per year by 2017 actually come to pass, much higher food prices could be in our future.

As the average American family feels the squeeze of higher food and energy prices, farmers are poised to harvest a bumper crop of government cash. Through hundreds of billions of dollars in federal subsidies over the years, there has been nothing less than a naked transfer of wealth from non-farmers to farmers. Corn-based ethanol will only bloat federal subsidies and hasten this transfer of wealth.

Take the latest record large farm bill, for example. On May 14 and 15, the House and Senate voted overwhelmingly to pass the latest $307 billion farm bill which is loaded with pork and earmarks that will go to wealthy farmers in addition to windfall profits from soaring crop prices. Not only will the latest farm bill spend over $300 billion of taxpayer money, it also extends dozens of other federal farm subsidies for another 5-10 years. So the farm lobby succeeded in winning another government windfall even as farm incomes are exploding.

Don’t you find it interesting that consumers cry foul and want windfall profit taxes and an end to oil company subsidies when gas prices rise, but allow huge subsidies to corporate farms to go unchecked when food prices follow suit? Of course, no politician wants to be seen as turning his or her back on the “family farm,” so expect such misguided government giveaways to continue. Oh well… back to ethanol.

No Benefit From Existing Infrastructure

Another factor in the inefficiency of corn ethanol lies in the way it must be transported. The current energy flow infrastructure in the US is designed to transport fossil fuels, petroleum and natural gas, through specially designed and constructed pipelines. This means that no matter where you live, generally speaking you have roughly equal access to these fuels and at roughly the same market price across the country. This is not so for ethanol.

Because corn ethanol cannot be easily transported through existing petroleum pipelines, it has no existing national infrastructure and must therefore be transported by truck to one of the 1,556 E85 stations across the country. That is only about 8% of all gas stations in the US, and the trucks that transport the E85 are burning diesel or gasoline, thus contributing to corn ethanol’s inefficiency.

The lack of a unified infrastructure also leads to regional price instability. Currently there is a 15% or more spread in the price of E85 at the pump across the country, largely due to delivery costs. In my home state of Texas alone, there is a 9% spread across the state.

Since ethanol cannot use the current oil and gas infrastructure, a new one will have to be built specifically to handle ethanol, if the politicians have their way. Who knows how many hundreds of billions of dollars it will cost or how many decades it will take to build it? So we face the potential of a burgeoning ethanol industry with no centralized means of distribution that will only contribute to higher prices at the pump in the future.

Other Types Of Ethanol Show Promise

Not all forms of ethanol are as seemingly hopeless as corn ethanol. A significant step up from corn-based ethanol is sugar ethanol, which is the leading form of ethanol in global production, accounting for well over half. It is sugar and its byproducts that have fueled Brazil’s amazingly successful ethanol industry, which is far and away the world leader.

Brazil’s ethanol program uses cheap sugar cane, mainly bagasse or cane-waste. This, combined with modern equipment, provides a 22% ethanol blend used in petroleum nationwide, as well as a 100% hydrous ethanol for the country’s four million cars. Today, Brazil gets more than 30% of its automobile fuels from sugar cane-based ethanol.

Unlike corn, sugar ethanol provides a much higher energy production-to-output ratio of about 1:6 to 1:8. This makes it several times more efficient than corn. So why don’t we use sugar based ethanol? Actually, we do, non-maize (corn) ethanol production in the US accounts for 3% of total production.

Why so little when it is clearly superior to corn? Well, for one thing, the agribusiness lobby is far too strong to allow sugar to have a chance in the US. The other limitation to producing sugar ethanol in the US is our climate. Only Florida, Louisiana, Hawaii and Texas have suitable climates for growing sugar cane, and only in certain areas of those states. And forget about importing sugar-based ethanol, because there’s a stiff $0.54 per gallon tariff on all imported ethanol, thanks to the agribusiness lobby.

Brazil has managed to carve out a thriving ethanol industry that employs over a million people and exports hundreds of millions of barrels a year - including about 160 million to the US (despite the tariff). Notorious global financier George Soros has recently invested $900 million in Brazilian ethanol production.

Actually, there are forms of ethanol that are even more efficient than sugar. Cellulosic ethanol is produced from “lignocellulosic biomass” which is wood residue, paper waste, agricultural residue and some dedicated crops like tall woody grasses. This form of ethanol has the capacity to produce 1:10 to 1:12 input/output ratio. Cellulosic ethanol facilities are currently under construction, though they will represent only a small portion of overall US ethanol production for now.

Conclusions – Ethanol Is Not The Silver Bullet

It is clear that corn ethanol, despite being a darling of the politicians, is not the answer to rising fuel costs or energy independence. As discussed above, corn ethanol is inefficient to produce and results in an input output ratio arguably no better than 1:1. But even if we include the more efficient forms of ethanol such as sugar and cellulosic, ethanol is still not the answer to our energy dilemma. There is no panacea to replace fossil fuels. It is going to take more than one new source of energy.

Ethanol may be a step in the right direction, as will other promising technologies such as advanced electric power and fuel cell technology. The key point to remember is that petroleum is an extremely versatile resource. As such, it does not lend itself to being replaced by a single alternative fuel. Instead, it will take several new sources of energy to replace fossil fuels.

Unfortunately, the fact is that even in the best of circumstances, these emerging energy technologies are likely 10-15 years away from having any significant impact. Thus, the only short-term solutions to domestic fuel costs is to increase the supply of fossil fuels from existing sources, and this means opening up more wells in the US (including ANWR and offshore), tap more proven reserves, construct new refineries, build both coal and nuclear power plants and change our consumption levels thorough elevated CAFÉ (Corporate Average Fuel Economy) standards and lifestyle alteration. And all of that will still take at least five years or so to have a substantial impact.

It now appears that high energy prices are here to stay and we all need to find a way to adjust. Back to you, Gary.

My Take On Ethanol
by Gary Halbert

Thanks, Spencer.

When I asked Spencer to research and write a piece on ethanol, I knew it would result in competing claims. For every argument in favor of corn ethanol, you can find one (or more) on the other side of the issue. Each side has its own set of studies, but they point in very different directions.

That being the case, how can we non-scientists know which claims are correct and which are bogus? I wish I had the answer, but I don’t. What I do know is that corn appears to be an inefficient raw material upon which to base our hopes for energy independence and, more importantly, if we commit 50% of future corn crops to ethanol, food prices will skyrocket even further. I’m not sure that American citizens realize the economic impact this feel-good policy may have on their pocketbooks.

With politicians having now jumped on the corn ethanol bandwagon, one might think that we could depend upon our elected officials to cut through the confusion and come up with a solution based on the real facts. Unfortunately, we all know that money greases the wheels in Washington, so the lobbyists will likely have more influence than any objective scientists.

The result is that it is likely to cost us all more money to buy food and fuel because of a politically expedient solution that embraces an inefficient technology. The thought of all the other political “solutions” that ended up having unintended consequences later on comes to mind.

Along that same line of thought, I have been following another piece of legislation that also has its genesis in questionable science. The Lieberman-Warner “Climate Security Act” is now making its way through the US Senate. While I do not intend to open the entire global warming can of worms at this point, I do know that it is now becoming very popular to be seen as “green” on Capitol Hill.

As a result, it is important for all of us to keep an eye on this legislation, as it also holds the potential to increase all of our cost of living in an effort to curb greenhouse gases, while other countries such as China continue to produce greenhouse gases unabated. President Bush says he will veto this bill if it gets to his desk, so the politicians are likely to delay this bill until the next president takes office. Stay tuned!

PONDERING MY RETIREMENT

by Gary Halbert

It was 32 years ago this month when I began my career in the investment business in 1976 at the ripe old age of 24. I have been in it ever since. It has been an interesting ride, and I have always had the hands-down best clients on the planet. But this year, I’ve been thinking of retiring. Yes, retiring at the age of 56.

But before you drop your jaw, let me assure you I am not thinking about retiring from my career in the investment business. Rather, I am considering retiring from my other job which is coaching youth sports. My son graduated from high school in May and will be off to college in the fall, so my coaching days, with him at least, are officially over.

I never had any intention of coaching my kids in sports. I was not a star athlete in high school or college, although I did play football, basketball and baseball as I was growing up. No, I was abducted into coaching, completely to my surprise. The abduction began in 1995, I think it was, when I took my son to his first tee-ball practice. When we arrived, I saw only one adult man there with 12-14 little kids. Out of concern for safety, I hung around waiting for the other coach to show up. No one did, so I stayed and helped for the whole practice. The same thing happened the next day.

At the end of the second practice, the coach called me over to his pickup truck. He reached inside and handed me a cap and a tee shirt and quietly said, You’ll be my assistant coach. What, me a coach?

What I didn’t know was that this man was the head of the local Youth Association in our area. What I also didn’t know was that he coached everything year-round - baseball, football and basketball. The tee-ball season was such a joy, despite my lack of experience, that I followed him into football as a coach in the fall, and on to basketball after that.

I had no idea that I would end up coaching my two kids year-round for the next 12 years. More importantly, I had no idea that coaching would become such a demanding and rewarding part of my life. The folks in my office call it my “other job.”

I can’t begin to describe how much coaching has meant to me, how much closer it has drawn me to my two kids, and how it has introduced me to some of the best friends I have ever had.

Most of the guys I coached with in the early years sent their kids to public schools, so their coaching careers ended after only a few years. My kids, on the other hand, have always attended a private Christian school that is always looking for volunteer Dads to coach. So I continued to coach my kids through middle school and high school.

Coaching these kids over the years has given me many of the best memories I have had in my life. My daughter will be a junior in high school this fall, but I don’t coach her basketball team anymore. So when the final pitch was thrown and the final out was made in my son’s last baseball playoff game in early May, it hit me in the dugout afterward as I was packing all the equipment: my coaching career may be over.

I have a standing invitation with the Athletic Director at our school to return next year and continue coaching. In fact, he frequently asks, You are coming back, right? I’ve been thinking about it a great deal over the last month. I just don’t know if I will continue to be so passionate about it without a kid on the teams.

I haven’t made my mind up yet, but I am thinking of just being a fan next school year, and see what that’s like. If I can’t stand being in the bleachers, I can always un-retire the next year. I know I’ll dearly miss those kids calling me Coach Halbert.

Kudos To My Son

Since this E-Letter is free of charge, I want to brag for a moment about my oldest child who just graduated from high school. He graduated Magna Cum Laude along with seven other students in his class, making straight As in his senior year. In football, he made the All-District and All-State first teams as a record-setting wide receiver. He also made the All-State Academic Team based on his school grades. In basketball and baseball, he also won All-District honors.

He was the only student in his class to win such honors in three different sports in one school year. He was nominated by our Athletic Director for “Athlete of the Year” in the Texas Association of Private & Parochial Schools statewide.

Watching him present his Senior Thesis (a requirement at our school) and hit it out of the park, if I do say so myself, and then watching him graduate from high school has been a very emotional experience for me. I’m not ready to let him go, but at the same time, I have every confidence that he will do very well in college where he plans to pursue a degree in engineering.

Debi and I are very proud of him!

Now that our son will be off at college, our high school sports focus will now be my daughter's activities. While she doesn't play as many sports as our son, she is definitely just as competitive!

(Thanks for indulging me.)

Best regards,

SPECIAL ARTICLES

The Many Myths of Ethanol
http://www.realclearpolitics.com/articles/2007/05/the_many_myths_of_ethanol.html

The Clean Energy Scam
http://www.time.com/time/magazine/article/0,9171,1725975,00.html

Forget the Ethanol Myth
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_wasik&sid=aOS8e5kvDESE

The Incredible Shrinking Republican Base

Gary D. Halbert — Tue, 20 May 2008 20:37:00 GMT

IN THIS ISSUE:

1. Republicans Upstaged By Democratic Race

2. Is The Republican Base Shrinking?

3. Conclusions – A Glimpse Into The Future?

4. Why Is Hillary Still In The Race?

Introduction

With all of the attention being paid to Clinton and Obama as they vie for the Democratic nomination for president, less media attention has been focused on John McCain and those who will be counted upon to elect him to the highest office in the land. After all, the Democratic contest is far more interesting, with almost daily gaffes, blunders and/or attacks from one or the other candidates, not to mention Slick Willie.

In contrast, the Republican nomination is already a “done deal,” with just the selection of a running mate still to be determined. There have been stories about whether or not the hard-core conservatives making up the Republican base will support McCain, but they seem to be coming to the conclusion that McCain is better than Hillary or Barack.

Of course, this “hold your nose and vote” idea assumes that the Republican base is made up of a certain demographic, namely white, married and Christian. While this description has been largely accurate over the past few decades, and still is to a great extent, there are indications that this demographic may be changing, perhaps in important ways. If so, this demographic sea change could transform Republican politics far into the future.

An excellent recent article by Dr. Alan Abramowitz discusses the dilution of the traditional Republican base within the general population, and what it may mean to the future of the GOP. Dr. Abramowitz is the Alben W. Barkley Professor of Political Science at Emory University, and the author of Voice of the People: Elections and Voting Behavior in the United States (2004, McGraw-Hill).

While I am not a member of any political party and never have been, I am conservative and therefore line up with the Republicans on most issues. Thus, any indication that conservative ideals may have to take a back seat due to changing demographics is a major concern, at least to me. In this week’s E-Letter, I reprint Dr. Abramowitz’s timely article, and I hope you will take the time to read it and think about it. Following that, I will offer a brief analysis of my own, and end with a few comments on the state of the Hillary/Obama race at this point.

The Incredible Shrinking Republican Base
by Dr. Alan Abramowitz

QUOTE:

Discussions of the current political situation and comparisons between the 2008 election and earlier contests frequently overlook a crucial fact. As a result of changes in American society, today's electorate is very different from the electorate of twenty, thirty, or forty years ago. Three long-term trends have been especially significant in this regard: increasing racial diversity, declining rates of marriage, and changes in religious beliefs. As a result of these trends, today's voters are less likely to be white, less likely to be married, and less likely to consider themselves Christians than voters of just a few decades ago.

The combined impact of these trends on the composition of the electorate has been dramatic. Married white Christians now make up less than half of all voters in the United States and less than one fifth of voters under the age of 30. The declining proportion of married white Christians in the electorate has important political implications because in recent years married white Christians have been among the most loyal supporters of the Republican Party. In American politics today, whether you are a married white Christian is a much stronger predictor of your political preferences than your gender or your class -- the two demographic characteristics that dominate much of the debate on contemporary American politics.

Figure 1 displays the trends in the proportions of whites, married persons, and Christian identifiers in the U.S. electorate over the past half century according to data from the American National Election Studies. Between the middle of the 20th century and the beginning of the 21st century, the proportion of whites has fallen by about 15 percentage points, the proportion of married persons has fallen by about 25 percentage points, and the proportion of Christian identifiers has fallen by about 10 percentage points.

Married individuals still make up a large majority of the electorate, whites are still close to 80 percent of the electorate, and Christians are still over 80 percent of the electorate. However, the combined impact of the changes illustrated in Figure 1 has been enormous. Married white Christians have gone from close to 80 percent of the electorate in the 1950s to just over 40 percent of the electorate in the first decade of the 21st century. Moreover, the data displayed in Figure 2 show that the decline in married white Christians has been even more drastic among younger Americans. The proportion of married white Christians among voters under the age of 30 has plummeted from almost 80 percent in the 1950s to less than 20 percent in the first decade of the 21st century.

These changes in the social composition of the American electorate are politically significant because married white Christians now constitute the core of the Republican electoral coalition. Not only are married white Christians more likely to support the GOP than other Americans, but, as the data displayed in Figure 3 show, the gap between these two groups has widened from less than 10 percentage points in the 1950s to 25 percentage points in the first decade of the 21st century.

Even though married white Christians have been shrinking as a proportion of the American electorate, the Republican Party has been able to maintain and even slightly increase its share of the electorate since the 1960s by steadily increasing its support among married white Christians. The data in Figure 3 show that between the 1950s and the first decade of the 21st century, Republican identification among married white Christians increased by more than 20 percentage points, going from about 40 percent to over 60 percent. However, the ability of the GOP to continue to offset the diminishing size of its married white Christian base by making further gains among this group is questionable. Republican gains among married white Christians have occurred almost entirely among self-identified conservatives. Between the 1970s and the first decade of the 21st century, Republican identification among conservative married white Christians increased by 26 points, going from 64 percent to 90 percent, according to NES data. During the same time period, Republican identification among moderate married white Christians increased by only five points, going from 38 percent to 43 percent and Republican identification among liberal married white Christians actually declined by 10 points, falling from 23 percent to 13 percent. These results suggest that the potential for additional Republican gains among married white Christians may be limited. Conservative married white Christians already overwhelmingly identify with the GOP and the party has had little success in increasing its support among moderate-to-liberal married white Christians.

The danger posed to the Republican Party by the declining size of its married white Christian base was clearly illustrated by the results of the 2006 midterm election. According to the 2006 national exit poll, married white Christians made up just under half of the midterm electorate and they voted for Republican House candidates over Democratic House candidates by a decisive 62 to 38 percent margin. However, voters who were not married white Christians made up just over half of the electorate and they voted for Democratic House candidates over Republican House candidates by an even more decisive 68 to 32 percent margin. The result was a big win for the Democrats in the midterm election.

In addition to the large gains made by Democrats in the House and Senate elections, another striking feature of the 2006 results was the presence of a fairly large generation gap within the electorate. As the data displayed in Table 1 show, voters under the age of 30 were considerably more likely to identify with the Democratic Party and vote for Democratic candidates than older voters. While the youth vote was not solely responsible for the Democratic victory in 2006, the party's 22 point advantage among voters under the age of 30 clearly contributed to the magnitude of that victory.

An important question about the generation gap in the 2006 election is whether it was based mainly on short-term factors such as discontent with the war in Iraq, or whether it reflected long-term trends in the demographic make-up of the American electorate. We have already seen that the decline in the proportion of married white Christians since the 1950s has been much more dramatic among younger voters than among older voters and the results of this long-term trend were clearly reflected in the social characteristics of the 2006 electorate. According to the national exit poll data, only 17 percent of voters under the age of 30 were married white Christians compared with just over half of older voters.

In order to determine whether long-term demographic changes were responsible for the generation gap in voting behavior, I compared the preferences of younger and older voters in the 2006 House elections while controlling for their demographic characteristics. The results displayed in Table 2 show that married white Christians under the age of 30 were just as likely to vote for a Republican House candidate as married white Christians over the age of 30. Similarly, voters over the age of 30 who were not married white Christians were just as likely to vote for a Democratic House candidate as voters under the age of 30 who were not married white Christians. Thus, the current generation gap in voting behavior appears to be completely explained by the difference between the proportions of married white Christians in these two groups. The reason that voters under the age of 30 are now significantly more Democratic than older voters is that they are much less likely to be married, white, and Christian.

In addition to age, two other demographic characteristics that have received a great deal of attention in commentary on the 2008 election are gender and class. In recent weeks there has been endless speculation about the relative abilities of Barack Obama and Hillary Clinton to appeal to two groups whose support is widely considered to be critical to Democratic chances in November: lower income whites and white women. The assumption here is that class and gender play important roles in shaping voter preferences in the contemporary electorate. However, the evidence from the 2006 national exit poll shows that whether someone was a married white Christian was a much stronger predictor of his or her political preferences than either gender or class.

According to the evidence displayed in Table 3, after controlling for whether or not a voter was a married white Christian, neither gender nor income had much influence on voters' preferences. Women who were married white Christians voted overwhelmingly for Republican candidates and men who were not married white Christians voted overwhelmingly for Democratic candidates. Similarly, lower income individuals who were married white Christians voted overwhelmingly for Republican candidates and upper income individuals who were not married white Christians voted overwhelmingly for Democratic candidates.

The decline in the proportion of married white Christians in the American electorate has been going on for a long time. Moreover, the large generational difference in the prevalence of married white Christians in the contemporary electorate suggests that this trend is likely to continue for the foreseeable future. What cannot be predicted as confidently is how party leaders will respond to this trend. Right now, Democrats appear likely to benefit from a continued decline in the proportion of married white Christians in the electorate because this group has strongly supported Republican candidates in recent elections while voters who are not married white Christians have strongly supported Democratic candidates.

Since the potential for additional Republican gains among married white Christians appears to be limited, Republican leaders will need to find ways to reduce the Democratic advantage among voters who are not married white Christians in order to maintain the party's competitive position. However, given the generally liberal views of this group, this will not be easy. In 2006, according to data from the Cooperative Congressional Election Study, 57 percent of these voters supported a woman's right to choose an abortion under any circumstances, 66 percent opposed a constitutional amendment to prohibit gay marriage, and 71 percent favored a single-payer health care system. Any attempt by Republican leaders to significantly increase their party's support among voters who are not married white Christians would therefore require changes in some of the party's longstanding policy commitments -- changes that would clearly upset a large segment of the current Republican base.

END QUOTE

Conclusion

While the ideological shift in the general population described by Dr. Abramowitz may prove to be problematic for Republicans at some time in the future, I think this change will be gradual in coming to pass. The data given in the charts and graphs above indicate that the Republican base is as solid as ever, even if John McCain is not the ideal candidate. Nevertheless, I don’t think these demographic trends are something that we can just ignore and assume that conservatives will always make up the “silent majority.”

One characteristic of conservatives in the US is their cohesiveness on certain “core issues” such as limited government, Supreme Court judges, gun control, immigration, abortion and gay marriage, among others. Thus, I found Dr. Abramowitz’s article to be of great interest in that the 2008 election may serve as a forerunner of future election cycles.

As we all know, McCain is no conservative in many ways. He has supported amnesty for illegal aliens, voted against tax cuts and co-authored the albatross known as the McCain – Feingold Act under the guise of “campaign reform.” Now, however, he is seeking the support of the Republican base – a group he has previously dubbed the “agents of intolerance.” Of course, that was then and this is now, so he’s forced to pander to the very groups he once criticized.

Though he was not the favorite of many conservatives, and certainly not of the religious right, he somehow pulled off one of the greatest come-from-behind victories in recent memory. He rose from the point of almost quitting the presidential race from lack of support and money to the position of presumed Republican nominee.

Was McCain’s rise to prominence due to the changing demographics that favor more moderate stances on core conservative issues? Or, was he just in the right place at the right time, being the last viable candidate left standing after the actual conservatives spent themselves in all-out campaigning?

Whatever the reason, it will be interesting to see just how McCain fares among independent voters, many of whom are moderate in their views, and the traditional right-wing core of the Republican Party. Will he somehow find a way to appeal to both demographics, or go down in flames by trying to be all things to all people? I don’t know the answer, but it’s sure to be an interesting race to watch, especially if it offers us a peek into how traditional Republicans will vote when candidates do not share some of their core beliefs.

And One Last Question:
Why Is Hillary Still In The Race?

If you read me on a regular basis, I must assume that you are at least somewhat up on the political scene, so I’ll be brief here. In my April 29 E-Letter, I discussed in specifics why Hillary could not win the Democratic presidential nomination. Now this is becoming clear to all. For better or worse, Obama is about to clinch the nomination.

The question is, why is Hillary continuing the fight, and more importantly why is she spending millions of her (and Bill’s) own money to do so? This issue boils down to one of two questions, assuming that Hillary knows (as she should) that she is going to lose. And she knows she will not be Obama’s choice for the VP slot, which she wouldn’t accept anyway. So why keep fighting and spending millions of her own money?

Question #1: Does she want Obama to lose, and McCain win, so she can come back for another potential presidential run in 2012? This is a very interesting question. It is clear that the Democratic nominee will be Barack Obama – this has been clear for some time as I have written. So, has Hillary recently decided that her best option would be to undermine him and hope he loses in November, so she can run again in 2012? Realistically, we should not rule this out. It’s the Clintons, let’s not forget.

Question #2: Is Hillary keeping on to try and get Obama to repay her the $15-$20 million she has spent of her own money in the late days of her campaign in exchange for her support? Hillary has pumped close to $20 million or more of her (and Bill’s) money into her campaign in the last few months. Could she be holding on hoping that Barack will agree to a backroom deal to pay off her campaign debts if she will drop out and support him? Stranger things have happened.

Then there is the question of whether Barack could legally pay her off to get her out or not. Some believe that there is no legal way that Barack could pay off Hillary’s huge campaign debts. I don’t know the rules, but I wouldn’t rule anything out.

In any event, it looks like the Clintons are on their way out, which nothing could please many conservatives more. Yet who knows what will happen if the most liberal Senator in the Congress becomes our next president, especially with a large Democratic majority in Congress… I hate to think.

Boy o’ boy will this be interesting as it plays out! I’m just glad that politics is just an amateur sport for me. That’s all for this week. Have a great Memorial Day weekend!

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Sky Isn't Falling On This Economy, Contrary To Myopic News Reports
http://www.ibdeditorial.com/IBDArticles.aspx?id=296089679282639

McCain Exceptionalism
http://www.nytimes.com/2008/05/19/opinion/19kristol.html?_r=1&ref=opinion&oref=slogin

Why Clinton Fights On
http://www.realclearpolitics.com/articles/2008/05/clinton_becomes_her_own_woman.html

Why We Want Obama To Be The Dem's Nominee

Gary D. Halbert — Wed, 07 May 2008 04:32:47 GMT

by Gary Halbert & Spencer Wright Many of you, like us, are probably at a loss as to which candidate we want to see run against GOP nominee John McCain. Both Obama and Hillary are very liberal and have similar policies. As much as I hate to admit it...(read more)

Forecasts & Trends : Politics

Stratfor: Odds of War with Iran Spiking

Healthcare Reform or Government Takeover?

Support Wanes For Obama's Huge Stimulus Plan

Introduction

Public Support For Trillion Dollar Stimulus Plunges

Senate Passes $838 Billion "Stimulus" Package

Senate Stimulus Amendment To Help Automakers

Republicans' Proposed Alternative Stimulus Packages

Republican Plans Never Had A Chance, Of Course

Final Stimulus Bill Will Be Higher Than $838 Billion

Frustrated Obama Says Spending IS Stimulus

50% of Americans May Pay Zero Income Taxes

Treasury Secretary Announces $2-$3 Trillion To Rescue Credit Markets

Obama's Tax Policy: None Dare Call It Welfare

Introduction

QUOTE: "Obama Stimulus Fosters Tax-Exempt Tyranny by Dick Morris & (wife) Eileen McGann

QUOTE: "The Tax Cut Mirage by Peter Ferrara

Conclusions

Economic & Investment Outlook For 2009

Introduction

Editor's Notes

Obama & The New Age Of Big Government

The Economy -- Have We Seen The Worst Of It?

Are The Bailouts Necessary & Will They Work?

The Latest Disappointing Economic Reports

Deflation -- Consumer Price Index Goes Negative

Stock Markets -- Might We Have Seen The Bottom?

Conclusions

Obama's Judges vs. Republican Opposition

Editor's Note

Introduction

Judicial Appointments - A Lasting Presidential Legacy

The Bush Record On Judicial Appointments

Get Ready For Liberal Judicial Nominees

Will The Republicans Roll Over Or Fight Back?

What About The Obama Supreme Court?

Conclusions - Who Knows What Obama Has In Store

The Democrats' Plan To Highjack Your 401(k)

Introduction

The Economy Falling Fast Into Recession

Democrats Want To Highjack Your 401(k)

The Democrats' 401(k) Replacement Plan

Congressional Testimony Paints A Different Picture

Socialism Du Jour - "Spread The Wealth Around"

A New Democratic Piggy Bank

Can We Afford This Nonsense? No, But So What?

Conclusions - After Today, Anything May Be Possible

Might Uncle Sam Make Money On The Bailout?

Introduction

The Latest $700 Billion Bailout Package

What Could Go Wrong - Potentially A Lot

What Could Go Right, If We Are Lucky

What Would Happen To The Profits, If Any?

A "Main Street" Backlash To Come?

The Economy, The Electoral Map & The United Nations

Introduction

The Economy Surges Above Expectations

Stocks - Have We Seen The Bottom?

The Electoral Map Remains Very Tight

My Thoughts On The Sarah Palin Pick

The Scary Democratic Party Platform!!

Dems Endorse Expansion of U.N. Power

Thoughts On China, The Olympics & Investing

Introduction

The Latest Economic Reports

QUOTE:"Economic Crisis Brewing In China?

Conclusions

I Appreciate Your Input - Keep It Coming

On The Economy, The Fed & President Obama

Introduction

Economy Holding Up Better Than Expected

Consumer Spending Remains Strong

Other Economic Indicators Are Mixed

The Fed In A Policy Box

Do Most Americans Really Know Barack Obama?

Obama Acts As If He's Already The President

John McCain's Electoral Mountain

The Vice Presidential Sweepstakes

Conclusions – Pass This Along

QUOTE:
"Obama Stimulus Fosters Tax-Exempt Tyranny
by Dick Morris & (wife) Eileen McGann

QUOTE:
"The Tax Cut Mirage
by Peter Ferrara

QUOTE:
"Economic Crisis Brewing In China?

My Take On Ethanol
by Gary Halbert