Saturday, May 30, 2009

Light at the End of the Tunnel – And It’s Not a Train!

From the Desk of Joe Rollins

Here in Atlanta, we are cycling out of our monsoon season into the heat of summer. Because of my workload during tax season, I usually miss most of the beautiful spring days. After tax season ends, in most years it has already become too hot to want to stay outside for very long. This year, however, the weather has been different.

Things are really changing all over. Cats must be sleeping with dogs and the world must’ve turned upside-down! In Atlanta, it has rained almost continuously since the 1st of April. Lake Lanier’s water tables are back to normal after years of drought, and my rose beds are so wet that a few days of heat would be appreciated. I have no fear, though, that the weather will return to normal. I expect that our typical hot and humid days are just around the corner.

So it is with the economy; normalcy has returned, although it crept in under the radar. Today is the last trading day for the month of May. Can you believe that May is the third straight month where all the major indexes have made a profit? With all of the hand wringing and calls for panic, the major stock market indices have slowly – but profoundly – made a turn for the better.

The chart below reflects how quickly and dramatically the stock market indices have completely turned around. Through the end of May, the Standard & Poor’s Index of 500 Stocks and the NASDAQ Composite are now positive for 2009 and the Dow Jones Industrial Average is only marginally negative.

On Wednesday, the National Association of Business Economists reported that 90% of their economists predicted a recovery in the U.S. economy to take place in 2009. In fact, 74% of the economists predicted that the economy would recover during the 3rd quarter of 2009. May I remind you that I made the same prediction many months prior, without the wealth of information that these learned economists possess? Sixteen percent of the economists said that the recovery would occur during the 4th quarter of 2009 and the remaining 10% said it would occur during the 1st quarter of 2010.

It’s hard to believe that the 3rd quarter begins in just one month. Even though many were predicting only a few months ago that the U.S. economy was on the virtual edge of a financial abyss, now almost all economists are projecting the turnaround to be in the near future.

It’s fascinating that this turnaround is occurring without the massive spending of the stimulus bill. Yes, it’s true that some of the stimulus money has made its way into the economy, but a vast majority of it has yet to be spent. You’ll recall that the mandate was that the money would need to be committed in the first 120 days after the bill’s passage. We just passed the 100th day, and only a small fraction of the stimulus money has made its way into the economy.

As I have often written in these posts, the U.S. economy is a fabulous corrector of its own abuses. The economy tends to correct itself without governmental intervention due to capitalism and entrepreneurship. The more government interferes with the economy, the worse it becomes.

I never believed that the economy was as bad as was being reported by the financial press, but even if it was, it is now on the mend. It’s unfortunate that panic caused us to appropriate literally trillions of dollars that will now be forced into the economy when it’s probably not even needed at this point. The deficits that are being projected for the economy over the next decade are truly mind-boggling in size. During the height of the panic, we felt we needed – and our Congress approved – massive spending undertaking for years to come unlike anything ever seen in the history of this country.

Now the economy is recovering without the aid of massive spending, yet the vast majority of the stimulus bill has not been spent nor will it be spent for several years. In retrospect, our government panicked to the ultimate price of the taxpayers.

I want to briefly review a few of the topics I have covered over the last eventful eight months. One of my posts explained the importance of the 3-month LIBOR interest rate. This is the interest rate that is used for interbank lending. Therefore, the higher the rate, the less likely banks are to lend to each other. In September of 2007, the 3-month LIBOR rate got as high as 5.7%. During the panic of October, 2008, the rate neared 5%, and it basically stayed at this level until it began falling very recently. As of yesterday, the 3-month LIBOR rate had fallen to 0.67%, which is one of the lowest rates on record. The economy has fixed itself and now banks are more than willing to lend to each other.

I previously wrote that the 10-year Treasury rate was yielding a minuscule 2%. Investors were so afraid of taking on risk that they were willing to accept a measly interest rate rather than risking their capital. Yesterday, the 10-year Treasury rate was at 3.5%, which is up 75% from where it was recently. Investors are no longer willing to accept diminutive yields on cash and government bonds when virtually every asset class is producing higher rates of return.

The steeper the yield curve between short-term rates and long-term rates, the more money banks can make. For example, if banks can borrow cheaply but lend at a much higher rate, their effective rate of return is dramatically improved. Today we have the steepest yield curve ever in our history. The 1-month Treasury rate is 0.11% and the 10-year Treasury rate is 3.5%. Never has the upward inclining yield rate been this dramatic. Notwithstanding all of the negative news you hear in the financial media, you do not need to know any more than this to predict that banks will report extraordinary profits this quarter – from banking, not investing.

Remember the infamous TARP plan proposed in September of 2008 that started the panic? Doesn’t that feel like decades ago? It’s hard to believe so much has happened in the intervening eight months. It was announced yesterday that the U.S. Treasury and the FDIC are postponing the implementation of the purchasing of toxic assets. You may recall that this is the exact proposed plan that got the panic rolling. Here we are, eight months later, and there is a likely chance that the TARP will never be implemented. So far, not even one toxic asset has been sterilized.

As I wrote in my post during that time, banks are unwilling to sell assets at the prices people would be willing to pay for them. The banks believed from the beginning that the prices were too low and that there was a high likelihood that price levels would recover. There are few investments for banks to make these days with higher rates of return, so banks want these toxic assets to improve their profitability. In fact, as convoluted as it sounds, the banks proposed to the U.S. Treasury that they would be willing to buy their own toxic assets. Of course, this was a sleight of hand by the major banks to indicate their own confidence level in their assets.

It was believed last summer that the reason the price of oil went to $150 a barrel was because of the extraordinary strength of the world economy. Obviously that was not the case, and as it became clear that many economies were faltering, the price of oil dropped down into the mid $30 per barrel range. Have you noticed that the price of oil has exploded in the last few weeks? Today a barrel of oil is $66. It’s unlikely to assume that the price of oil would double if the worldwide economies were falling further into recession. There are signs in all the commodities that positive economic activity is occurring since they are virtually all accelerating higher.

Investors are beginning to believe that the stock market increases are for real. During April, investors invested $12.3 billion in new money in stock funds. This was only the second month of positive cash inflows over the last year. Even more astounding is that investors withdrew $27 billion from stock funds during the previous month of March to turn around and invest $12.3 billion of new money during April.

Today there is roughly $3.5 trillion invested in stock mutual funds. It is currently estimated that the total commercial cash in deposit accounts exceeds the full value of the stock mutual funds. Only a small portion of this cash, which is earning virtually zero percent, would make the stock market go dramatically higher. As investors become disenfranchised with earning less than ½ of 1% in money market accounts and less than 1% on their CD’s, they will seek the higher rates of return that financial markets offer. When that happens, the stock market will go up even higher.

All of America has lost a great deal of money over the past year from financial assets and real estate. All of our retirement and liquid assets have been depleted. I vividly remember begging my clients to invest in their IRA’s at the lows of the stock market in February and March of 2009. Very few did so. With the market up some 35% in the intervening few months, I’m willing to bet that those who didn’t wish they had.

I consistently see misplaced blaming regarding the reasons for the financial meltdown. Politicians are notorious for incorrectly placing blame. It’s true that there were bankers who did things wrong, and it’s also true that Wall Streeters took advantage of the situation for their own economic benefit. But the true source of this financial meltdown can only be attributed to our government itself. The following quote from Thomas Sowell, a well-known U.S. economist, succinctly characterizes the current financial situation: “Riskier mortgage lending practices, imposed by government, were what set the stage for many mortgage payments to stop, and thus, for the financial disasters that followed.”

In the end, blame should be placed where it properly rests. The Federal government’s intervention with private industry is where the mistake began and ended. They forced banks to lower their lending standards to boost homeownership, and that was the principal mistake. Then they encouraged Fannie Mae and Freddie Mac to finance the whole mess by buying up the bad loans. These governmental agencies were essentially threatened with extinction if they did not comply with the government’s ill-advised mandates.

The end result is that the government forced private industry to do what it did not want to do and the financial results are self-evident today. Now, by the government’s own estimate, we are going to have to borrow $9 trillion in new debt to recreate the American economy in the eyes of the current government. With the government’s own extraordinary track record of ineptitude, you should not be anything but discouraged for the future.

As the last eight months have shown, private industry and the U.S. economy are more than able to recover on their own. My hope is that as the economy continues improving over the next 12 months, we will abandon all of these ridiculous unneeded governmental spending programs and get back to a U.S. economy controlled by business people and not politicians who have no experience in working in the private sector.

Everything mentioned above is just my thoughts and opinions. As always, I could be wrong.

Saturday, May 16, 2009

The Most Important Stock Market Week of the Year!

From the Desk of Joe Rollins

Since tax season has ended, I’ve actually gotten to play golf a few times, which means I can take out my frustrations regarding tax season and the stock market on the turf. I’ve yet to decide if playing golf is a good release for frustration or not, but I quit taking golf seriously a long time ago because I know that otherwise, it’ll drive you crazy! However, there are still days when the stress level on the golf course is just as great as in the business world.

In high school, I was had the good fortune of being a gifted athlete. Unfortunately, the toll of growing older has diminished my athletic abilities, but in my younger years I could pick up virtually any sport and play it well. Even though I had no formal golf lessons (and frankly, was never very interested in it), I was able to play a decent game the first day I stepped on a golf course.

My father was an older fellow when I started playing golf, but he was always able to beat me over a full round. I could easily drive a golf ball twice as far as he could, but he would always beat me with his finesse game. Playing with my brothers and the other kids in the neighborhood, it was not uncommon for us to throw clubs and use unsavory words to describe a terrible golf shot (which happened often).

I only played golf with my father on rare occasion since he worked almost daily at the local church and finding time to play golf was somewhat difficult for him, especially on Saturdays when he would prepare for Sunday services. I do remember, however, one specific day we played together that changed the rest of my golfing life. On this particular day, while standing in front of the golf cart we were using I hit a particularly bad three wood that hardly went 20 yards. I threw the club down the middle of the fairway – much further than the golf shot – and used many loud obscenities to express my anger.

No sooner had I thrown the club and let out those offensive words did I remember that my father was sitting directly behind me – a man who never uttered a swear word in his entire life. Recognizing that I was clearly in trouble, I tried to figure out a creative way to not have to turn around and face the wrath of my father. Sure enough, his understated response taught me more than any capital punishment that could’ve been inflicted on me. Turning to face the golf cart, my father said, “It didn’t help at all, did it?” He was right; it didn’t help at all – the shot was still bad. From that day forward I’ve never thrown another club (although I have cursed a golf ball on occasion).

In the last year, I have often cursed the financial media; this has been one of those weeks. As I write this post, the stock market is trading down significantly for the week. In fact, the losses have been so great over the last few days that the spectacular gains we had in the early weeks of May have been wiped out. Given the title of this post, you might be surprised about the market’s poor performance this week. However, there are enormous positive undercurrents in the stock market recently, which I seriously doubt have been expressed in the financial media.

Last Thursday, the Treasury Department announced the infamous stress test that they had been working on for some months with the 19 largest U.S. banks. There was, of course, great anticipation and trepidation as to what the stress tests would reveal. I’m not sure that anyone understands exactly what was going on, but I can assure you that the media clearly misunderstood the process. I’ve tried to get a clear understanding of what the Treasury was trying to accomplish, but I’ve failed in that attempt.

It is interesting to note that 10 of the 19 largest banks required no additional capital at all after the stress test was performed. Given the criteria of the stress test, I am absolutely “blown away” that all banks wouldn’t have required additional capital under this extraordinarily extreme scenario.

First, it’s important to remember that stress tests are not uncommon in the banking industry. In fact, they are completed almost monthly by every large bank in America. In order to test the banks’ reserves for potential bad debts, each of the major banks do stress testing of their entire loan portfolio. In fact, stress tests are regularly audited by outside accountants, and there’s a good deal of scrutiny that is attributed to the expected loss reserves on the bank’s loan portfolio.

In this particular stress test by the government, there was an assumed loss rate that was even greater than the loss rates that were incurred by the major banks during the Great Depression. That struck me as somewhat unusual given that the Federal Reserve was forecasting a GDP rate for 2009 of zero, and a positive GDP growth rate for 2010 and 2011. Did they not believe their own numbers? However, for the purpose of this stress test, they assumed a loss rate greater than in 1933 and 1934 when the GDP contracted in double-digit range and unemployment in America was close to 25%. Whatever criteria were used, I think the banks came out with a good report card, for the most part.

The stress test is not the reason for this post’s title. Rather, it’s because of the incredible financial events that have occurred over the last week since the stress test was completed. Almost immediately after announcing the stress test, the banks lined up to issue stock and raise capital from the general public. Wells Fargo & Company set out to issue $6 billion in new stock, but since it was oversubscribed by a factor of two to one they eventually issued close to $8 billion in stock.

Morgan Stanley set out to sell $2 billion of stock and due to the high demand, sold $4 billion in only a matter of hours. Given how easy it looked to raise this additional capital, Morgan Stanley issued another $2.5 billion in debt just a few days later. U.S. Bancorp issued $1 billion in debt and $2.5 billion in common stock on Monday. The Bank of New York Mellon issued $1.2 billion in new stock, and BB&T issued another $1.5 billion. The speed (and ease) of the issuing of stock to cover these capital shortfalls have been nothing short of breathtaking. Have you read this anywhere in the media?

Sales of common stock since the January 1, 2009 have been unprecedented. So far, there has been $54.9 billion in new stock issued in a little over four months, which has been the busiest stock issuing pace since 2000. In the first few days of May alone, U.S. companies sold a total of $28.9 billion of shares and convertible bonds as compared to $6.5 billion in the entire month of March alone. In addition, there have been $13 billion of high yield (or “junk”) bonds sold since the end of April. Even this amount pales in comparison to the issuance of investment grade bonds that have had the best record levels since Dealogic began keeping track in 1995. Even the last independent, non-government owned automobile manufacturer in the United States was able to issue common stock. Ford Motor Company sold $1.4 billion in brand new common stock to the general public this past Tuesday.

To show the non-discriminatory nature of this floodgate of new money, Microsoft, who has never borrowed money in its history, sold $3.5 billion in new bonds. Given that Microsoft already has a war chest in excess of $25 billion in cash and no debt, it seems strange that they would need to raise an additional $3.5 billion. The incredible nature of this issuance of stock and debt was that in many cases, the debt had coupon interest rates that were only marginally higher than the highest quality of government-guaranteed bonds.

Am I confused? Are these not the very same banks that the financial media have in recent months been proclaiming to be insolvent? How could it be possible that so many of the banks proclaimed to be technically insolvent by the financial media are easily raising common stock from the general public and debt that bordered on investment-grade interest rates?

I couldn’t help but note that Nouriel Roubini (a.k.a. “Dr. Doom,” and a professor of economics at New York University), who’s been on almost every financial news program lately, keeps stating that every bank in the United States is insolvent at the current time. Further, Paul Krugman of The New York Times (who is also an economics professor at Princeton University and who won the Nobel Memorial Prize in Economics in 2008) has written a number of editorials recently proclaiming that the only viable situation for the banking situation in the United States is for complete and total nationalization of the U.S. banks. He has been overly critical of the Obama Administration for being too easy on the banking industry and says that only when the government controls every bank will Americans be assured of stability. I guess the millions of people around the world who are buying the stocks of these banks must not agree with these learned economists.

With all the good news regarding the equity flowing into the banks, one might question why the stock market has performed so poorly since the announcement of the mostly positive stress tests. There are some basic technical reasons for the market’s poor performance: In order for a company to be able to sell stock in the secondary market, the stock has to be sold as a discount to the market price. For example, if the an investor purchases stock for $100 a share on the open market, what incentive would he have to buy a new issue when it can be bought at the same price in the marketplace?

In order to encourage new investments, the companies that want to issue secondary stocks do so at a discount. As the new stock is issued at a lower price, the publicly traded stock will adjust down to reflect the issuance price. There has been such a massive underwriting of stocks in the last week that many of the major stocks making up the indices have been adjusted down to reflect these new discounted prices. Since these stocks are part of the major indexes, the indexes must fall.

Additionally, active traders do not help this situation. Recognizing companies will have to issue new stock, the traders will sell short the underlying security even before the secondary offer has even been priced. The idea is that they will force down the issue price and the stock will jump back to its original price once the secondary offering has been filled. Essentially we have only had three trading days during the week, yet close to $35 billion in new stock have been issued in only these three trading days. This enormous amount of new stock has used up a lot of available cash flow that might have been utilized to force stock prices even higher.

The reason that this is “the most important stock market week of the year” should be clear to everyone. Only a few short months ago, the financial media was proclaiming the banking industry in America insolvent and unable to move forward. This week, investors voted with their hard-earned dollars that this was not the case. Even though the Federal government proclaimed the U.S. banking industry to be $75 billion short on capital as of last Thursday, almost half of that has been made up in new stock offerings in less than a week. I have yet to hear the financial media proclaim that over half of the risk capital has been raised in less than a week, even with the stress test that bordered on the ridiculous. Capitalism is a beautiful thing to watch when greed is filtered out. Why are we trying so hard to eliminate capitalism in the U.S.?

I’m not trying to say that the financial crisis has come to an end. But I do believe that these factors indicate that positive healing is occurring. Good companies are now able to issue stock and banks are able to raise capital. As I have repeatedly said since the beginning of this financial crisis, no major U.S. banks will be nationalized, nor will they need to be. What started the financial fear were the banks; at least now we have fewer and fewer banks to fear. Even though there are many economists who believe in the socialized banking example in Sweden, it will not be necessary in America. We may socialize the automobile and health care industries, but not banks (not this year, anyway).

As usual, these are just my opinions. I could be wrong.

Saturday, May 9, 2009

Spring Has Sprung - But the Media Are the Blooming Idiots!

From the Desk of Joe Rollins

Long time, no see. I haven’t posted to our blog in several months since my time has been consumed by my CPA firm’s heavy work schedule during tax season. But now it’s time for me to get back in the swing of things, and here I am to give you all the gory details on the financial markets and the economy over the last few months.

Since I last blogged about three months ago, things have been fairly eventful in the economic world. At least I finally have some good news to report rather than the bleak avalanche of negative publicity we were barraged with over the last 12 months.

In my February 19, 2009 post, I told you about the tree in my backyard that I use as a predictor of spring. At that time I mentioned my belief that as the winter turned to spring, the stock market would start performing better, and we would see consumer confidence start improving. While the parallels that I drew may have been somewhat silly, I honestly felt that the economy was not nearly as bad in February as the press was reporting, and it was just a matter of time before the financial markets would improve.

Here we are today, less than three months later, and the tree that I referenced in my February 19th post is now in full bloom, and almost all of my roses awake from the winter. Here are a few pictures of my garden for your reference (and before you ask, yes, I tend to the roses):

As I predicted back in February, the financial markets have improved greatly over the past three months – since February 19th, the Dow Industrial Average is up 12.5% and the S&P 500 is up 15.5%. The market continued going down even after my February post, but it appears to have finally bottomed as of March 9, 2009. Since that bottom was established, the Dow is up 28.3% and the S&P is up a stunning 33%. The S&P 500 is now slightly positive for 2009. It’s hard to imagine that these indices moved up so quickly in the face of such horrible financial news. Also, don’t forget that on Election Day in November of 2008, the Dow was at 9,625; today it’s at 8,436 – that’s 12.5% lower.

Many of my clients continue to express their opinion that the markets will not improve because the economy is so bad. I would like, however, to take the opportunity to go through the reasons why the financial markets do not need the economy to improve before they go up. The financial markets only need for the economy to quit going down before they improve, and it appears that as of today, the gradual deterioration of the economy has slowed, if not turned towards the better.

The first quarter financial earnings results for the S&P 500 have been quite interesting. While they are significantly down from this time last year, they are still significantly better than anyone projected. I absolutely do not believe the poor quality of the reporting regarding the earnings and financial data provided by the national media. It seems that these “learned” reporters cannot believe that the banks made any money during the first quarter of 2009 much less billions of profits.

The bigger question to me regarding bank earnings is how banks could possibly not make money. Have you checked out what money market accounts are paying now? Even harder to believe is that CD rates are paying below many money market account rates. Therefore, the cost of money to the banks is practically zero. If they can loan money at 4%, 5%, or 6% when their money cost is practically zero, then even a less savvy investor can make money with that interest rate spread.

The national media just cannot seem to wrap their brains around the fact that the environment for loaning money has rarely been better. There are basically two ways to subsidize the banking industry: one is that you actually subsidize them, which we have already done. But the most efficient way is to simply allow them to make more money by making their cost of money at nearly zero. That is what we are seeing now.

I suggest you re-read my February 19th post wherein I set out two criteria for the financial markets to improve and for consumer confidence to get better. One was the elimination of the mark-to-market rules. I am glad to report that in early April, mark-to-market was dramatically revised, and it now implements common sense rather than just mathematical calculations. Maybe they read our blog… While the uptick rule has yet to be completely restored, there is no question that it’s coming.

Almost all of the major pension plans have removed their shares from brokers if those brokers were allowing the shorting of stocks. The combination of the SEC’s enforcement of the laws that have been on the books since the 1930’s along with the availability of fewer shares to short have dramatically leveled the playing field for those of us who are long in the market. The combination of these two items has drastically improved stock market performance in the intervening three months.

As I indicated in prior posts going back six months ago, I didn’t feel there was any question that the economy was going to improve. The reality of the situation was that the economy was never as bad in October and November of 2008 as the media was trying to make you believe; and it’s not as good today as they would like for you to believe, either.

The fact of the matter is that in many respects, the recession was manufactured by media hyperbole. Had it not been for the hysteria caused by the media in the fall of 2008, this recession would have been much milder than it eventually became. The enormous scare tactics from the media and our own government caused consumers to shut down their spending habits. The end result was a complete bankruptcy of the automobile industry in America. While the fallout started there, it certainly didn’t end there.

For those who are interested, my prediction is that there will be no American auto manufacturers in the United States – that will soon be a thing of the past. This is not so much because of design or production failures, but because of the failure to control the unions, which have essentially destroyed car building as we know it in this country. Don’t get me wrong; there will be millions of cars produced in America in the coming decades. Unfortunately, they will not be produced by American companies.

When I’d expressed my confidence in the past that the Federal Reserve and its very able chairman, Dr. Ben Bernanke, would restore level footing to the economy, I was greeted with incredible skepticism by my readers. I knew from economic history that the steps taken by the Federal Reserve would work, but many of my clients remained unconvinced. In fact, it wasn’t uncommon for me to be told that while that might’ve been true in the past, “things were different this time.”

While I suppose everyone would like to believe that the world is different now, when it comes to economics there haven’t been any significant new developments. Money trends and flows tend to have the same effect as they have always had on the economy. If you flood the system with money, eventually that money will end up in the pockets of the people and then it will eventually be spent. The beauty of flooding the system with money is that it creates commerce; the negative is that the flooding eventually creates inflation. Given the two, we would rather have growth than inflation, and that’s the risk Bernanke took in the fall of 2008.

It is often believed that it takes at least a year for the Federal Reserve’s moves to positively impact the economy. Here we are today – only eight months into this process – and there are already clear signs that the economy has stabilized. The economy isn’t nearly as good as it should be, but at least it has quit falling.

Before anyone jumps to any conclusions regarding where this improvement has fallen short, it’s important to understand the facts. The tax stimulus changes only went into effect on April 1, 2009, so we’re only five weeks into this relatively small tax decrease for 150 million Americans. While the tax decrease will benefit the average taxpayer as we go forward, it has had very little effect so far.

The remainder of the $800 billion in the stimulus package has yet to be spent. I read almost daily of roadblocks set up by Congress and by various state governments to actually spend the money. The money is coming and it will help, but it just hasn’t started yet. Expect to see this money in the economy by the summer.

Does that make you wonder why the economy has already started to turn around even before the stimulus bill has been spent? You might recall from prior posts that I suggested the stimulus act was necessary, but that it was for way too much and for way too long. The current environment of an improving economy, even before the vast majority of the stimulus bill was spent, has clearly proven that effect.

Don’t you find it somewhat ironic that President Obama signed an executive order basically requiring union labor on all stimulus funded projects? Aren’t these the same unions that systematically destroyed the automobile industry in America? Isn’t it also interesting that only 11% of workers are now covered under union contracts? That means that 100% of taxpayers (only 50% actually pay income taxes) will fund jobs for workers only covered by 11% of the workforce. I guess all of those political statements regarding an administration with no biases and no preconceived allegiance to campaign money got lost somewhere in the application of the stimulus act.

The stock market is a forecasting vehicle. It looks into the future and evaluates stocks not as of today, but forecasts where it will be six months or a year from now. The stock market forecasted the downward turn in the economy before it actually happened and the stock market today is forecasting an improvement in the economy even though it’s not here. Yes, we see optimism all around us, and hopefully the bottom has been hit. However, as of today, there is too much unemployment, little (if any) activity in the housing market, and there is still a reluctant consumer who is unwilling to part with their hard-earned money.

The beauty of the American political environment is that the majority rules – whatever the majority decides is the rule of the land, be it good or bad. Since the majority elected that current administration, all of us – regardless of our beliefs – must support the actions taken by our government. It is clearly the majority that is driving the train at the current time, and all of us will have to deal with its repercussions.

Unfortunately, the current administration is not following the history books. Higher taxes have never led to helping the deficit situation. Nationalizing health care will soon be known as Medicare II. None of these enormous acts to make government bigger will work, but I guess the current administration hasn’t learned anything from the past. However, the U.S. is a broad and diverse economy; we will survive these acts and the economy will grow bigger and stronger as a result of the knowledge we get from even these misplaced efforts. I am very optimistic.

Many of the advocates of higher taxes point to the Clinton years to prove that you can have higher taxes and a good economy. No one can argue that the economy wasn’t good during the Clinton years. As you recall, with the help of the Federal Reserve, the country came out of a recession in 1993 and was basically strong through 1999. It is also true that Bill Clinton, in the last few years of his final term, increased taxes and actually balanced the budget. However, it’s often forgotten that this one act alone threw the country into a relatively severe recession during 2000 and 2001. Those of us who lost in the stock market during that time do not readily forget it.

I have often wondered why a country that has grown and prospered so much under capitalism for the last 233 years would suddenly want to scrap its heritage and move to a socialistic system. But that discussion is for another day… In any case, the majority rules, and we will need to see how it all turns out.

There is no question that the financial markets are seeing inflation on the horizon. The benchmark 10-year Treasury bill has moved from a rate of 2% to well over 3% in just the last few months alone. The financial markets would not be bidding-up interest rates if it did not see significant inflation coming and the economy improving. All of this is incredibly ironic given that home mortgages are now maintained at artificially low interest rates by the Federal Reserve. If you have not looked into refinancing your home by now, your opportunity is quickly evaporating. It would not surprise me in the least to see home mortgages start to rise dramatically in the coming months once the Federal Reserve quits subsidizing long-term interest rates.

The Obama Administration just proposed stricter tax policies on overseas earnings of U.S. corporations. Once again, this is a misplaced act that is being proposed in a time when it is needed least. The fact of the matter is that the U.S. would be much better off if corporations paid no income taxes. I realize that sounds like a radical approach, but economic history has proven this to be crystal clear. Corporations do not pay taxes; individuals pay taxes. If anyone believes that tax rates paid by corporations are not passed along to consumers, then they really do not understand cost accounting.

It would be best for all Americans if corporations were completely exempt of United States income taxes. You often hear about corporations relocating to countries without taxation. If we had no taxation in this country, there would be no reason for our great corporate entities to relocate to tax havens. Many corporations from around the world would come to the United States to enjoy the tax benefits. With them, they would bring their capital, their employees and their prestige.

There have been many studies on the subject that prove the economics that no corporate taxes would be much more beneficial than higher taxes by corporations. While it does not seem intuitive, the economic benefits of bringing new and better corporations along with their capital, personnel, resources and prestige is far greater than the minor economic impact of tax rates on these corporations. Once again, the current administration has failed to read the economic textbooks, and once again, it is not different this time.

The reality of the situation regarding foreign corporations is that most of the employees that U.S. companies employ overseas are not performing highly skilled jobs. Yet the profits from these overseas companies allow the U.S. to maintain managerial and skilled positions here in the United States. The claim that punishing corporations abroad will create more jobs at home is completely false. It’s more likely that they will drive away domestic and foreign investors, leading to few jobs, not more.

Washington needs to quit trying to punish corporations; at some point, companies and entrepreneurs will simply go elsewhere, taking their investment capital – and the jobs that go – with them. The United States currently has the highest corporate tax rate in the developed world. Our rate is almost 50% higher than the composite of all other developed countries. To make that matter worse by increasing overseas taxes is another misplaced effort by Washington.

The economy will get better for the remainder of 2009. It will be a gradual but slow improvement. 2010 will be even better than in 2009. As the trend continues, 2011 will be better than either of the two previous years. As workers resume full-time employment in 2010, each of them will continue to contribute a small part to an economy that, by then, will be growing at a very healthy pace.

Yes, there are problems coming down in the economy. At some point there will be inflation. We must rely upon the skill of the Federal Reserve to take away some of the punch from the party when the economy improves. We have a very able head of the Federal Reserve. Hopefully he will react as well then as he has recently.

The government was slow to attack this recession, but they moved aggressively when they finally saw the light. They did not change the mark-to-market rules until April, when many of our great bank institutions had already been destroyed. Literally trillions of dollars of wealth have been destroyed by the failure to install the uptick rule. All of these moves came late, but at least they came.

Contrary to what you read in the newspaper and what you hear on TV, no major United States banks will be nationalized. Yes, they went through a hard time, but if it had not been for mark-to-market accounting issues that destroyed many banks, it would have been just another recession that the banks would have had to survive. As the economy continues to improve, and as the banks make more money, there will be a substitution in the capital positions by extraordinarily high earnings. Contrary to what you hear from the media, there is no need now, nor was there a need then, to ever nationalize a major U.S. bank.

If you wonder how I can express such certainty that the economy is going to improve, basically the axioms of economics dictate this result. There is an extraordinarily large freight train of money that is getting ready to be dumped into the economy. Not only are we going to have the stimulus act money, but also the literally trillions of dollars in government supported bonds and debt instruments. As the banks stabilize, lending will improve and the car companies will once again issue debt on new automobiles. This overwhelming avalanche of money will make its way through the economy and ultimately into consumer’s hands. As consumers start to feel confident, they will once again spend and the battleship of economic stability will turn.

I envision the stock market taking a summer swoon and then having a very good fall season. Many of the well-known mutual funds are now up for 2009. All of the skeptics that failed to make their 2008 or 2009 IRA contribution because they thought the economy was so bad were wrong. The stock market doesn’t react to the economy; rather, the stock market predicts the economy. Right now, the stock market is clearly predicting a better economy.

All of the above is just my opinion; I could be wrong!