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Politics are swinging between left and right as the European Union tries to deal with their debt crisis. Watching this news unfold is important for investors – we think it’s important to know how austerity, deficit spending, taxation and other economic news affects your portfolio.
That said, here’s some of the news we’ve been following about the political and economic climate in the Eurozone:
Just to bring this a bit closer to home, local politics affects our portfolios as well. Here in our home state of California, we have similar deficit, taxation and spending issues to the EU. Here’s a few of those news stories:
Be careful in the markets and stay aware of how politics affects your portfolio – listen to our podcast every week for up-to-date details and analysis, or call us today for a personalized consultation at 1-800-391-1118
Here on the Fabian Wealth Strategies blog and podcast, we’ve talked frequently about the European debt crisis so you might be sick of hearing about it. However, while our listeners and readers might have been hearing a lot about this topic, many mainstream news-readers probably hadn’t before this week’s 60 Minutes special “An Imperfect Union – Europe’s Debt Crisis” aired.
This debt crisis discussion is important to pay attention to, not just because Europe is an important economy in the world, but because the U.S. is headed for a similar problem if we don’t get our deficit spending under control. Deficit spending is usually 2-4% of the economy, but right now the U.S. is spending at 9%, and coming up against the limits of our credit lines. Plus, there is currently a lot of artificial stimulus from the federal government in the economy, and taxes are going up next year – both aspects which are causing some anxiety in the markets.
We think that the European debt crisis will be a critical player in the next few year’s investing plans. Markets, internationally, tend to move together, meaning that the European markets can’t falter without impacting other regions in the world.
(If you read this blog and enjoyed it, listen to Doug’s podcast this week for even more details on these topics, and please share this information with others who might benefit from our perspective.)
So why are we talking about the next three years, when so much is changing this year?
The answer is realistic, if not optimistic. We believe that our national habit of deficit spending will have to be dealt with in 2013 and beyond. If we don’t see sufficient austerity from the federal level, we think that interest rates will go up.
It’s important to note that debt-related troubles are coming from more than just Washington D.C.. Deficit spending gets a lot of attention at the federal level, but many people don’t notice or know how much trouble local counties, cities and states are in as well. There are many places in the U.S. which are simply running out of money, which means austerity that is on its way.
Austerity doesn’t just mean lower income, it also means higher taxes. We are seeing the effects of high unemployment and austerity in Europe, and those problems (and with them, civil unrest) might be coming to the U.S. in the next couple of years.
You need to be aware and prepared for these challenges. It’s going to be very tough for any politicians to make good decisions on our behalf, and it’s critical that investors understand the risks in the market and what might soon be coming.
So, how do we achieve financial goals over the next three years? Our three-step plan is:
Capital preservation should be your highest priority
Monitoring and analyzing your portfolio positions in light of these risks
Know your exit strategy
Despite rising markets, risk is extraordinarily high, and investors need to avoid getting lulled into complacency by a seemingly safe market.
(If you read this blog and enjoyed it, listen to Doug’s podcast this week for even more details on these topics, and please share this information with others who might benefit from our perspective.)
Watching the European debt crisis right now seems to illustrate that deficits do matter, and that countries can’t spend money they don’t have, at least not indefinitely. In this post we want to talk about the United States, however.
In February, the U.S. set a deficit record of $229 Billion. To put this in perspective, only five years ago we had a deficit of $500 Billion in an entire year. So right now, we are deficit spending at 10% of the U.S. economy, (compared to 3-4% in the past) and this is uncharted territory. We have also gone 41 months without a positive month in terms of revenue vs. spending, and we are borrowing 42 cents on every dollar spent. Of course, President Bush, President Obama and the Congress is all to blame for this, and so far there haven’t been any consequences on our elected officials.
As long as a country’s economy is growing, borrowing is OK. But when things are slowing down and contracting (or growing too slowly, as the U.S. is now), borrowing starts to be a problem. No elected official wants to touch the sacred cows of the budget (Social Security, Medicare, etc.) and so we just keep spending to keep up the status quo.
However, we think the markets will solve this problem for us, because it will become much more expensive for us to borrow money in the near future. This is why Greece defaulted on its bonds last week, and it’s what is causing so much pain in Europe right now.
No matter what administration gets voted in this November, budget cuts will have to made. In our opinion, Social Security, Medicare and Defense are the three major items which need the politicians and our attention in order to move forward, and we believe that deficits do matter in the long run.
This is a podcast summary. For more complete details, please listen to the full podcast here.
Doug Fabian’s next live public speaking event will be in Las Vegas at the Money Show, where we’ll have about six different opportunities to present. Please check out moneyshow.com to register or for more information. Also, if you’re not already receiving it, be sure to sign up for our free e-newsletter, the Making Money Alert, here.
This is a podcast summary. For more complete details, please listen to the full podcast here.
Doug Fabian’s next live public speaking event will be in Las Vegas at the Money Show, where we’ll have about six different opportunities to present. Please check out moneyshow.com to register or for more information. Also, if you’re not already receiving it, be sure to sign up for our free e-newsletter, the Making Money Alert, here.
The world is running out of ways to fund itself
We believe, as we’ve stated before, that there are some serious structural and fundamental risks in the market this year, and potentially for some time to come.
Major risks (what we believe will affect your portfolio in the next 90 days):
European debt crisis
U.S. deficit and debt
China’s upcoming economic slowdown
Secondary geo-political risks (things to be aware of, but probably won’t immediately affect your portfolio):
“In a stark warning ahead of next month’s Budget, the Chancellor said there was little the Coalition could do to stimulate the economy.
‘The British Government has run out of money because all the money was spent in the good years,’ the Chancellor said. ‘The money and the investment and the jobs need to come from the private sector.’”
We believe, and our research shows, that Britain has some major structural problems, similar to what we face here in the U.S., and stories like the one we just referenced should help us prepare for what’s to come in the markets.
All of the issues we’ve mentioned before, and the fiscal problems around the world, are affecting our economy and our ability to weather economic storms. All of the countries that matter (all countries with sizable economies) are involved in deficit spending right now, which we think is unsustainable and will lead to more economic risk. We believe that the U.S. is probably two years away from a significant debt crisis, which is why we are advising investors to be more aware of risks than they’ve ever been before.
If you need more information on how to protect yourself, don’t hesitate to call us at 888-300-3684.
Greece is a relatively small country, but it is a microcosm of the larger credit and debt problems around the world, specifically in the Eurozone.
On Sunday the Greek parliament voted for severe austerity measures, which caused the riots we are now seeing. Greece politicians also voted to lay off a large percentage of government workers, and lower its minimum wage by 20%. We believe that the European economy will continue to contract with these forced austerity measures, which will cause the U.S. economy to slow down as well.
We just got to see President Obama’s new budget, which is calling for a 1.3 Trillion deficit for FY 2013 and not facing the big fiscal problems that the country really faces. We believe that whether President Obama gets re-elected in 2012, or we elect someone else, that we need to be watchful of politicians, who are unlikely to tell us the whole story or make necessary steps to avoid what is currently happening in Europe.
We advise caution and care with your money at this point in time. We suggest that our clients watch what happens in Europe, because the problems there are very serious, and might soon be the future for the U.S. Our number one priority for our clients is capital preservation, and we advise you to be cautious when looking at the markets and investing your hard-earned capital.
We all know that politicians make promises in order to get elected. The Greek politicians were told that if they didn’t vote for these recent austerity measures, serious problems would ensue. Austerity measures are now causing a lot of pain to Greek citizens, and the politicians will probably be somewhat insulated from this, despite the chaos and riots currently underway there.
Here in the United States, politicians are no different. President Obama’s new budget is calling for a $1.3 trillion deficit for Fiscal Year 2013, and it’s interesting to note that we’ve suddenly gotten used to “trillions” of dollars in deficit. What’s disturbing is that Europe is starting to really feel some pain because they can’t borrow any more money. With budgets like President Obama’s and the seeming lack of interest in dealing with these issues, the U.S. may see a similar problem and similar pain in the years to come.
We suggest that our clients watch what happens in Europe closely, because the problems there are very serious, and might soon be the future for the U.S. if we’re not careful. Our number one priority for our clients is capital preservation, and we advise you to be cautious when looking at the markets and investing your hard-earned capital.
(If you read this blog and enjoyed it, listen to Doug’s podcast this week for even more details on these topics, and please share this information with others who might benefit from our perspective.)
After months and months of debates, gridlock and uncertainty, President Obama signed into law his coveted health-care overhaul, “ObamaCare,” with implications for you and your investment portfolio. If you feel like I do about the folly of tax-and-spend politicians adding wildly to our deficit, it’s difficult to have a “glass-half-full” kind of attitude about this legislation. While the plan is intended to provide insurance for an estimated 32 million additional Americans, it is projected to cost $938 billion during the next ten years. But the legislation also may help certain health-care companies, since the number of people who have insurance will grow dramatically, as will health-care spending.
Because it’s difficult to say exactly which stocks will benefit from ObamaCare, since we still are learning about the contents of the unwieldy new law, investors who are bullish on health care may want to consider an exchange-traded fund (ETF) that allows exposure to the entire sector. One such broad-based ETF is the Health Care Select Sector (XLV). Companies in this fund primarily include those that manufacture health-care equipment and supplies, provide health-care services, offer biotechnology and develop pharmaceuticals.
Although ObamaCare may be bad news for overburdened American taxpayers, the new health-care law likely will boost sales for a number of the health-care companies.
As far as the bill itself, the money to pay for the new government spending is going to have to come from somewhere and, unfortunately, I’m afraid it’s going to come from people like you and me. Affluent families, successful entrepreneurs, investors and employers will have to pay additional taxes and fees in order to fund this unbelievable debt.
President Obama just submitted a new 10-year federal budget that has me very worried. The primary reason for my concern is tax hikes. As I expected, the mammoth $3.8 trillion budget for the next fiscal year raises taxes on businesses and upper-income households by $2 trillion over 10 years. And after what could be called very minor spending cuts, the country still will face $8.5 trillion in added debt over the next decade.
The budget for fiscal 2011 imposes nearly $1 trillion in tax increases on families with income above $250,000 over the next 10 years, and it does so by allowing the Bush tax cuts to expire. That’s income, mind you, and not take-home pay or profits. That means a small businessperson with income of $250,000 or more would pay a much bigger portion of that income to Uncle Sam. And because most of the jobs created in this country are created by small business penalized by the new taxes, I think we can safely say that this budget is not conducive to job growth.
How much will taxes go up? Well, the two top income-tax brackets would rise to 36% and 39.6%, from 33% and 35% respectively. For families earning more than that what the president thinks is a mystical sum of $250,000 per year, capital gains and dividend tax rates would rise to 20% from 15%. According to the Wall Street Journal, upper-income families would face $969 billion in higher taxes between 2011 and 2020.
To put it quite simply—the taxes are coming, the taxes are coming, and it’s your job as a smart citizen to make sure you take steps to keep your tax liabilities as low as legally possible.
If you don’t already have a good CPA, then I highly recommend you consult with one soon, especially now that tax season is here.
