Infrastructure plan or…..scam?

Hernando de Soto Bridge, Memphis

Paul Krugman, columnist for the New York Times questions the plan to use tax credits to incentivize corporations to build or repair US infrastructure. Krugman states that the plan is to allow the corporations to use up to 82% tax credits on the equity created and then to allow these corporations to charge the public for the use of these projects to recover the other 18%. Krugman rightly observes that with transportation projects the new corporate owners can apply toll charges to recoup the remainder of their investment but what of such needs as sewer replacements? He does not answer this question entirely but, imagine if your city allows a corporation to upgrade its sewer system. Under this proposed plan, that corporation could apply sewer fees above the city’s cost of normal maintenance. What about municipal water systems? Will Americans soon anticipate their water system to be privately owned? Krugman points out the very limited utility of this arrangement as being “back door” borrowing but with the catch that the public ownership would be lost.

Do elections really matter to financial markets? Pt3

white-house Today is the first day after the election of Donald Trump. My earlier posts on this topic focused upon how a Hillary Clinton administration would affect the economy and the financial markets. I did not address how a Trump administration would affect them largely because I did not believe he had much chance of being elected. Now that he has been elected, I want to address this. Here is the editorial posted by the New York Times today: “Trump’s Revolt”.

Donald Trump opened his campaign with an attack on new immigrants to America; particularly Mexican immigrants. He claimed, without references that recent Mexican immigrants were “sent” by Mexico to this country and that Mexico was sending us “their worst”. Trump pledged that, as a remedy he would build a high wall the length of the US/Mexican border ostensibly to prevent more undocumented Mexicans and others from entering the USA without visas. This wall would be paid for by the Mexican government he said; threatening Mexico with adverse currency exchange rates if they did not. He stated that, if elected, he would mount an effort to identify and uproot the estimated 11 million undocumented immigrants and deport them to their country of origin. Trump has blamed these immigrants for displacing native and properly documented American workers. Donald Trump expressed alarm about the resettlement of war refugees; particularly those from war torn Syria and Iraq. Trump expressed much suspicion about Muslims living in this country.

On foreign policy, Trump claimed he knows more about the situation in Iraq and Syria than the US military commanders there. He stated he would “tear up” the multinational treaty to end the nuclear program in Iran. Regarding the war in Syria, he stated he would simply “bomb the s**t out of them”. During national security briefings he reportedly wanted to know why the USA did not use nuclear weapons more frequently. Trump depicted the current trade policy of the USA as being very unfavorable to the USA; citing the NAFTA for being “the worst trade deal in US history” and cited the US trade deficit as an example of government officials who “didn’t know what they were doing”. A regular theme of Trumps was to declare that Washington DC is a “swamp” of corruption and incompetence that he and he alone could fix.

Trump’s own business practices reveal a practice of lying and cheating his competitors, government regulators, his own employees, and those contracted to do work for him. His justification for these practices was that ethics really knows no place in business dealings; that the “art of the deal” is to win at any cost. He has displayed wanton disregard for the privacy and dignity of women and used his ownership of beauty pageants as a means to satisfy his sexual fantasies; bragging to other men about how he was free to intrude upon dressing rooms and even to take liberties with women without their consent; a practice many consider sexual assault. During the campaign more than 11 women came forward to assert he had sexually assaulted them; one of them a 13 year old at the time.

Trump is currently under investigation for fraud perpetrated upon thousands of students who enrolled in Trump University; saddling many of these students with massive debt with little to show for their money. There is evidence that he defrauded an insurance company of $17M claiming damages upon his Mar a Lago resort in Florida that was largely unscathed by a hurricane.  The US Dept. of Labor has issued three complaints against Trump for failure to bargain in good faith with a union representing workers at his Las Vegas casino.

President Elect Donald Trump will have Republican majorities in both the US House and Senate. Speaker Paul Ryan has already stated that his cohorts in the Senate are ready to scrap the Affordable Healthcare Act that has brought health insurance to more than 20 million uninsured Americans. They have no proposal to replace this program. This prospect suggests that those 20 million people will now have to return to waiting in emergency rooms when their ailments have reached extreme conditions. Hospitals; required to provide this care will now return to massive costs of uncompensated care. Here in Arizona, acceptance of the Medicaid portion of the Act brought an estimated $11B in insurance to hospitals and healthcare institutions saving many rural clinics from closing.

His suspicion of Muslim immigrants; particularly those war refugees led him to declare that he would no longer allow them to come to the USA.  I believe this suspicion could lead to a requirement that current residents from war torn countries in the Middle East would need to register with the Federal government and face an extended vetting process. The prospect of locating 11 million undocumented immigrants living in the USA would require massive investigations pitting community members against each other. Hillary Clinton depicted this process as likely to be “busloads and trainloads” of people forcibly removed from the country. I assert that it is likely that if Trump keeps this promise internment camps will have to be constructed as these people are processed for deportation.

Trump’s trade policy could cause the USA to attempt to renegotiate trade agreements decades old; causing constriction in trade between countries and possibly trade wars. The policies he has pledged to implement are likely to cause extreme uncertainty for investors in financial markets. I assert that the severe Market contraction of 2001 was more likely caused by investor uncertainty after the election of George W. Bush than it was from the so-called “tech bubble” or as some assert a “market bubble”. This contraction began a 10 year period in which the Dow produced no gain. The Trump policies are much more extreme than those of George W. Bush.

What vexes advisors in this extreme situation is that although we may believe there is a contraction coming due to this change in US leadership, there is no way to predict with accuracy when it will commence and there is especially no way to predict when the market hits the bottom. Systematically buying more shares of stock holdings as they decline in value will result in more shares ready to increase in value once the market turns up again. This “portfolio rebalancing” will produce better investment results over the long run but for those investors who are currently depending on their portfolios for income they face difficult times ahead. Election night saw S&P 500 futures slide 800 points until trading mechanisms closed the trading. Today’s 295 point Dow rally will be short lived, in my opinion.


Do elections really matter to financial markets? Pt 2


To continue. So Hillary Clinton will arrive at the White House with her two shipping containers of baggage. She will (unless this election outcome is the best possible and that is with Democrat majorities in both halls of Congress) have to fight hard to implement her platform.

However, Obama’s sweeping overtime rules reform is a powerful force for economic growth as I asserted above. This will help her right out of the box. Then there is her minimum wage increase initiative. That initiative, if implemented sooner rather than later will bring with it profound economic growth. Economists agree that demand side economics is an undeniable force for growth. The minimum wage increase brings with it a change in the distribution of value added in services and manufacturing. Instead of an inordinate proportion of income, both personal and corporate flowing to a tiny minority, less will flow to them and more will remain with employees who will spend it quickly, so great is pent up consumer demand.

Workers with their new disposable income will empty stores enthusiastically causing a supply shortfall that will drive manufacturing expansion. They will dine out more often filling tables at local restaurants; take vacations and travel more often; etc., etc. as a more dynamic economy takes hold.

That brings to mind another important Clinton economic expansion proposal: the ambitious 10 year $500B infrastructure renewal and jobs program. The beauty of this and many other Clinton economic initiatives is that it is largely funded by the richest 1% of Americans through increases income tax rates and even a 30% surcharge tax on incomes in excess of $5M. This is where fallow capital is to be found. It sits, mostly in US Treasury bonds; largely unproductive. This capital is to be given new velocity as it is appropriated through taxation and put to work building new bridges, laying high speed railroad track, installing high speed internet cable among other projects. This new and improved infrastructure will lower production and transportation costs increasing productivity that has been stagnant of late.

Another Clinton program is the promise of free college education for all Americans at community colleges and state universities. This is for students from households with income of $125,000 or less. This will create a post-secondary education boom growing jobs for educators, administrators and support staff. New student capacity will be needed causing growth in commercial construction.  The “value added” of a vastly improved educated workforce will be tremendous in the decade to follow this initiative as these colleges and universities graduate these new students. Instead of our society bringing on young college educated people with college loans averaging $27,000, these students will graduate debt free. Instead of these payments flowing to capital-bloated Wall St. banks, these new graduates will have much more disposable incomes with which to buy homes, furniture, cars, clothing and other tangible goods. The supply side will be greatly enriched with sales.

It must be obvious to the reader at this point that I am extremely optimistic about the new Clinton administration and the fiscal policy she brings. If she can implement a good deal of her platform, we will see an economic boom perhaps the likes none of us has ever seen since the 1950’s. This boom will be reflected in the financial markets as investors bet that great companies, both existing and to come will be ubiquitous and their stock offerings will find many excited investors.

Do elections really matter to financial markets? Pt 1

Image Stock Market Trading floorI was further amused just now to learn that this article from the Minneapolis Star Tribune was printed on Oct. 22nd and ran in the Arizona Daily Star yesterday. This article seeks to calm investor jitters over the looming election. Naturally, both Hillary Rodham Clinton (HRC) and Donald Trump (DT) are painted as being completely disastrous to the economy. First, I think that elections DO matter. I don’t know if it is a violation of my securities license to weigh in on an election or if it is not. I think this is ethical as long as I am controlling my emotions and being as objective as I can be. I have no financial stake in the Presidential race or either candidate.

I think that HRC comes to us with two large shipping containers. Both say “10 tons” but only one weighs 10 tons. The other container is empty. It is perceived to contain 10 tons but it does not. The first container contains all of the mistakes HRC has ever made in public life. She is not a perfect human being so she has made mistakes; some serious mistakes. When you operate with responsibilities of a magnitude that only perhaps one or two dozen people in the entire world operate with; your mistakes can be measured in as much as lives lost. Some people are willing to accept such staggering responsibilities but they are rare individuals. HRC is one of those.

I believe that for the mistakes she has made she has owned up for the most part. I could not support her, regardless of how correct her platform was if she did not have integrity. She is honest, public-serving, especially hard working and dedicated to the welfare of her country. She has endured great burdens throughout her public lifetime. Yet, she continues to want to serve. That is an admirable characteristic.

That brings me to the second container. I believe the awesome majesty of the media has been able to fill a 10 ton container with nothing but suspicion and innuendo. HRC has been singled out for special character assassination for at least 25 years. She was especially loathed by the most self-serving 1% when, upon her entering the White House with Bill, she set upon constructing nothing less than the complete overhaul of the so-called US healthcare system. She was brutally punished, pursued wherever she went to hold town-hall meetings, and vilified until she crept back into the WH kitchen where she “belonged”. The extent and magnitude of the false image that is borne by HRC and constructed by those who wish only to roll back progress or at the least to preserve the status quo is of historical proportions. The Whitewater Investigation; a Congressional investigation pursued both the Clintons for ten years and cost at least tens of millions of taxpayer dollars only to uncover coincidences and possibilities. Not a single indictment came from this foray. Whitewater is just one example of the numerous legal attacks that have been levied against the Clintons over more than a quarter of a century.

By now, any reader who is still with me has a good idea of whom I am going to vote for and I haven’t even begun to address Donald Trump. I am not going to do that but, instead examine the possibilities that a HRC administration could bring. These musings are not going to contain exact figures just recollections and approximations if you don’t mind. However, the practical effects of these policies can be examined without exact figures. First, lets take the effect of one labor policy that will begin to be implemented upon her arrival on Penn. Ave. That is the restructuring of the overtime rules. Obama, as Chief Executive is the commander of all US agencies. One of those is the Labor Dept. The Labor Dept. rules govern business employment. Employers have to observe these rules or face fines or even imprisonment. Long ago, a labor standard was agreed upon by Labor and Capital in the USA. That was indeed called the “Grand Bargain”. That agreement held that workers can be considered “full time” if they work no more than 8 hours per day, five days per week. They could not be compelled to work more in a day or more days in a week without their consent and the employer was sanctioned by being required to pay the hourly wage and a 50% bonus for the overtime.

Currently, the limit to consider employees “salaried” and therefore exempt from overtime rules is more than $54,000/year. That means, all those workers earning this much or less can be compelled to work overtime and they receive no bonus for this work. Obama, by Executive Order, had the Labor Dept change the exclusion allowance to less than $24,000. That means that many, many workers will either receive more time off, a higher wage, or time and a half for overtime. The macro-economic effect of this is to create a very large pool of jobs AND to create a huge pool of consumer demand. This will result in increase sales of consumer goods and all the ripple economic effects in the supply chain. (to be continued)