July 31, 2011
The Deficit talks have come a long way. Let's review. The President wanted a clean debt ceiling bill with no spending cuts. That's not going to happen. President Obama called for tax increases on the rich. That also looks unlikely. What is being talked about is a 2-3 trillion dollar cut in the increase in spending over ten years which would result in about a 6-7 trillion dollar increase in the national debt over that period. That’s not enough, but it is the first time this country is requiring spending cuts equal to the amount the debt ceiling is raised.
It's a move. Not a large one, but a move. It at least reduces the increase in government spending, and more important; it puts tax reform on the table. A committee could recommend reduced tax rates in exchange for limiting or eliminating deductions, subsidies, and corporate welfare. And even better (if it is true) is the rumor of a “trigger” that would cut government spending across the board if these objectives are not met. This is the scuttlebutt coming out of Washington at this hour.
If this is indeed what is going to be passed, I would consider it more a down payment on deficit reduction. Having been one of the first to call for using the debt limit as a leverage tool to get spending reductions and no tax increases, I’m not too disappointed with the bill and tax reform being talked about. But it is only the beginning. Next come the elections…
I have not heard such negative talk about a President since Richard Nixon. There is across the board disappointment with Barack Obama’s presidency from the right as well as the left. His chances of being re-elected grow dimmer by the day. And so do those of the Senators seeking re-election. This is in no way the end of the story—it is merely the end of chapter one.
This year—and next—the government will increase spending, regardless of income, to the highest amount any nation has ever spent in history. Yet the politicians are unable to curtail this new spending in more than a token way. This has threatened the US bond rating. So much so, that there is talk of US government bonds being downgraded by rating agencies, even with an agreement to raise the debt ceiling.
The downgrade would have an immediate negative market effect, but I think it will be limited. The reason is two-fold:
I expect a downgrade. I do not see it as a threat, but a trading opportunity. I’ll gladly take whatever the market offers. We must never lose sight of the fact that the US government is on a different planet than the private sector. It is a story of “two different worlds,” the government who struggles to pay its bills and is technically broke, and the private sector which is making more money than any other nation on earth—by far!
Apple Inc. has more cash on hand at this moment than the US Government. Its income is larger per year than the GDP of most nations. And that is just one company. No company in China or Japan comes anywhere near the profits of US companies. While the GDP in this country averaged less than 1% the first half of the year, US profits rose about 15% higher than expectations. Companies like Boeing, Caterpillar, and Netscape, just to name a few, are making more money than most governments could ever dream of.
California, one of the worse fiscal nightmares in the country, is where 90% of the world’s innovation comes from. Never take your eye off the ball, and remember, there are two different worlds out there; the public sector and the private sector. The US makes its money off the private sector. The government is simply a drag on us all. It can create havoc, like it has, but even in a 1% economy; look at what this nation’s companies are capable of.
That is why I am concerned about the amount of regulation about to descend on American business. Yes I’m concerned about the slowing growth rates around the world, but the dollar is not crashing, nor are US Bonds. The demand for US bonds is 2-3 times the supply of them. And that is in these times. With everything going on today, the price of gold (in real terms) is still lower than it was in 1980. This all may seem like a giant contradiction, but again it is testimony to the strength of the private sector, and America as a country.
Interest rates continue to fall here in the US, the dollar remains steady, and earnings continue to come in stronger than expected for most US companies. Most strong earnings are coming from international profits. Wal-mart, McDonald’s, and Netscape's entrance into world markets are among standout expansion stories.
Gold continues to make all time high's, yet gold stocks are still underperforming. One exception is Rubicon Minerals (RBY) which has been under a cloud of suspicion, due to an unexpected re-evaluation of gold reserves. Last week, Agnico-Eagle, (AEM) took a 700 million dollar position in RBY, supplying it with both capital for further exploration, and a new found confidence from investors who figured if AEM is willing to invest in RBY, they were. RBY soared 30% on the news. It is still over 30% off its yearly high, and I'm looking at it for a possible add.