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PAX, LUX ET VERITAS SINCE 1965
Post Thoughts on the Obama-Romney Contest
Created by John Eipper on 05/07/12 2:51 PM

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Thoughts on the Obama-Romney Contest (Richard Hancock, USA, 05/07/12 2:51 pm)

Now that we finally have a Republican nominee, the presidential campaign should get more interesting. President Obama seems to be emphasizing the politics of envy, i.e., tax the wealthy (1%) for the benefit of the remaining 99%. I hope that the American public is smart enough not to buy this fantasy. I don't know what the ideal leavel of taxation should be for the wealthy. I do know that we all have an interest in growing our economy because that is the only way that we will solve our problems of underemployment and the balancing of our national budget. Whether we know it or not, we all have a stake in the stock market. To quote Donald L. Luskin in the Wall Street Journal of May 5-6, "It's pretty much axiomatic: after-tax yields lower, stock prices lower...It's the 30% down in the stock market we ought to be worrying about."

Please don't be misled by Obama's stance that he will not do anything to lower the income of the middle class. If the stock market crashes, all Americans will suffer, not just the elite 1%. I know this from my experience since the market crashed in 2008. We have a small holding in mutual funds and we are accustomed to receive $5 to 10 thousand every December as capital gains income. During the last three years this has been lowered to less than $1,500/yr. If Obama raises capital gains taxes from the current 15% to 43.4% as is scheduled in December, 2012, the stock market could fall of a cliff and I can say goodby to any further capital gains income for the forseeable future.

Many people will say, "why of course let the rich pay higher taxes," not realizing that everyone in America has a stake in the stock market in terms of jobs, pensions and income. If you have a 401K, or are enrolled in an institutional pension fund, your retirement will be affected if the stock market ceases to remain healthy.

I try not to envy people that are better off than I am. The Tenth commandment forbids this: "You shall not covet your neighbor's wife, or male or female slave, or ox or donkey, or anything that belongs to your neighbor." This is profound wisdom. I think that Abraham Lincoln one said something to the effect that envy is the poorest possible way for anyone to spend their time. I think that moderation is the key to messing with the tax system.

JE comments: As of yesterday, we're going to witness a test case in extreme "tax the rich-ism": France. Let us see what happens under Hollande's plan to raise the top bracket to 75%. For now in the US, is there any clear economic principle that an increase in capital gains tax will drive the market "off a cliff"? People (and pension funds) have to keep their money somewhere. An increased tax on capital gains might actually encourage investors to a buy-and-hold strategy.

With this posting from Richard Hancock, I've inaugurated a new WAIS topic:  US Elections 2012.  It's time.  I'm sure we'll accumulate hundreds of posts in this drawer of our archive by November 6th.



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  • Capital Gains Tax and Revenue Collection (David Duggan, USA 05/09/12 6:26 AM)
    In response to JE's response to Richard Hancock (7 May), the capital gains rate may not increase tax revenue: you get the "lock-in effect," when shareholders simply don't allocate their capital efficiently, taking their profits and re-investing in more promising ventures. To an extent, we saw this in the 1970s, with a maximum tax rate of 70% on unearned income (whether from dividends, capital gains, interest or royalties). The stock market was moribund, and tax revenues from capital gains not commensurate with the rate.

    The additional problem with the lock-in is that with the expiration of the $5 million exemption for the estate tax at 35%, reverting to a $1 million exemption and a 55% rate as of Jan 1, 2013, a lot of people are going to simply let their heirs pay the tax on built-in, but unrealized gains. That may lead to wholesale liquidations in order to pay the tax, timed, not by any desire to re-allocate capital, but by the death of the original holder. One may question the economic utility of a tax on productivity (the price of a corporation's shares is correlated with its productivity as an economic entity, sometimes expressed as the present value of the future expected income stream) collected against those who are no longer productive.


    JE comments:  It also seems a given that an increase in capital gains tax will reduce market volatility.  Perhaps that's a good thing; perhaps not.  A question about the "death tax":  if the exemption goes down to $1 million in 2013, might we see a rise in philanthropy?  I presume that if Romney is elected, the current $5 million ceiling will be extended or increased.


    (By the way, it's been three months since the last WAIS fundraising appeal.  I'll post an updated Honor Roll by the end of this week.  Philanthropy has never been easier:  PayPal at donate@waisworld.org)




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  • Thoughts on the Obama-Romney Contest (Paul Pitlick, USA 05/16/12 4:27 AM)

    In Richard Hancock's post of May 7, he alluded to the "politics of envy," with respect to the top 1% vs. the remaining 99%. The envy I feel is not that the top 1% make more money than I do. The envy is how the top 1% and their Republican allies can turn reality on its head, and folks buy into it. For example, I interpret much of the rest of Richard's post as saying that Mr. Obama's policies might damage the stock market, thus significantly cutting back distributions in retirement portfolios. We are all entitled to believe whatever we want to believe, but let's also look at numbers. Below are the Dow-Jones values on certain dates:


    1/22/93         $3,257     Clinton begins

    1/19/01         $10,588   GW Bush begins

    10/4/02         $7,528     trough

    10/12/07       $14,093   peak

    1/23/09         $8,078     Obama begins

    3/6/09           $6,627     trough

    5/15/12         $12,632   Today



    Personally, I'm more concerned about what happened to the stock market under George W. Bush than under Barack Obama. The market was lower when Bush left than when he began. Even if you want to say Obama was responsible for the market from day 1 (which, of course, is absurd), it's still nearly double the trough. And it tripled under Bill Clinton. Why are we concerned about what Mr. Obama is doing, compared to what the Republicans might do again?


    JE comments: The last six weeks haven't been kind to securities markets around the world. This must be making Gov. Romney happy, although he's no doubt losing a lot of money. Most of the pessimism is due to uncertainty in Greece and elsewhere in the eurozone--matters beyond the powers of any US politician to influence.


    I'm glad Paul Pitlick has brought up the Romney-Obama contest. We haven't discussed US politics in at least a week. Kind of missed it. A question for the floor: will Pres. Obama's declaration in favor of gay marriage help or hurt his chances in November? My first thought would be for the latter, but Obama's opponents are keeping surprisingly mum on the topic.  Is gay marriage as a fundamental civil right finally making its way into the mainstream?

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    • Can the President Affect Stock Prices? (Cameron Sawyer, Russia 05/16/12 1:21 PM)

      Paul Pitlick wrote on 16 May:


      "I'm more concerned about what happened to the stock market under George W. Bush than under Barack Obama. The market was lower when Bush left than when he began. Even if you want to say Obama was responsible for the market from day 1 (which, of course, is absurd), it's still nearly double the trough. And it tripled under Bill Clinton. Why are we concerned about what Mr. Obama is doing, compared to what the Republicans might do again?"


      Answer: Because the President does not make the stock market with any direct act. You can't measure the quality of a president's economic policies by the stock market value at the end versus at the beginning of his term. Economic policy influences the stock market through a million intermediate events, through the generalized development of the economy. The main effect of economic policy on the stock market will play out years and decades later, not during that president's term. Furthermore, it's not the President who is primarily responsible for economic policy--it's Congress. The influence of the President depends on how much he is supported in Congress, and depends on how active he is in economic policy. Bill Clinton, governing with a Republican Congress, and not undertaking much of anything in economic policy in any case, had influence on the economy approaching zero. Ronald Reagan, by contrast, made economic policy the centerpiece of his election campaign, and then of his administration. He did lead a supportive Congress and significantly influence economic policy. The effects lasted decades; arguably, to this present day. So people are rightly concerned that Obama's policies might cause long-term damage to the economy, and indirectly, to the stock market. We need economic growth in order to have anything good economically, including growing stock portfolio values and thus a decent retirement, not to mention decent employment prospects for our children and descendants. It is a perfectly legitimate topic of discussion.



      On the other hand, Paul's point that we should not automatically assume that Republican presidents will have better economic policies than Democratic ones is well taken, and I agree with it absolutely. Bill Clinton at least did no harm (or little). George W. Bush contributed to the Crash of 2008 with a number of harmful economic policies, the greatest of which was the economic effect of the insane wars in Iraq and Afghanistan.


      JE comments:  Meanwhile, we had yet another grim day on Wall Street.  My "portfolio lite" includes a few dozen shares of JC Penney, which tanked by almost 20%.  Ouch.  Will Ellen Degeneres get the pink slip?


      On a related topic:  has anyone taken the plunge on Facebook's IPO?  I'll pass.  To my mind FB is a fad that will run its course, and $100 billion for a website is a lot of money.  Reminds me of tulips or Beanie Babies.  At least Pets.com, back in its prime, would mail you some cat food.

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      • Can the President Affect Stock Prices? (Tor Guimaraes, USA 05/18/12 3:54 AM)
        In general I agree with the observations by Cameron Sawyer (CS; 16 May) regarding the President-Stock market relationship. However, some of Cameron's specific statements are questionable.

        CS: The main effect of economic policy on the stock market will play out years and decades later, not during that president's term. Furthermore, it's not the President who is primarily responsible for economic policy--it's Congress.


        TG: Cameron neglected the strong and relatively immediate impact of monetary policy (the FED which supposedly politically independent) on the stock market. Traders commonly recognize this as "Don't fight the FED."


        CS: The influence of the President depends on how much he is supported in Congress, and depends on how active he is in economic policy. Bill Clinton, governing with a Republican Congress, and not undertaking much of anything in economic policy in any case, had influence on the economy approaching zero.


        TG: The economy and the stock market were quite strong under Clinton. We even ran a budget surplus, believe it or not.


        CS: Ronald Reagan, by contrast, made economic policy the centerpiece of his election campaign, and then of his administration. He did lead a supportive Congress and significantly influence economic policy. The effects lasted decades; arguably, to this present day. So people are rightly concerned that Obama's policies might cause long-term damage to the economy, and indirectly, to the stock market.


        TG: Whoever is/will be in the White House next will have great difficulty with economic policy. Bush/Cheney policies (job outsourcing, major wars, tax break for the wealthy and corporations) destroyed the economy and the middle class, representing 70 percent of the economic engine. Except for my favorite politician Ron Paul, everyone else seems out to lunch. Obama's policies are to benefit the middle class, but his policies seem ineffective so far. As I forecasted in 2009, his policies seem to be spread the pain until things improve, but where is the improvement? Romney strikes me as a chicken-hawk vulture capitalist there to continue the Bush/Cheney policies. If he gets in, the gap between rich and poor in this country will make South American dictators look generous.


        CS: [That] we should not automatically assume that Republican presidents will have better economic policies than Democratic ones is well taken, and I agree with it absolutely. Bill Clinton at least did no harm (or little). George W. Bush contributed to the Crash of 2008 with a number of harmful economic policies, the greatest of which was the economic effect of the insane wars in Iraq and Afghanistan.


        TG: I agree.


        JE commented: Has anyone taken the plunge on Facebook's IPO? I'll pass. To my mind FB is a fad that will run its course, and $100 billion for a website is a lot of money. Reminds me of tulips or Beanie Babies.


        TG: John Eipper's instinct is serving him well. A significant bet on Facebook now is too risky. Experts are having great difficulty with stock valuation. However, the primary factor, future earnings, could be explosive, in which case JE will wish he had bet big. I agree with Buffett and Langone, not my kind of game.


        JE comments:  Financial news will be dominated today by the Facebook IPO.  It may give the moribund market a kick in the pants, although this is not a good month to float an IPO.  We'll see how much exuberance is out there.

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    • Obama-Romney Contest and the Economy (Tor Guimaraes, USA 05/16/12 2:02 PM)
      Paul Pitlick (16 May) makes some excellent points. Personally I am very critical of the Obama administration's neglect to pursue the corporate fraudsters who created the global financial crisis we are in. I believe these are worse than terrorists, because we know the latter are out to kill us, but these financial terrorists disguised themselves as trustworthy patriots before crippling our nation.

      Nevertheless, listening to many of the Wall Street managers and traders, I am surprised to hear how many seem partial to Obama and see Romney's expected policies with skepticism and disdain. Their rationale is simple: Obama is supportive of more control over bank risk-taking activities like the latest JPM debacle. The Wall Streeters agree with the need for more government oversight, but think Romney will dismantle whatever regulation there is.


      JE comments: Dismantle? That hints of Ron Paul. Gov. Romney's favorite verb is "to restore" (prosperity, world dominance, moral values, etc.). I like restoration a lot when it comes to classic cars or motorcycles, but how can it apply to running a nation? Language matters, and the verb is a wise choice for Romney: it conveys managerial competence, but also appeals to the nostalgia of those who feel the American Dream has passed them by.


      Is "to restore" the technocrat's translation of "morning in America"? My vote is to restore my local Borders bookstore, as well as the Nash and Hudson automobiles, both of which were killed off by Romney's dad.



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    • Stock Prices and Inflation (George Krajcsik, USA 05/17/12 7:04 AM)
      I'd like to make a slight correction to Paul Pitlick's comment of 16 May regarding stock market figures. The figures he cited are current and not inflation adjusted. The value of the dollar eroded considerably since 1993 (since 1972 the dollar has lost 98% of its value) and the market takes that into consideration, hence the higher figures.

      JE comments: I asked George Krajcsik off-Forum for clarification on the 98% figure--the inflation numbers I found show more like an 80% loss of value since '72 (meaning, one Nixon dollar equals about five Obama dollars). Here is George's reply:


      "There are numerous ways of comparing historical value of the dollar. Using the CPI (Consumer Price Index), we find $1 in 1972 is worth about $5.37, which yields about 18%. If we use a measure of economic power, that is measuring $1 relative to the total output of the economy, then comparing it to other incomes or wealth, showing the relative influence of the owner of this income has in controlling the total amount production in the economy, i.e. measure of share in the GDP, that yields $12.20. That tells us the dollar declined to about 8% of its value since 1972. Still not 2%.


      "I used a somewhat more startling comparison, the price of gold. In 1972 one ounce of gold sold for $38, today $1,571 (avg. price). That shows about 2.4%."


      JE again: It's all in the measuring. Gold prices don't line up with what things (other than gold) actually cost: Recall that the shiny stuff hit $840 in 1980, which would equate to around $2000 today. If you sank your 1980 life savings into gold, you would have experienced decades of pain.  (Having a lot of gold lying around would make you feel rich, though.)


      Great to hear from George, by the way. Yesterday I received notes from two of our Hungarian-born colleagues--George Krajcsik and Istvan Simon. A total coincidence, but a happy one.


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