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Archive → June 9th, 2017

Don’t trust the messenger

Don’t trust the messenger


Man reading paper

Never forget that most of the journalists writing business and economics articles majored in English, not economics.

I know this because I’ve been in plenty of newsrooms over the decades. I’ve also been at the bar at the National Press Club on more than a few occasions. Most journalists are assigned a beat whether they want it or not. And if they’re not that interested in their beat, they try to do a credible job writing “click bait” stories so they get their editor’s attention and can get moved to the one they really want.

This isn’t new to newsrooms, but now they hire cheaper help and want them to post stories constantly to feed the website content beast. It’s not about structure, quality or accuracy; it’s about volume.

That’s why I skim most stories, get the key information and then do my own research.

A recent case in point was the release of the April retail sales numbers. The breathless article on a major financial site was how well the consumer is bouncing back and really powering a revived economy.

What were the great numbers? Retail sales, excluding big ticket items like houses and cars, were up 0.4 percent in April. Year over year, April numbers were up 4.5 percent. That sounds great, no? That’s the headline piece or the throwaway line on CNBC.

But a few paragraphs down you see the bigger picture. Most economists were expecting 0.6 percent last month. In March consumer spending came in lower than expected at 0.3 percent, and in February it was actually negative.

That means the story should be that April showed U.S. consumers are not back,  they weren’t in the mood to spend and it may have something to do with their real — not imagined — view of the economy.

Facts vs. feelings

It seems all the sentiment numbers — purchasing managers, consumer sentiment index, home builder sentiment, stock indexes, etc. are going gangbusters, but the real numbers are less than impressive.

For example, home sales. The National Association of Home Builders just released its sentiment indicator. Basically they ask home builders around the country whether they expect 2017 to be a bullish or bearish year. They are bullish. Last year, the index was at 58; anything above 50 is bullish. This year it’s at 70, the highest since 2005.

That’s awesome, right?

Well, if you look at the numbers — people actually buying new or existing homes — mortgage applications were down 4.3 percent in April according to the Mortgage Bankers Association. Applications are down 20 percent since March.

And materials prices as well as labor costs are on the rise, so homes are more expensive.

Burying the lede

In journalism, when you write a story your lede is the most important information of the piece. If you end up telling the best part of the story later in the piece, they say you have buried the lede.

There is a graveyard full of ledes nowadays.

Let’s go back to the broader economic numbers. For Q1, consumer spending was up 0.3 percent, the weakest pace since Q4 of 2009.

Add to that the fact that Fed funds futures traders are pricing in 78.5 percent chance that the Federal Reserve will raise rates at their meeting in mid-June.

So, you have a skittish consumer whose spending makes up two-thirds the U.S. economy, slow housing market with rising input costs and rising interest rates which directly affect spending on all levels.

I feel fine

But everyone is feeling very good.

The markets continue their bull run. All the sentiment indicators show that companies are optimistic about selling things, making things and hiring people.

Whom to believe? How about major hedge fund managers? They should have a fairly objective view of the markets since their job is to make money regardless of whether the market is soaring or crashing.

More and more of them are saying the market is reaching dangerous levels. Some are discussing their concern with all the money going into passive management (index funds). It’s a no-brainer bull market like it was in 1999 and 2007.

The managers that are most pessimistic also warn that this time around a correction could be worse than any of the modern corrections we’ve been through. And any correction will be amplified by the huge amount of money in passively managed funds since there’s less and less diversification among the assets investors are holding.

Build your hedges

The one lesson to take away from hedge funds is the fact that good hedge funds make sure you’re covered over the long term. By trading and hedging those trades, you lower your risk profile.

If you don’t have a few million with a hedge fund and need to do it on your own, here are a few tools that will help you hedge any long positions you have in stocks.

  1. VIX through the ProShares VIX Mid-Term Futures ETF. The VIX is the stock market’s “fear index” or volatility index. Right now volatility is near historic lows. If the market tanks the VIX takes off. Even in a “normal” market the VIX is significantly higher than it is today.
  2. U.S. Treasuries through iShares 7-10 Year Treasury Bond ETF. When selloffs in stocks happen, a lot of money goes back into the safety of Treasuries. Rising rates will also help boost Treasuries yields. And no matter what happens, the U.S. will likely weather any storm better than other industrial nations, so it’s a global flight to safety.
  3. Precious metals and funds that own physical gold and silver like Sprott Physical Gold Trust (and Silver Trust). Don’t buy the miners, they’re a secondary beneficiary and are worth a long buy when they get going. But the metals as a great non-financial hedge.
  4. Consumer durables stocks like Clorox, Johnson & Johnson and Colgate Palmolive. Come what may, people still buy toothpaste, bandages and cold medicine. They still wash their clothes. Plus most of these firms have been around for over 100 years so they know how to get through bad times.

— GS Early

Source: Will County News

Tax hikes would only put a further strain on people’s wallets, their job prospects and the economy.

Illinois Senate Democrats recently passed an income tax hike that would raise the individual rate to nearly 5 percent. This tax hike would hit Illinoisans’ wallets and further weaken the state’s economy.

But the negative effect of the tax hike wouldn’t end there. Such a tax hike would also open the door to a progressive tax hike pitch from any candidate for governor.

A progressive tax structure would allow politicians to tax personal incomes at increasingly higher rates. An Illinois lawmaker pitched such a plan in 2013 that would have imposed a 4 percent rate on anyone earning just $18,000 a year, with rates going all the way up to 9 percent for top earners. Middle-class earners would have faced rates of 5-7 percent.

Residents of Illinois are already struggling with the nation’s highest property taxes and one of the weakest economies in the nation. Tax hikes would only put a further strain on people’s wallets, their job prospects and the economy.

And an influx of revenues would relieve the pressure for reforms to Illinois’ structural problems, just as the additional $32 billion taxpayers forked over during the 2011-2014 tax hike allowed politicians to put off necessary reforms.

But the bigger danger is that an income tax hike to 5 percent makes a call for a progressive tax system during the 2018 gubernatorial race a much easier sell. That’s because the legislature would already have done the dirty work of raising taxes.

All a gubernatorial candidate would have to do is run on changing the tax rate – lowering it for most, but promising to raise it on the rich.

For example, a candidate can promise a tax rate below 5 percent for Illinoisans making less than $100,000, giving 80 percent of Illinoisans a tax break. Then, to make up for the revenue loss, politicians can hike taxes on the “rich” through increasingly higher rates above 5 percent. California’s highest tax bracket, for example, is at 13.3 percent.

But a progressive candidate’s math only works out if income taxes have already gone up – as they would under the Senate Democrats’ income tax hike.

In contrast, if Illinois’ rate remains at a flat 3.75 percent, politicians can’t easily raise billions in new tax revenues and at the same time promise a tax cut to most through a progressive tax plan.

Some will correctly argue that a progressive tax can’t pass without a constitutional amendment, and the soonest it can happen is after the 2018 election.

But that won’t matter on the campaign trail. All a progressive-tax candidate has to do is run on it. And promise it. And it’ll be hard for most Illinoisans – already overtaxed – to reject this proposal for the mistake it is.

Illinoisans don’t need a progressive tax, which exaggerates booms and busts in revenues. This tax policy contributes to budget deficits and makes tax receipts more volatile. Over time, it ends up targeting the middle class. And it punishes success – driving people away.

The General Assembly should reject an income tax hike and close the door on the call for a progressive tax.

Ted Dabrowski
Vice President of Policy

Source: Will County News