Why These Two Investment Fears Aren’t Genuine Threats

by Alexander Green, Chairman, Investment U
Monday, January 19, 2009: Issue #919

As I write, I’m here at the Intercontinental Hotel in Managua.  When we’re not eating tortillas and sipping margaritas, my colleagues and I  are surveying the global economy, making assessments about what lies ahead for world stock and bond markets.

However, two of the greatest fears voiced here are not genuine threats to your financial well-being, in my view. You’re probably hearing these opinions, too. So let me give you my take on them.

The first fear, especially among folks with a particular political viewpoint, is that the incoming Obama administration and the new Democratic Congress are going to fall prey to their worst instincts to tax, spend, regulate and redistribute, further damaging an already fragile economy.

Again, I don’t buy this.

For starters, Obama has been tacking to the right on economic issues ever since he gained the Democratic nomination. In the primaries, he talked about renegotiating NAFTA. (To which Canadian Prime Minister Stephen Harper famously replied “Say what?”) But no longer. Obama also talked about raising top marginal tax rates. But not now.

It’s time for a reality check. Obama is getting economic advice from Paul Volcker and Robert Rubin (not Jerry Rubin.) He made economist Larry Summers the director of the White House National Economic Council.

Despite the heated rhetoric during the campaign, Obama is not a socialist. And the Republican minority in Congress will block far lefties from enacting protectionist legislation or fast-forwarding new re-distributionist policies.

Top marginal tax rates are likely to remain the same at least until the end of next year. Why? If nothing else, it gives Democrats political cover. They can avoid criticism that they’re raising taxes during an economic downturn and can claim that the Bush tax cuts simply expired. This will play better when the mid-term elections roll around.

Yes, we’re going to get a massive fiscal stimulus because it has bi-partisan support. But so far Obama has shown that he intends to govern from the center, not the far left.

The other great fear I’m hearing is that this is not going to be just a tough recession but another depression.

I don’t buy it. This is a nation of 300 million resourceful, enterprising people, not 300 million on a morphine drip.

We will pull ourselves out of this. The Great Depression was caused primarily by policy errors.  And those aren’t likely to be repeated.

Herbert Hoover raised taxes. Obama is promising to cut them for 95% of Americans. (Although I’ll concede he would boost the economy more – and actually generate increased revenues – by cutting marginal tax rates on small and large businesses and individuals.)

The government also tightened the money supply in the 1930s. Today the Federal Reserve has taken interest rates near zero and is sharply increasing the money supply. That’s the right thing to do.

In the 1930s, Congress passed high tariffs to protect domestic jobs and businesses from the threat of foreign competition. Predictably, this caused foreign countries to retaliate by blocking imports of American products. The result? International trade contracted over 25%. But no such nonsense is in the air today.

Bear in mind also, Bernanke is an expert on the Great Depression. He has published a book of his academic essays on the subject. (Check it out on Amazon. It’s a wonderful cure for insomnia.)

Bernanke will move heaven and earth to keep the U.S. economy from going into a deflationary spiral. And in this objective, we should all root for him. (Although, admittedly, cleaning up down the road is going to be a challenge.)

The bottom line is this: Economics in the 1930s was like medicine in the Victorian Era. We’ve learned a lot since then. Paul Volcker, Larry Summers and Ben Bernanke are not going to bleed the economy with leeches.

We’re in a sharp economic contraction, yes. Should you avoid highly leveraged businesses and those in a weak competitive position? Absolutely.

But are we in for another Great Depression? The smart money – from Peter Lynch to Warren Buffett – is betting against it.

Maybe you should, too.

Good investing,

Alex

Today’s Investment U Crib Sheet

Tomorrow is inauguration day. But the experts at Investment U have been looking ahead to the new administration’s proposed changes for a while now. They’ve been identifying the best ways to prepare you, and your portfolio, for the next four years.

• While many will be watching closely to see how Obama handles the ongoing financial crisis, Dave Fessler is interested to see how he handles a far more ominous one: our ongoing energy and infrastructure crisis. For the full story, read more on The Gas Price Rollercoaster.

• On June 20, Alex Green took a look at the “First Obama Investment. Obama has promised to raise the top marginal tax rate back to the old Clinton rate of 39.6%. If you’re not in the top bracket, you may think this is of no great import. But it will be important to high-income earners…” And while we’re all not in the top tax-bracket, there’s some profit potential and things we should all be looking at. For more information, read The First Obama Investment.

Another hot button political issue, oil, hasn’t been in the news as much as it was a few months ago. But that doesn’t mean that there aren’t profit to be made. One of our analysts brought a unique situation with oil “contango” to our attention just last week. Take a look at the most recent update here.

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