Budget Cuts
Much like a company or a household, to properly run a government, revenue must meet or exceed expenditures. When spending is more than the revenue obtained, there is a budget deficit. One way to reduce the deficit is through budget cuts. Budget cuts for the government can come in many forms, including reducing services and administration. Ultimately, budget cuts are needed to maintain a balance between spending and revenue.
Is the Only Safe Investment Your Piggy Bank?
By George Leong for Investment Contrarians | Apr 10, 2013
I think maybe it’s time to start putting your money in the piggy bank to avoid any major investor mistakes.
With the Dow and the S&P 500 at record highs, I’m trying to find reasons to want to buy in this market. However, I’m finding it difficult to even want to buy, as I still feel a stock market correction is on the way.
I’m sorry, but I can’t tell you when this will happen or by how much. All I know is that you need to be careful to avoid possible investor mistakes.
We have the first-quarter earnings season that started on Monday, and if you believe the early estimates, there will not be many happy traders and investors out there.
FactSet estimates earnings will contract by 0.7% in the first quarter, followed by an overly optimistic second half, predicting an explosive earnings rally of 10.1% and 15.6% for the third and fourth quarters, respectively. I’m not sure why FactSet is this giddy, but in my view, for these growth metrics to emerge, all of the stars will have to align.
I’m still not convinced corporate America is set for another growth spurt. The Federal Reserve knows this. Based on the recent non-farm payrolls reading showing a dismal 88,000 new jobs, I just can’t comprehend how the country is set to achieve revenue growth.
I may sound like a downer, but I consider myself more of a realist who wants to avoid investor mistakes.
And Main Street has also appeared to have forgotten the debt, while the government and Congress are still battling it out to come up with … Read More
Dow Jones Hitting 15,000 a Real Possibility Thanks to the Fed?
By George Leong for Investment Contrarians | Mar 22, 2013
The Federal Reserve is intent on keeping this Fed-induced stock market rally intact for perhaps another few years.
At the Federal Reserve monthly meeting this past Wednesday, the Federal Reserve reconfirmed its program of maintaining near-zero interest rates and its $85.0 billion monthly bond-buying strategy. As I recently discussed, the environment of low rates will offer little choice for investors who have to weigh low-yielding fixed-income investments against stocks. In other words, the equities market will continue to be driven, at least in part, by the cheap money. This will be great for the people who have the funds, but it will be horrific for those with lower income and who may be dependent on income from their investments. But for the government it’s great news, especially when it’s carrying so much debt—well, the government can thank the Federal Reserve.
Faced with the uncertainties in the jobs market and job creation, the Federal Reserve suggested it would maintain its record-low interest rates until the country’s unemployment rate falls to 6.5%. The problem is that the Federal Reserve predicts this will not occur until sometime in 2015, so that’s another two years of easy money and the building up of massive national debt. Remember what I said about the sequestration cuts and how they are well below the interest paid on the debt? Imagine the payments when interest rates ratchet higher! It’s not going to be pretty. The Federal Reserve has created this situation, which could inevitably blow up.
In reality, achieving an unemployment rate of 6.5% may not happen until after 2015, based on current job generation. According to the … Read More
U.S. National Debt to Surpass GDP for Third Year in a Row
By George Leong for Investment Contrarians | Mar 18, 2013
The more I look at the size of the national debt, the more I get squeamish. With the national debt at $16.7 trillion and growing, something needs to be done, as the Federal Reserve continues to print money, creating the artificial economy that is making people think America is faring well and forgetting about the national debt.
The sequestration program will help, but will it hold as the two parties continue to argue about where the cuts should be from and alternative revenue sources? Budget cuts due to the sequestration are already at $17.2 billion and running (source: U.S. Debt Clock web site, last accessed March 14, 2013), but as I have said on numerous occasions, $85.0 billion a year will likely do very little to tackle the mounting national debt. Just the interest on the national debt is already around $223 billion, so the national debt will continue to expand in spite of the sequestration cuts. I wonder if the government gets it. You have $17.2 billion in cuts as of March 14, but $223 billion in interest costs. Something just doesn’t add up here.
The U.S. national debt as a percentage of the country’s gross domestic product (GDP) stood at 102.9% in 2011. (Source: “List of Countries by Public Debt,” Wikipedia, last accessed March 15, 2013.) This was just below the massive 208.2% in Japan and the 160.8% in Greece, according to the International Monetary Fund (IMF).
Translation: America is in a financial mess, and it will not be easy to get out of it.
And despite the national debt burden, the Federal Reserve has its hands tied. … Read More
Shocking Data Could Sink These Stocks
By Sasha Cekerevac for Investment Contrarians | Mar 5, 2013
The American economy, as with most developed nations, is based primarily on consumer spending. With the collapse in the housing and stock markets several years ago, a big chunk of wealth evaporated overnight. This hurt consumer sentiment, which resulted in a significant slowdown in economic growth.
For economic growth to regain momentum, consumer spending needs to increase, but it needs to be based on a solid footing. It’s one thing if consumer spending was increasing due to higher disposable income, but it’s quite another if consumer spending was increasing due to higher levels of debt, which would lead to fragility when it comes to long-term economic growth.
New data from the Commerce Department stated that personal income declined by 3.6% in January, far worse than economists had expected. However, personal consumption increased by 0.2% in January. (Source: Sparshott, J. and Morath, E., “U.S. Incomes Fall, Spending Rises,” Wall Street Journal, March 1, 2013.)
The higher payroll tax is clearly hurting disposable income for most Americans. Disposable income, which is the amount of income left after taxes, decreased by four percent in January. According to the United States Department of Commerce, this is the largest decline on record. With economic growth being extremely weak, this type of decrease in income has the potential to severely impact consumer spending for some time.
This information was collected prior to sequestration. If budget cuts are to be enacted without revisions, it will be difficult to see how economic growth will accelerate through the remainder of the year. Consumer spending will most likely suffer at some point, because incomes are not growing, taxes are rising, … Read More
Sequestration’s Here: What You Need to Know
By George Leong for Investment Contrarians | Mar 1, 2013
The day has arrived. Today will see the start of the much-anticipated $1.2-trillion decade-long budget cuts under the Sequestration Transparency Act of 2012 (394 pages if you want to read it), which represents America’s own austerity measures to cut the deficit. The proposed cuts will entail about $85.0 billion in annual budget cuts; and while it’s needed, given the runaway national debt of over $16.6 trillion, it will have a widespread impact on the state of the country and the economy, including program cuts, job losses, and chaos.
The cuts will have a negative impact on the country’s fragile economic recovery, but it’s something that is required; otherwise, it’s more of the same in the way of money printing and pumping up the national debt just to keep afloat and avoid a crash. If not for the significant fiscal and monetary policies that focused on pumping liquidity into the economy, I’m pretty sure the country would have fallen into a depression.
The nonpartisan Congressional Budget Office (CBO) estimates the automatic cuts to spending will reduce gross domestic product (GDP) growth by 0.6% this year and will result in the loss of 750,000 jobs. And while this is not what you want to see during these difficult economic times, the sequestration is needed; without it, the ballooning national debt will continue to spiral out of control, hurting future generations.
While I doubt the budgetary cuts will drive the country into another recession, I do feel there will be negative impacts across the board.
The question is: where will some of the budget cuts be made?
Defense will lose a big chunk … Read More
National Debt
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