budget cuts
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
Fiscal Cliff Averted, but the Massive Debt Will Limit Government Flexibility
By George Leong for Investment Contrarians | Jan 8, 2013
Well, the doom and gloom of the fiscal cliff was averted in the nick of time, which in turn, pleased Wall Street and gave stocks a boost to begin the new year.
While the deal was a nice compromise between the two parties on the tax issues, there is a lot of work ahead for President Obama, as the statutory national debt limit of $16.4 trillion nears. As of this morning, the national debt balance used for the limit stood at a superlative $16.39 trillion. The headline national debt of $16.43 trillion is actually already above the limit, but don’t worry, the Treasury Department said it will be able to pay its debt payments and bills. Of course, we know this will also hold until the extended deadline on March 1.
The bottom line is: President Obama needs money to operate his plan to save America. Obama has asked for increased power to increase the national debt limit without Congress, but we all know this will never happen under the Republican-controlled House.
So while I view fiscal and monetary strategies as critical to keeping economic growth going, I also understand that the government needs to be tough and do something to the staggering national debt or risk deepening the financial crisis down the road for generations.
The problem is that if too much spending is cut, the impact on the economic recovery could be enough to send America back into another recession and financial crisis this year.
The question is concerning where some of the budget cuts will originate from.
Defense will likely lose a big chunk of its budget, … Read More
Why “Plan B” Is Set to Fail
By George Leong for Investment Contrarians | Dec 20, 2012
The U.S. House of Representatives is planning to throw out a “Hail Mary” in the ongoing “fiscal cliff’ discussions, but I really doubt it’s going to work. Frustrated by the lack of a resolution to the pending automatic budget cuts and income-tax hikes, the Republican-controlled House is looking to push forth what they call “Plan B,” which extends the Bush-era tax cuts to those making less than $1.0 million.
This is no secret development that will resolve the fiscal cliffhanger and budget cuts, but the Republicans are proposing that their tax plan be passed in the House to try to avoid the fiscal cliff. The problem is that Plan B will not get approval in the Democratic-controlled Senate, so it will fail. President Obama has moved the threshold for the tax cuts to $400,000, up from the U.S. presidential election talk of $250,000, but we all know there needs to be some compromise.
Moreover, besides the tax cuts, the two parties are also divided on the budget cuts to Medicare and Social Security, the two largest components of the mounting $16.3-trillion national debt. The legal limit is $16.4 trillion, hence the need for the budget cuts.
As I have said in the past, we need to get the country working and back on its path as the world’s dominant economy and superpower. Of course, to achieve this status, the United States had to spend trillions on defense, another major area that will see budget cuts.
I love capitalism, and the idea that you can generate unlimited wealth to drive consumer spending. This is the reason why the United States is … Read More
For the 50th Time, the Eurozone’s Digging Its Own Grave
By George Leong for Investment Contrarians | Nov 28, 2012
Greece finally received approval for its austerity measures and, in the process, will get another $70.0 billion or so in loans. The money is not earmarked for growing the Greek economy out of its deep recession; rather, it will be used to keep the lenders away as the country tries to get out of its financial crisis. What is happening in Greece and the eurozone is absolutely an economic farce that will likely take years to rectify. For Greece, the country will be stuck in its own economic abyss for years, even decades. The problem for Greece is that the deep budget cuts are occurring at a time of fiscal confusion, massive unemployment, and negative gross domestic product (GDP) growth. The deep cuts will hurt the country more in the short term, but they are needed to help Greece become a contributing member of the eurozone. As I said, it could take decades. Don’t believe me? Just take a look at the two-decade drought in Japan.
The Organisation for Economic Co-operation and Development (OECD) just suggested the global economy was on shaky ground again, with weakness in 31 of 34 member countries. (Source: Matt Nesto, “The Five-Year Funk: OECD Slashes Global Growth Estimates,” Yahoo! Finance, Breakout, November 27, 2012.) The report “Global Economy Facing Hesitant and Uneven Recovery” called for the eurozone to experience another two years of mild recession. GDP growth in the U.S. is estimated at a mere two percent for 2013, which is not unexpected, given the current conditions in America. Failure to resolve the fiscal cliff will make the growth worse.
The way I view it … Read More
Why the Fiscal Cliff Is Only One Problem Amongst Many
By George Leong for Investment Contrarians | Nov 14, 2012
There are 47 days left in the year, and I’m worried. Not about my holiday shopping, albeit the retailers might be, but about whether President Obama can get Congress to agree to his demand to extend the Bush-era tax cuts, while increasing taxes to the rich, cutting expenses, and avoiding a potential financial crisis.
Based on what has happened since the election on November 6, we are seeing a selling bias toward stocks, as there may be a shift to investors taking their profits now; investors are avoiding what will likely be higher taxes on capital gains and investments going forward in 2013 should the fiscal cliff be allowed to follow through without any modification.
We are at a standstill. A financial crisis may be at stake.
The Republican-controlled House wants the tax cuts extended to all taxpayers, while Obama said he would veto any bill that pushes for tax cuts to those earning over $250,000 annually. You can see the dilemma and the difficulty concerning the cliff and potential financial crisis.
Of course, the government needs to be tough and do something to the staggering $16.3 trillion in national debt, or risk deepening the financial crisis.
With every passing second, America is growing poorer, and it will continue to unless major changes are made to avert a financial crisis. At the core of the problem is the direction of the upcoming fiscal cliff and its impact on the economy, national debt, and the financial crisis.
If too much spending is cut, the impact on the fragile economic recovery could be enough to send America back into another recession and … Read More
Why Europe’s a Bomb Waiting to Blow Up
By George Leong for Investment Contrarians | Nov 12, 2012
The doom and gloom on this side of the Atlantic is focused on the country’s pending “fiscal cliff,” but in Europe, it’s focused on the continent’s own financial crisis and how to escape it. You have six eurozone countries in a recession, with the whole region threatening to collapse into a recession in 2013. There’s barely any gross domestic product (GDP) growth while debt levels surge. You also have high unemployment and rallies on the streets of Athens and Madrid in response to the tough austerity measures put forth by Greece and Spain. You kind of wonder if Americans would flood the streets here if wages and pensions were suddenly axed.
Yet what makes the slowing of GDP growth in the eurozone a significant concern is its negative impact on the non-eurozone countries, including the Asiatic countries, such as China and Japan, which have seen their GDP growth affected.
We are seeing more cuts in GDP growth rates across the board for 2013. GDP growth in the United Kingdom (U.K.) was slashed to a mere 0.9% in 2013, down from the prior estimate calling for growth of 1.3%, according to research by the European Commission. The reality is that GDP growth could be even worse should the eurozone fail to sufficiently recover.
The European Commission is predicting a gloomy outlook, with the eurozone’s GDP growth contracting 0.4% this year and growing a muted 0.1% in 2013. Add in the massive debt loans and pressure to cut spending, and you’ll realize why I’m deeply concerned.
Of course, the problem is that the spotlight on the massive debt and bailouts of Greece … Read More
What’s Around the Corner Now the U.S. Election’s Over
By George Leong for Investment Contrarians | Nov 8, 2012
Investors bid up stocks prior to the presidential election on Tuesday, when President Barack Obama won his second term. Investor confidence was due to some uncertainty eliminated with the election, but the nervousness quickly resurfaced on Wednesday morning, impacting investor confidence; stocks plummeted on the realization that Obama still has many hurdles to overcome and the fact that the global economy, namely in Europe and China, may be prone to more weakness that will negatively impact investor confidence.
I’m sure President Obama is relieved that the election is over; but I can tell you, it’s only the beginning of some difficult times ahead that will challenge his patience and fortitude, while also impacting investor confidence.
While the uncertainty of the election is over, there is a lot of work ahead for Obama, as he now needs to immediately deal with the pending fiscal cliff. This will not be an easy feat, but it must be done to instill some investor confidence in the equities market.
The major problem is that President Obama must be careful, as he will need to cut and control the deficit and national debt of over $16.0 trillion, while at the same time not allowing the full extent of the $607.0 billion in broad budget cuts to take place on January 1; if he doesn’t balance the two, he will likely kill the economic recovery, 2013 and 2014 gross domestic product (GDP) growth, and investor confidence.
Moreover, any agreements or decisions made by President Obama will need to be agreed upon by the House. This will be problematic, given the continued political gridlock, as the Republicans … Read More
Folks! We Have $16.0 Trillion in Debt
By George Leong for Investment Contrarians | Oct 17, 2012
When you scroll through the pages of Investment Contrarians, you cannot help but notice the running U.S. national debt counter that sits at over $16.2 trillion and rapidly moves higher. With every passing second, America is growing poorer and will continue to unless major changes are made, but it will be difficult. At the core of the problem is the direction of the upcoming “fiscal cliff” and its impact on the economy and national debt.
Automatic and massive budget cuts are forthcoming in January, unless an extension is made. At first, this may sound like the correct strategy but, as many of you know, cutting government spending will impact the country’s already fragile economic recovery. And what concerns me more is where the cuts will be made.
The problem is that a significant cut in fiscal spending could make the economy worse, according to the Congressional Budget Office (CBO). The CBO predicts the U.S. economy could contract by 0.5% in 2013 if the spending is curtailed. (Source: www.CBO.gov.)
While there is no indication of what areas will be affected, my feeling is that the cuts will likely be from Medicare/Medicaid, Social Security, defense/wars, and federal pensions.
Whether President Obama extends his term in office or Mitt Romney takes over, the next government has major decisions to make, including what to do with the pending budget cuts.
The media continues to focus on the debt distress in Spain and the tough road ahead for Greece, but there is seldom any mention regarding the massive and runaway U.S. debt.
Spain has a national debt of around 758 billion euros, about US$988 billion, … Read More
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