22 August 2012

6 Issues America Needs To Deal With ASAP

I read a great article in Time about some very serious financial issues that will most likely present themselves in debates as we approach November. Sivy wrote the article- click here to check it out. Here is a skeleton of the main points-

Our current financial spending is unsustainable and delaying policies necessary to move us toward a more fiscally sound path will prove to be disastrous and unpalatable in the next 10-25 years. Here are Sivy's six issues that need to be dealt with:

1. National debt (currently at 81%). will reach 93% in 10 years, 200% in 25 years.
2. Taxes: cutting taxes for middle class and bringing back Clinton-era taxes on wealthy people will reduce deficit by 10% in 10 years.
3. Social security: the trust fund will be completely exhausted in 25 years. Social security taxes only cover 75% of the benefits promised.
4. Pension funds: they're over-promising and not delivering.
5.Medicaid/Medicare
6. Defense: 900 trillion currently (5.5% of GDP).


09 August 2012

August Industry Analysis

      Make no mistake, we're living in a seller's market. Weak global economic outlook coupled with anticipated action by central banks (ECB and Fed specifically) will continue to propagate a bleak economic forecast and a hard market. In the wake of a global slowdown, here are some industries that deserve a second look:
      Auto: The industry is definitely revitalized since the meltdown in 2008-2009. Declining capacity as a result of the shutdowns has resulted in a more efficient industry. We're currently seeing an upward trend. Manufacturing has grown by 26.4 percent since 2009 and auto sales have increased 23% year-over-year through June. Also worth mentioning: according the the July report, published a few days ago, consumer credit is up to about 5%.
      Airline Industry:we've seen increases in efficiency for reasons similar to those of the auto industry. I'd be cautious, though- the airline industry is very volatile-- 40% of cost is fuel.
      Gaming: Macau, the Monte Carlo of the Orient, is a good place Western casinos are heading right now. Currently, Macau is the only place in China where gambling is legal. Surely, with the rise of the middle class, we can expect more vacations there. Just this morning, Jim Murren of MGM announced that he expect the Macau government to approve MGM's plan to build a $2.5 billion casino. Macau is the world's largest gambling market and is growing with a 1.5 percent year-over-year increase (this July reported $3.08 billion).  
      Lodging REITs: The hotel industry is doing pretty well. Click here for a more in depth explanation (graphs and all!) 

03 August 2012

The July Report


      The just-released July report affirms economist predictions that the U.S. economy remains too anemic to bring down the unemployment rate. The economy is still at 2% growth and is treading water, not bringing us any closer to normal levels of unemployment. The disappointing economic news from the report along with the disappointing news from consumer spending and manufacturing has resulted in a decline in forecasted third quarter GDP growth. The unemployment rate ticked up to 8.3% from 8.2%, adding 163,000 nonfarm jobs. While this report is not one to celebrate, the Obama administration can take solace in the fact that the number of jobs added is greater than the 95,000 that were expected by economists. 
      The numbers aren’t indicative of the kind of growth we’ve had in the beginning of the year, but July’s additions are better than any month since February. July’s performance was much better than June’s poor performance of only 64,000 job additions. Companies added temporary workers in the manufacturing and restaurant businesses. Professional and business services added 49,000 jobs, manufacturing added 25,000 jobs, and the health care industry added 12,000 jobs.  We saw declines in the number of utility workers, by 8,000, due to a labor dispute at ConEd (the work stoppage ended last week). Unsurprisingly, there was also a reduction in construction and government education jobs. We’ve seen this pattern for the past two years, which is why the Jobs Act is so crucial—it targets these two industries through investment in infrastructure and helping the local governments keep their teachers. 
      Many companies are holding off hiring until they have more clarity about policy conditions (congress is now in recess and is not expected to commence any noteworthy actions before November’s election) and global markets—particularly regarding the European debt crisis. The American fiscal tightening scheduled for the end of 2012 is also a major concern for companies. 
      If needed, the central bank can be expected to launch another round of stimulus, most likely through asset purchases and extending its public predictions on interest rate policy. Fed policy makers are slated to meet formally on September 12 and 13. 

02 August 2012

Tax Policy Center: Romney's Plan Is the Anti-Robin Hood of Tax Plans


      Does Romney's tax proposal provide hefty tax cuts to the wealthy while increasing the tax burden on the low and middle class? According to a study released today by the nonpartisan Tax Policy Center, the answer is a resounding yes. Experts at the Tax Policy Center, a joint venture between the Urban Institute and Brookings Institute, have concluded that those who earn more than $1 million would save around $87,000 under Romney's Plan while those who earn less than $200,000 would actually see their taxes increase by as much as $1,339. The tax increase is due to the loss of popular tax breaks that Romney would slash, most notably those for employer health insurance and mortgage interest.
       The heart of the analysis by the Tax Policy Center sought to examine the tradeoffs between Romney's proposal to slash income taxes by 20% across the board and the revenue he would gain from broadening the base, mostly through the elimination of loopholes. Of course, the Romney campaign denounced the study as liberal, citing that it failed to include his proposed spending cuts as well as the effects of his corporate tax cuts. To the Tax Policy Center's credit, Romney has not yet put on the table what those proposed cuts are. He also has yet to specify which deductions and loopholes he would eliminate. 


Basic Outline of Obama and Romney's Tax Plans
Individual Taxes
Obama:
>Raise Taxes on the wealthy, ensuring they pay 30% of their income at a minimum. The top two tax rates to go up 3 to 4 percentage points to 39.6% and 36%.
>Supported extending Bush-era tax cuts for individuals with incomes less than $100,000 and couples with incomes less than $250,000 (he supported 2-yr. extension for all in 2010).
>Raise capital gains and dividends on the wealthy.
Romney:
> Cut taxes by 20% across the board, so the highest tax bracket of 35% will pay 28%. (According to his plan: "Romney believes that the high marginal rates on a narrow base discourage work, savings, and investment. 54% of private sectors workers are employed outside of corporations, so these individual rates also define the incentive for job-creating businesses.")
>Keep the bush-era tax cuts for all incomes.
> He wants current taxes on interest rates, dividends, and capital gains. Taxpayers with AGI below 200,000 will not have to pay any interest rate, dividends, or capital gains taxes. Furthermore, he wants to eliminate the Estate Tax and repeal AMT. 
> Limit deductions, credits and exemptions for the wealthiest.
Corporate Taxes 
Obama:
>Slash the corporate tax rate to 28% (currently it's 35%) by closing some 130 tax loops businesses can take advantage of. The Obama Administration expects that closing eliminating these advantages will bring in $250 billion over 10 years. 
>There will be some loops that will remain in order to incentivize clean energy, domestic manufacturing and R&D firms. 
Romney:
>He wants to cut the corporate tax rate to 25%.
>Strengthen and make permanent the R&D tax credit , switch to a territorial tax system, and repeal AMT.

01 August 2012

It's time for California to get serious about their structural deficit.

        On July 12th, shortly after announcing it had only enough cash to pay its city workers for one more month, San Bernardino became the second largest city in America to file for bankruptcy. The announcement came less than two weeks after two other California communities, Stockton and Mammoth Lakes, filed for Chapter 9 protection. 
        Officials announced that the city council in San Bernardino filed for bankruptcy so it could renegotiate its labor agreement. Currently, San Bernardino takes in $120 million in revenue and pays out $126 million to workers and retirees. You read that correctly- before any basic civil service is carried out, the city is 6m in the hole. The economic situation for the city looks even bleaker when you take into account the city's 16% unemployment rate and a foreclosure rate that is three times the national average. 
        Municipalities all over the state aren't doing much better than San Bernardino. They too are running out of money, mostly due to outrageous pension obligations and rising health care costs. And don't think Sacramento, where the state government resides, will be able to fix the debt crisis at the state and local level should more communities reach out for help. The recent bankruptcies of its communities are indicative of a larger structural problem throughout the state of California. If California does not lead the way towards making serious structural changes to their deficit, there will be many more cities declaring bankruptcy to escape the pressure of meeting their financial obligations. 
        California's state coffers are already overburdened. According to the Pew Research Center, California has a $1.38 trillion gap between the pension benefits they've promised to pay and the money they've set aside. Add the state's already overwhelming financial obligations to an unemployment rate of 10.8%, the largest in the nation after Nevada and Rhode Island, and the still felt impact of the financial meltdown, and you've got a serious financial problem. 
        The financial problem, unsurprisingly, has its roots in some mind-boggling political decisions. California is known to make irrational spending choices with little regard to the future costs, like the recent blessing Governor Brown and the legislature gave to a $68 billion high-speed rail boondoggle. While spending by the general fund is the lowest it has been since 1973 (as a share of the total economy), these white-elephant projects are still indefensible. There is an obvious and unsustainable pattern in California in which basic expenditures are growing at a higher rate than state and local revenues. Tax revenues, in particular, are taxing an ever-diminishing part of the economy. Susan from the Pew Research Center is spot on when she says "California is using a 20th century tax base for a 21st century world." In other words: sales taxes aren't growing because people are buying more online, Gas taxes aren't as effective because people are buying more fuel efficient cars. Furthermore, Governor Brown's ballot initiative to raise the top income tax rate to 13.3%, which is the highest in the U.S., will surely result in more people moving--the tax base of entrepreneurs and the middle class is already being replaced by lower income people who-surprise, surprise-generally utilize more social benefits and pay no taxes.