Politics drives me crazy!

The recent release of Republican presidential candidate Willard "Mitt" Romney's 2010 and 2011 tax records--all 500 pages of them--has generated a lot of buzz among financial types and mainstream voters. Indeed, people who work with financial planners might be wondering: "why the heck can't my advisor get my federal taxes down to a 14% rate? Couldn't I be parking money in Bermuda (page 52 of the 2011 return) Switzerland (position sold in 2010 after the Swiss bank UBS came under federal investigation for facilitating tax fraud) and the Cayman Islands (called "various countries" on the return) if my advisor were just a little more creative?"

You can see the estimated 2011 return for yourself here: http://mittromney.com/learn/mitt/tax-return/2011/wmr-adr-return, although the home address and the Social Security numbers for Willard M. and Ann D. Romney have been blacked out. What you DO see is a little over $4 million in taxable interest, a little over $3 million in dividends, $10.7 million in capital gains, $2.8 million in income from rental real estate, $110,500 as a member of (the listed profession) "independent artists, writers, performers" and zero for wages or salaries. The estimated tax bill: $3,226,623--about 14% of the nearly $21 million in total income.

This percentage could go down between now and the next filing date. Page 11 of the return says that the Romneys expect to receive a foreign tax credit, which is not yet factored into the tax payment. Pages 30, 31, 32, 33, 34 and 35 note that the K-1 tax information on various partnerships (one called "Rob Rom Enterprises, LLC") is also unavailable, and the tax calculation "may change significantly when the final 2011 K-1 is received."

If you're feeling envious of the low rates, and the fact that much of it was exempt from Social Security payroll taxes, you aren't alone; according to one report, Romney's secretary paid taxes at a higher marginal rate.

There are several ways to look the situation. One is that Romney actually paid MORE than his fair share--in fact, you could argue that he paid much more.

How? The argument goes something like this: if you walked into the grocery store to buy a loaf of bread, would the cost be dependent on your income? If it was, the average American would be paying roughly $2.00 while Mr. Romney's cost would be closer to $300. If we all receive the same basic package of services from the government, and the total cost is about $6 trillion, then each of the 300 million people who live in America would owe about $20,000. Mr. Romney, by paying about $3 million a year, might be considered to be overpaying for his share of those governmental services.

Another way to look at it is that people who have more income or assets have more to protect, and therefore need those government services more than most. A progressive tax system that is capped at the top forces wealthier people to pay proportionately more, but they also get to keep a majority of what they earn. If you buy this philosophy, then the question becomes: how do you decide what is fair for everybody, the high earners as well as the low earners?

One traditional answer is that everybody should pay something. You hear a lot about low-income wage earners paying no income taxes, but in fact they are all required to pay Social Security payroll taxes, which are actually higher than income taxes for the majority of Americans. On the other end of the wealth spectrum, there are so many nuances to the tax code, so many deductions and loopholes, that it was possible for General Electric to largely escape corporate taxes. That isn't possible for individuals, ever since, in 1969, the U.S. Treasury Department disclosed that 155 high-income households had paid no income taxes. In the ensuing uproar, Congress passed the alternative minimum tax--and has been trying to fix it ever since.


There were two reasons why candidate Romney was able to escape the highest tax rate. The first is that his "job" at Bain Capital Management was to--as Warren Buffett has recently described it--"move money around." Specifically, he was investing his own and others' money into companies and then restructuring them. People on Wall Street and in Silicon Valley will tell you that this is real work, hard work, but all too often the result is to shift money from the company to the pockets of the investors. For this sort of work, the tax code applies the same tax rate as the taxes on dividends and capital gains--15% at the high end--rather than the maximum 35% rate that a corporate employee earning similar compensation would have to pay. Even somebody who sweeps the floors or answers the phone at Bain's offices, who earns more than $35,000, would pay taxes at a 25% rate.

The second--lesser--reason why candidate Romney's taxes were so low is that he voluntarily gave $2.6 million a year to his church and a total of more than $4 million in total to charities (Schedule A and page 68). One could argue that his actual financial contribution to society--to his church, to the Bush presidential library, to other charities and the federal government--was actually $7 million a year. That amount would equal roughly a 33% tax rate.

If nothing else, those voluminous tax returns, detailing offshore accounts, capital gains taxes for the same kind of work that corporate executives do and charitable donations, will create a new awareness of the implications of different candidates' positions on tax reform. The New York Times recently noted that candidate Romney's own tax reform proposals would require him to pay less than he does now, suggesting that he supports the idea that he's paying more than his fair share. The Newt Gingrich tax proposal would, if passed, essentially eliminate candidate Romney's tax burden altogether. Interestingly, Mr. Romney has labeled this "irresponsible."

One additional note: the Romney tax return checked the boxes to donate $3 for each spouse to support the Presidential Election Campaign.

Congress fiddles while U.S. burns!

Politicians around the world seemed to have messed things up so badly our investments were making little or no sense, based on history. Or were they? All great empires come and go: Greece, Rome, Italy, Spain, Great Britain and now the United States?

You see we have been looking at the last 10 year wondering what was wrong with the stock markets. We were wondering why they were not performing like they did during the last century. Here is a persuasive argument that we may be overestimating future equity returns and return estimates in our investments, and maybe investing in all the wrong places.

Financial Advisors in the United States (U.S.) tend to use long-term U.S. equity returns as their guidepost for what they expect stocks to do in the future in the United States. Most advisors adapt historical assumptions based on PE ratios and other valuation measures. But if you go back to the beginning, where did these returns come from? They came from our country at the start of the 20th century until now. The United States at the turn of the century was basically an emerging market economy. Then it moved to a developed market and then to the leading economy in the world. During this time the dollar became the world's reserve currency.

Here's the point that affects our planning assumptions: going forward, are U.S. equity returns going to reflect the rapid growth of an emerging market becoming developed, or a developed market becoming the dominant global economy? Have we built in return assumptions that were extraordinary once-in-a-lifetime trajectory of economic growth, along a path which almost certainly cannot be sustained going forward?

If we have: we need to look outside the U.S. to find the returns that would reflect that growth. What we want to do is consistently hitch our wagon to the emerging, developing economies around the world; to the extent we can identify them. That's what U.S. investors did for 100 years in the U.S., by investing in the United States. That may be the only way we get returns like we got from U.S. equities over the past century.

There are a lot of implications here, and potentially a lot to change about our current thinking. So let's start by taking a closer look at the U.S. growth story. In 1900, the estimated total market cap of the world was $18 billion. Europe made up 56%, with Britain comprising 24% all by itself. India accounted for 10% of global market cap, Russia 11% and the U.S. 16%. The U.S. was a smaller, less wealthy country. You could have described it as an emerging economy, even though the term didn't exist back then."

Between 1900 and the mid-1970s, the U.S. share of the world's market cap grew from 15% to over 70%. Be-tween the mid-70s and the end of 2010, the rest of the world caught up dramatically, and the U.S. share of the world's $47 trillion share value had fallen back to 32%. Since 2000, our equity returns haven't been exactly world-beating. Is it possible that this is a better predictor of the future than the time period when the U.S. was increasing its percentage of total market cap and global GDP?

I know we have all be raise to believe that the United States is the best, biggest and most wonderful country in the world and I would agree with you right up until sometime around March of 2000. Looking forward, Jeremy Siegel has projected that by 2050, the U.S. share of global market cap will have fallen to 17%, almost exactly where it was in 1900.

Looking at the situation another way, the U.S. economy grew by an average of 3.8% a year from 1946 to 1973, right around the time when America's share of market cap peaked. Since then, GDP growth has averaged 2.7%, and the most recent decade has not lived up to even that average. From 2000 to 2010, the U.S. accounted for just 15% of total global GDP growth, less than Europe (21%) or China (23%). The U.S. share of global GDP peaked in 1985 at 32.74%. In 2010, the U.S. accounted for 24% of global GDP.

This is not to say that the U.S. will fall into some kind of severe slump, or that U.S. companies won't continue to generate profits. But it does suggest that the long, rapid run up from an emerging economy to global super-power was an extraordinary wagon to hitch your portfolio to. A long projected decline from the world's dominant economy to a market share under 20% might generate lower annual returns going forward.

A better way to say this is that U.S. investors have been spoiled by extraordinary domestic growth that helped produce extraordinary domestic stock returns not found anywhere else. If we anchor on the returns that investors enjoyed during that probably never-to-be-repeated era in the U.S., and project them forward in our portfolios, there is a strong possibility of disappointment.

So how do we want to deploy our assets in the global opportunity set, if the U.S. is mature and likely descending from its peak? Who or what is ascending? Where can we find similar growth to what the U.S. had enjoyed? And how can we position our investments to capture that growth?

Our search led to those economies that are currently emerging and what was most surprising was how rapidly this is taking place today. The term "emerging markets" was been coined in 1981, defined as countries with in-come per capita of $10,000 or less. The threshold today is around $15,000. The first EM indices seem to date back to 1995, when this obscure niche of the global economy made up 3% of the world's market cap. By the end of last year, that percentage had grown to 28%. Goldman Sachs recently issued a report that suggests that by 2030, the market cap of what we used to call emerging markets will exceed that of the traditional developed markets. Jeremy Siegel forecasts that EM countries will make up 67% of total market cap by 2050.

Turning back to GDP, during the 2000-2010 decade, China alone contributed 23% of total GDP growth, India 8%, Japan 3%, and other Asian nations 12%. For the next five years, while the U.S. is projected to contribute 13% of world economic growth, China's projected contribution is 29%, India's is 10%, Japan's is 3% and the rest of Asia is projected to contribute 11% of the world's growth. My calculator says that this makes up more than half (53%) of the world's growth coming from Asia, mostly from the less developed economies.

While China gets the majority of the press coverage, it is not the only country that is growing rapidly. According to the International Monetary Fund, by the year 2015, there will be 17 countries with an annual GDP over $1 trillion, compared with only ten today." In the first half of 2010, Asia, notably including the Hong Kong market, accounted for 60% of global IPOs, vs. 16% for the U.S.

Okay, so what do we DO with this information? Step one is to overcome our homeboy bias and recognize that much of the GDP and portfolio return growth is going to come from abroad in the years ahead. Our homeboy bias will be harder to cure because it worked so well for U.S. investors in the past well, until ten years ago, anyway; and because we probably have unrealistic expectations about future U.S. stock returns.

Step two is to recognize that what we call emerging markets are not what they were in 1995. Most of Asset Allocations in the U.S. allow only 3% of a portfolio to be allocated into emerging markets. They just assume, without really thinking about it, that our emerging markets allocation should be somewhere in that range. But if that's where the majority of the world's growth is going to come from, it needs to be a bigger part of our allocations.

Step three is to recognize that the traditional indices severely underweight the places where the growth is expected to come from. The MSCI EAFE Index allocates 66% of its weightings to Europe and another 20% to Japan. The EAFE EM Index, meanwhile, allocates just 7% of its assets to Indian stocks, and 18% to China. We have an unusually high 40% allocation to non-U.S. equities. If you have 20% of client portfolios in EAFE, and another 20% in the EM index that means your total allocation to India is 1.4%. To China (including Hong Kong): 5.2%. To other Asian countries: 12.2%.

In all, this aggressive international investor would have just under 20% of his client’s portfolios invested in the economies that are projected to generate 50% of the world's economic growth over the next five years.

Step four is to reexamine the argument that you can get all the exposure you need to international and emerging markets growth by investing in U.S.-based multinational firms. There are 5,000 companies worldwide with a market cap over $1 billion, and 75% of them are located outside the U.S. There are 25 stock markets with an average company size of $1 billion or more. Ten of these are considered emerging markets, and the U.S. is number three on that list.

Step five, it may be time to retire the term "emerging markets" altogether. "There's a real lack of consistency in how some of these countries are defined and categorized. China is the obvious example; if you look at coastal China, you see all the signs of a major economic power, a country with 1.1 millionaire households. True, many people in the interior are impoverished, but given China's importance in the global economy, and the sophistication of its technology and its overall wealth, how much longer can you say it is "emerging”? Plus, Hong Kong is considered a developed market, and China's and Hong Kong's stock markets are clearly intertwined. Half of the market cap on the Hong Kong stock exchange is made up of mainland Chinese companies.

Rethinking Allocations
Once you make all of these mental adjustments, what then? The Americas, including the U.S., Canada and Latin America make up 40% of the world's market cap. So that becomes the reference percentage you start with before making any tactical or strategic adjustments. Note that this allocation includes a number of developed markets, Canada and the U.S.; and a number of emerging economies, Latin America. Instead of drawing a lot of distinctions about how developed each country is, focus on capturing the region and its various economies.

The Asian/Pacific region currently makes up 30% of the world's market cap. Europe, which includes many developed and some emerging Eastern European economies, makes up 25%. An "other" category, which includes many Middle Eastern and African nations, currently makes up 5%.

That's the base allocation. If you still have a U.S. bias you could raise the Americas allocation from 40% to 45%. You still want to stay ahead of the strong growth in Asia, so increased the Asia allocation a little bit, up to 32%. Next you reduced the Europe allocation from 25% to 20% to make room for the slightly increased expo-sure to the Asian region. The last piece of the puzzle is to reduce Middle Eastern and African nations from 5% to 3% of client portfolios.

Another advantage is that this approach is easy to implement. Within each of the broad allocations are a variety of country-specific ETFs, plus ETFs that focus on the different regions.

There could be a problem with two very popular ETF the Vanguard Emerging Markets Index and the iShares Emerging Markets Index. Both funds are based on MSCI criteria, what happens when MSCI determines that China is no longer an emerging market? It could be a huge mess. We need to keep track of this situation, since we currently use them in our client allocations.

When you look at the years since 2000 in this larger context, the lost decade doesn't seem quite so strange any more. We are starting to experience what everybody else in the world would consider normal market returns, perhaps even subnormal since the U.S. is now on a course that is opposite to its remarkable 20th century burst from relative obscurity to preeminence.

The difference between what we have come to expect and what we can actually expect from U.S. equities may not be as enormous as the big picture would make it seem. To satisfy my curiosity, I pulled out the Credit Suisse 2011 Global Investment Yearbook, which has stock returns for various countries and regions since 1900. The real (after-inflation) growth in U.S. stocks over that time period has been 6.3% a year. During much of that century and a decade, at least the first 80years or so, the U.S. was taking global market share away from Europe; in other words, America was ascendant and Europe was being passed, the way America is now being passed by the more rapidly-growing Asian economies.

Wrangling Over a Phantom Stimulus By Bob Veres

The headlines are screaming again, this time about the Capitol Hill controversy over payroll tax cuts. And, as usual, there is more to the story than what you're reading.

First the good news. Earlier reports said that a stalemate on the tax cut would shut down the government, but before the Senate went home for the holidays, it passed a separate bill that finances the government through next September.

Better news: by all reports, Republicans and Democrats were--and are--in general agreement that there should be some kind of stimulus to the still-recovering economy, and the biggest, least-stimulated sector is consumer spending. The Republicans argued for more tax relief for the wealthiest Americans, and want to reduce pollution controls and force the President to approve the proposed Keystone XL pipeline, which would deliver oil from tar sands in Alberta, Canada to refineries in Texas. Meanwhile, the Democrats wanted a broad-based stimulus measure that would put spending money in the hands of more mainstream American consumers. And they supported environmentalist opposition to the pipeline and the pollution proposals.

Naturally, the two sides couldn't agree on a compromise, so the Senate, by an overwhelming majority, kicked the can down the road for two months by agreeing to continue the reduction in Social Security taxes from 6.2% to 4.2% until Congress could get back in session early next year.

It seems clear that the Senators expected their colleagues in the House of Representatives to follow this simple solution. But nothing is simple in this partisan political atmosphere, and the House (for now, at least) has rejected the measure.

There are several interesting complexities here that should have gotten more attention. One of them is the problems that this wrangling has created for employers, who will have to scramble at the last minute to change their payroll systems to reflect either the 6.2% rate or the 4.2% rate. Which will it be? Who knows? All anybody knows for sure is that the withholding amount will need to be correct starting January 1, and the National Payroll Reporting Consortium has already said that, as a result of the brinkmanship, there is now not enough notice to accommodate any changes that quickly.

Of course, if and when the whole issue is taken up at the end of the proposed two-month extension, companies would face exactly the same dilemma. Chalk this up to a Congress that is oblivious to the consequences of its actions on the business community--especially small businesses.

Behind the scenes, there are other dramas. One involves the very complicated way that the Social Security tax reduction is structured. Reducing the payroll tax would obviously reduce the flow of money into the Social Security trust fund, which is famously experiencing solvency troubles of its own. Neither side wanted to be seen as making the entitlement mess any worse, so the stopgap bill would have had the U.S. Treasury pick up the payments--a sideways accounting move has no real substance. The bill also prevents doctors who accept Medicare payments from receiving a 27% reduction in reimbursement payments, which would weaken the financial stability of another entitlement program, so the Treasury will pay that out of its pocket as well.

But the surprising thing here is that this is actually a revenue-neutral piece of legislation. The Treasury coffers would be replenished through a side door that nobody seems to have noticed. Title IV, entitled "Mortgage Fees and Premiums," would have raised the amount that Fannie Mae and Freddie Mac--the organizations that back a majority of home loans in the U.S.--would collect in mortgage fees after January 2012. In all, the raised mortgage fees--which would increase the cost of homeownership at a time when the housing market is staggering--would pay for the two month extension of the payroll tax cut (estimated at $20 billion) plus two months of additional jobless benefits for 2.5 million out-of-work Americans (an estimated $8.4 billion) and two months of added Medicare reimbursements to doctors (an estimated $6.6 billion).

Can we call this a stimulus, when money comes out of the pockets of home buyers and put in the pockets of payroll workers, the unemployed and doctors? Since the bill seems to be stuck in partisan wrangling, maybe the question is moot anyway.

Don't Kill The Messenger

Don’t kill the messenger!

In days of old messengers were often killed by leaders, if they brought bad news to them, after awhile the messengers would defect or leave the country rather than bring bad news that would get them killed. Can you blame them?

Since the middle of August there has not been that much good news to talk about. I know some of you have been pretty disappointed that investments have not done better. Most people just want some good news. However, my job is to tell you the truth and safe guard your investments during times like this.

November 30th the DJIA was up almost 500 points and people were disappointed that we were not completely back into our investments. Yet if you understand what caused the rally you might be happier with cash.

First, China cut its reserve ratio requirement by 50 basis points overnight, which is the most effective means it has for trying to boost bank lending. This sent the markets up a bit over 1%. This is the first time since 2008 they have done so, indicating that the recent weakness in housing and construction markets in China is bad enough that China had to do something. The part that should be worrying you is China’s economy has hit a wall despite massive amounts of bank lending and deficit spending by China equal to at least 37% of its GDP in each of the last three years.

Second, there was a coordinated global central bank action to lower swap rates for European banks borrowing dollars. The U.S. Fed, ECB (European Central Bank) and other central banks are trying to make it attractive for banks in the Euro-zone to borrow dollars directly from the ECB instead of in the private or interbank markets. This keeps interest rates low. This was good for another 2% or so move in the markets. However, this does nothing to solve the underlying credit issues that are plaguing Europe, but merely postpones the day of reckoning. Everything I see and read tells me Europe will be in a recession like we had in 2008 within 18 months.

Third, the markets were oversold and trading on light volume which makes the sustainability of this move suspect. Despite the big move the markets stopped dead in the middle of the resistance band of 1245 to 1250 on the S&P 500.

Don’t Miss the Ten Best Days in the Stock Market

We have all seen the articles “Don’t Miss the Ten Best Days in the Stock Market” which all show that missing just a small percentage of the market's best days dramatically reduces an investor’s return. This assertion has been repeated so often that it's become unquestioned. Have you read an article that disputes this belief?

If you look at the top one-day gains and losses for the Dow Jones Industrial Average (DJIA), you will notice an interesting phenomenon.

1.The worst days seemed to be in close proximity to the best days

2.In the majority of cases, large percentage gainers were no more than 90
trading days away from a large percentage loser, sometimes before and sometimes
after.

3.In 50 percent of the cases, gainers and losers were separated by no more than
12 trading days.

4.When looking at Nasdaq's the largest gainers and losers, all but two have
occurred since 2000.

These observations make it hard to believe that investment success rested upon being fully invested in order to catch the winning days. Rather, especially in the case of the Nasdaq crash of 2000, it suggests that it was more important to miss the worst bear market which brings us to the other side of the coin: All of the "Don't Miss the Ten Best" articles fail to mention what would happen to your portfolio if you missed the ten worst days. We know that it takes a 100% gain to make up for a 50% loss and Monte Carlo retirement analysis shows that low volatility portfolios often last longer than those tuned for high returns especially during your retirement years when you are drawing on your investments. So it's more important to avoid large losses than it is to pursue large gains.

What happens if rather than missing the ten best days, you miss the ten worst?

Paul Gire, CFP®, from Strategic Advisory Services decided to study this. He examined one of the most bullish periods in Dow history, from 1984 to 1998. In addition, He examined the impact from missing not just the 10 best and worst days, but also examined the 20, 30, and 40 best and worst days. What he found was simply remarkable.

1.The buy-and-hold return for this 15-year period was 17.89%, one of the most
bullish periods in the stock market’s history.

2.As expected, missing the best days lowered returns, and missing just 40 of
the best days over this 15 year period cut returns nearly in half.

3.Missing the worst days has the expected result of increasing returns
substantially, improving the return by 77% for missing the 40 worst days.

However, how realistic can it be to get in and out of your investments and be in your investments on the best days and out of your investments on the worst days, if 50% of those days are within 12 trading days of each other and all the rest are within 90 days of each other? Paul’s next discovery was really remarkable and to me the final key to my puzzle.

By missing both the best and the worst days between 1984 to 1998 you got a remarkably consistent return. Whereas missing just the best or worst had a magnified impact as the number of days increased, missing both produced a consistent return of approximately 20%, as shown by the chart at the beginning of this post.

Not only does missing both result in superior returns, imagine the benefits from lower volatility:

1.Lower mental and physical stress.

2.Less volatility on retirement income making it last much longer.

As investors learned during the 2000 to 2002 and 2008 to 2009 market meltdowns, it's one thing to stay the course when investments are booming, yet quite another when market meltdowns are rapidly eroding gains from years of careful saving and investing. The 30 months 2000 to 2002 stock market meltdown erased half of the market gains made since 1974, the previous 26 years. Then came 2008 and early 2009. Now look at what is happening in 2011.

Is it possible we are missing something when we look at the last 110 and 10 year periods? Stay tuned for next month's post!

World problems and November 23rd:

The current worldwide problems have so many twists and turns you just don't know what to do next. Let’s take a look at what I am seeing right now.

Europe: Every time one of the PIIGS (Portugal, Italy, Ireland, Greece & Spain) appears to have or not have a solution to their debt problems your investments go crazy. The DJIA can move up and down 500 points in a day. The problem as I see it is that we have five countries with debt problems and only one or two have been working on their problems. So does this mean we will continue to have 500 point swings until all five countries get things under control? Probably?

United States: The Presidential cycle tells us that we have 7 ½ months before the market volatility will slow down in the United States. Our unemployment is way too high, with no hope to go lower until after the election next year. Does that last statement surprise you? It should not. The Republicans do not want the country to get better, or they won’t be able to put a Republican in the White House.

Inflation and Interest Rates: Here the government maybe down right lying to us. They tell us that we have no inflation and it is better for the recovery to keep interest rates low.

I was buying this for a while. Then I heard the statement, “If Italy could pay 2%, rather than 6% on their bonds, Italy would not have its current debt problems.

That got me thinking, since I was also told that higher inflation would help the recovery rather than hurt it. With inflation housing prices would go up, companies could raise prices, profits would go up, individual wealth would increase, companies would have a reason to start hiring and the economy could get better.

So why has the Federal Reserve stated that they will keep interest rates low for the next two year. The Government maybe afraid if inflation and interest rates were to be allowed to move freely, the interest rate the government would have to pay on their bonds would go up so high that the United States could be in the same shape that the PIIGS are now.

The Super Committee: Before you start thinking of Thanksgiving turkey or holiday shopping, there’s a big hurdle we have to surmount. The Nov. 23 deadline for the “Super Committee” of the U.S. Congress to come up with at least $1.2 trillion in cuts to the federal budget deficit over the next 10-years. If they don’t work out a deal, automatic budget cuts will take effect, as ordered by last summer’s debt ceiling agreement. While we’ve been watching Greece and Italy, this small group of legislators has been trying to work out an agreement on how to do this. Neither party wants their members to give in to an agreement that does not help their own party in the coming election.

If there isn’t some give and take now, the consequences could be draconian cuts in everything from the military budget to all social programs, not to mention what this would do to the stock markets.

There are other possibilities. The committee could ask for a deadline extension. The goal is to have the Congressional Budget Office “score” the savings in time for Congress to pass the package by the end of the year. They will only have four weeks to do that, after the 23rd, if they want to go home for Christmas.

If the committee is deadlock and fails to agree, it could put the United States in the position that Italy and Greece are currently in.

If they could come to agree on even deeper cuts than the minimum, it could set America back on the right course for the next generation. Today's voters would not like what it would take to do this, but it would have a very positive effect on the future of the country and the stock markets. What do you think the chance of this happening is?

The results that come out of the Super Committee will create a significant turning point for the economy. So we want to be prepared to adjust your long-term investment allocations, but we don’t want to jump before thinking about the consequences.

If the Super Committee and Congress can’t come to an effective resolution, gold will surely soar; inflation or debt default will push interest rates much higher. The stock market’s immediate reaction would be downward as market participants don't like uncertainty, but stocks historically have been a very good hedge against inflation. If the Super Committee does not come up with a solution by November 23rd and the stock markets fall; any cash you currently have will look pretty good. Yet, you will need to get that cash invested while the markets are down to profit from our government’s inability to do what it should do.

So how should you invest if that happens?
That just went out in my latest newsletter to clients.

U.S. Debt: YOU CAN BE PART OF THE SOLUTION!

Since April 2011 Americans witnessed a political theater over the U.S. debt ceiling. The Standard and Poor’s review of that performance resulted in a downgrade of the federal government’s credit rating.

While Congress raised the debt ceiling for now, the U.S. debt remains a problem and the short-term solution offered by the deal in Congress does little to give us a long-lasting solution.

The creation of a “super” deficit committee by Congress merely kicked the can down the road. Congress, and its long years of indecision regarding what to do about deficits and the national debt, is the problem!

The U.S. is currently experiencing historically high levels of debt. The best way policy experts have of measuring debt burden is comparing the national debt to total Gross Domestic Production (GDP). Today, the total net debt is 75% of GDP. This type of high debt is normal during periods of war like that of WWI and WWII. We are at war in Afghanistan and Iraq; however, that is nowhere near the wartime mobilization of WWI and WWII.

The U.S. debt is an accumulation of many years of deficits, which has been brought about by exceeding revenues during past fiscal year. These deficits did not cause our current situation alone. The U.S. has run an annual deficit in almost every year since 1945. But we have never encountered debt levels as perilous as the one we have now.

Our debt is due to structural causes brought about by poor political choices. These poorly designed public policies directly contributed to the housing bubble, loose oversight of Fannie Mae and Freddie Mac, lack of regulations on sub-prime lending and low-interest rates for far to long.

Public policies in response to the 2008 meltdown led to even higher debt with its fiscal stimulus and monetary policy. We should not fault the federal government’s response to the crisis in 2008; there were very few alternatives available once we got into that mess.

So you see, our large debt burden problem is structural and will not be reversed when the economy picks up. The hole the Congress has dug for our country is far to deep and getting deeper at an accelerating rate. We are coming to a tipping point. If we reach that point, several negative consequences could result.

1. The national debt will crowd out private investment.
2. Spending will have to be cut and taxes raised to pay off just the increasing interest on the U.S. debt.
3. The debt load will severely restrict the government’s ability to act in times of an emergency.

There is time to start reversing the trend; we are not doomed to the fate of countries such as Greece and Ireland. Yet, it will take a bipartisan approach and shared sacrifice to correct our present course and here in lays the problem. We have seen how our Congress and Senate work together, or should I say do not work together. If the U.S. continues down the same road it has been on for the last 12 years, we are going to get the same results: recessions, higher U.S. debt and continued high unemployment.

The definition of insanity is continuing to do the same thing you have always done an expecting a different results.

You can be part of the solution. We are about to go through the thing that has always made this country GREAT! A National election! You need to meet with our candidates and listen closely to them. You also need to be heard by them. You need to be heard saying that you will not stand for politics as usual. You know in your heart of hearts that to actually fix the problems of the U.S. debt, unemployment and our country; we will have to raise taxes and cut spending. Don’t stand for a politician that is promising “No new taxes” or “We can cut spending” alone. They are simply saying what you want to hear to get elected. Stand up for what you personally feel it is going to take to fix our country!

Did anyone get the license number of the truck that just ran over the stock markets?

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity…” These words, penned in 1859 by Charles Dickens, could well describe the technical picture of our current market.

Without the help of any particularly bad news announcements, the stock market fell hard today, August 4th, with Dow Jones Industrial Average down nearly 513 points.

We moved our bond money back into markets during the first of the week just before the debt problem was fixed. Yes, Washington just kicked the can down the road and did not fix the problem, but they did enough that the markets should have been happy for now. However, look what is happening?

I have checked the Yield curve, oil prices and transportationals and only the transportationals show any signs of a problem.

I am not sure what is causing the current problem, except Washington’s dragging out the debt crisis and other problems like the air traffic control problem. Washington may have spooked the world by their ineptitude and lack of understanding of what goes on in the real world. Congress and the Senate went on vacation while the U.S. Markets (Roman) burns.

Every year the stock markets have a 10% or 15% correction. We had a 10% correction caused by the Japanese Tsunami. I had hope that would be the only one this year. However we are down 10% this week, during a period of time that we should be going up? It feels like October 1987?

Stay tuned for tomorrow!

God bless!