FINANCIAL ADVISOR INSIGHTS: Advisors Are Getting Flooded With Questions About Gun Stocks

FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisors.

Advisors Are Getting Flooded With Questions About Gun Stocks In Aftermath Of Newtown Shooting (The Wall Street Journal)

Gun stocks like Smith & Wesson’s and outdoor goods retailers like Cabela’s that also sell guns, got crushed in the immediate aftermath of the Sandy Hook massacre. Amid the outcry and the Obama administration’s plan to change gun policies, advisors expect clients will want to sell gun stocks but that it might be difficult to clear portfolios. Others however warn that this uproar about guns will die down in six months.

The Four Big Investment Themes Of 2012 (The Reformed Broker)

Investment advisor Joshua Brown says there were four major themes for investors this year. The first was the Apple obsession, but the stock’s recent downward trajectory has left investors in unfamiliar terrain. The second and the biggest winning trade was in homebuilder stocks. The third big theme was investors piling into bond funds.  And the fourth big theme was the inflows out of active funds, and into passive funds like Vanguard.

Wall Street’s Biggest Geniuses Reveal Their Favorite Charts Of 2012 (Business Insider)

As we wrap up 2012, Business Insider’s Matthew Boesler reached out to some of our favorite analysts, economists and traders to get their favorite charts of 2012. Of the 70 charts he curated Boesler said John Stolzfus and Matthew Naidorf’s gold chart was his favorite. Here is their explanation:

“Uncertainty, financial crisis, currency debasement, accommodative monetary policies, and central bank additions to gold reserves undoubtedly wheaten investors’ appetite for the ‘safe haven’ and ‘storehouse of value’ attributes of the metal. We believe, however, that ultimately it was the accessibility and liquidity provided by the ETF structure that facilitated the momentum and scope of gold’s performance. Our chart illustrates the rise of gold eight years before and eight years after the launch of SPDR Gold Shares (GLD).”

gold chart

If You’re Investing In Alcohol, Long Bourbon, Short Beer (Citi)

Per capita beer consumption has been falling and bourbon sales have surged in comparison, according to Citi’s Vivien Azer. Meanwhile, spirits also give alcohol drinkers more “buzz for their buck”.

“While we like the pockets of growth that remain in the U.S. beer category, overall we continue to believe that the U.S. spirits segment offers a more attractive return profile for investors, given the less impressive trends that we expect to continue to see for the U.S. beer category, generally. As such, our favorite name within our alcoholic beverage coverage remains Brown-Forman, where we have an $80 target price, which represents 28% ETR from current levels.”

A Baker’s Dozen – 13 Investment Themes for 2013 (Credit Suisse)

Credit Suisse analysts expect 2013, to be “disappointingly similar to 2012” but identify 13 investment themes for next year. These include healthcare reform, U.S. housing, shale revolution, and, automation.

In housing, homebuilders and building product companies will benefit from the improvement in home sales and prices. Among banks Wells Fargo will likely be the biggest beneficiary, and, mortgage REITs and insurers will also be key winners. The biggest risks to housing are  “elimination of the mortgage interest deduction and/or significantly higher FHA down payment requirements”.

Here’s How Index Funds Can Save Your Retirement (Marketwatch)

Paul Merriman, founder of Merriman LLC writes that moving money out of individual stocks and active funds, into index (passive) funds can help people retire earlier. 

Index funds add money to savings and help avoid stupid decisions. Merriman highlights ten ways in which index funds can help savings, these include reducing turnover since they rarely replace stocks and bonds, saving on taxes, and reduced risk through diversification. 

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The 2 Big Ways The Fiscal Cliff Is A Problem For The Housing Market

arizona houses suburbs tucson

Housing is considered a bright spot in the U.S. economy. But the fiscal cliff – over $600 billion in tax and spending provisions set to expire at the end of the year – could deliver a blow the housing recovery. 

Bank of America’s Michelle Meyer writes that the hosing market is exposed to the cliff in two ways.

First, policies that impact growth and that could potentially send the economy in to a recession or create uncertainty could weigh on housing demand and construction.

Second, policymakers also need to hash out how they intend to support the housing and mortgage market. 

“Tax policies for housing and the government’s role in the mortgage market are up for debate. The biggest concern is removing or reducing the mortgage interest tax exemption, which costs the Treasury about $80bn a year. Homeowners with a mortgage can deduct interest payments from household income if they chose to itemize allowable expenses. If homeowners do not itemize, they can take the “standard” deduction, which is up to $11,900 for couples and $5,950 for singles. About two-thirds of the population takes the standard deduction.

Those who chose to itemize have large mortgage payments and/or other deductions such as charitable contributions; this mostly captures the upper income cohort. Of those who itemize deductions, 90% earn more than the median income.1 This means that if the mortgage tax deduction was removed or phased out it would hit the higher priced markets disproportionately. Home prices would have to adjust lower as effective mortgage payments would be higher.”

Meyer doesn’t anticipate any changes immediately but expects them to be part of the ‘grand bargain’. She thinks the high-priced housing market would be most affected.

She projects that home prices will increase 3 percent in 2013, and that housing starts will increase 25 percent to an average of 975,000.

SEE ALSO: The 15 Best Housing Markets For The Next Five Years

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FINANCIAL ADVISOR INSIGHTS: A New Investor Manifesto

FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisors.

Housing Is Not Exempt From The Fiscal Cliff (Bank of America Merrill Lynch)

In a new note, BofA’s Michelle Meyer writes that housing is not exempt from the fiscal cliff. In particular she writes that policymakers need to “consider how to prioritize support for the housing and mortgage market”.

For now policymakers are concerned with removing or scaling back the mortgage interest tax exemption that costs the Treasury about $80 billion a year. But 90 percent of those who use this earn more than the median income so removing it would “hit the higher priced markets disproportionately”.

An Investor Manifesto From Woolley And Vayanos Of The London School Of Economics (FT Aplhaville)

Kate Mackenzie at FT Alphaville points out the inherent problems in traditional investing, since fund managers have different motives than their clients, and because the mere act of getting a fund manager shows a “disbelief in efficient markets theory”. 

Paul Woolley and Dimitri Vayanos of the London School of Economics have a manifesto to tackle this problem. Their strategy involves 10 basic tenets that include adopting a long-term approach to investing, capping annual turnover of portfolios, and being cautious of alternative investing.

Jeff Gundlach’s New Trade (Business Insider)

At his latest webcast Jeffrey Gundlach advised his DoubleLine Funds clients to watch for inflation in Japan. He said the country will pursue currency debasement as it tries to stimulate the economy. Recently, Japan’s trade balance turned to a deficit as the demand for nuclear energy fell, forcing energy imports to spike.  Gundlach told his clients to short the yen and long the Japanese stock market.

jeff gundlach japanese imports chart

The Chinese Boom Story Doesn’t Pass The Smell Test (Advisor Perspectives)

“We at Smead Capital Management believe that prolonged faith in China’s economy and the belief that emerging market growth will be an elixir for developed market multi-national companies is the erroneous gift that just keeps giving. If China’s economy has been successfully soft landed from its boom, why is the internal Shanghai Composite index making new lows as recently as last week (November 29th, 2012)?

From its peak on October 16, 2007 through December 3, 2012, the Shanghai Composite is down over 64.8%, whereas the S&P 500 is up 2.7% on a total return basis. We at Smead Capital believe that China’s boom and the boom in commodity prices which it undergirded do not pass the smell test!”

Brokers Breathe A Sigh Of Relief As FINRA Clarifies Suitability Rule (The Wall Street Journal)

Brokers that have been anxious about the Financial Industry Regulatory Authority’s (FINRA) strengthened suitability rule can breath easy. The rule  had brokers concerned because of FINRA’s broad definition of ‘customer’ that could make them liable for comments made during social gatherings. 

“The new guidance, which was posted on Monday to Finra’s website, dials back the possible circumstances in which the rule would apply.

It specifies that the potential investor must become a customer in order to trigger the broker’s suitability obligations. The rule wouldn’t apply, for instance, if a potential investor doesn’t act on the recommendation or if he or she executes the recommended transaction on their own or with another firm.”

‘The Bond Cult Has Been Financing The Bull Market In Stocks’ (Dr. Ed’s Blog)

In the 12-months through October bond funds witnessed new inflows of $392 billion, while equity funds saw $80 billion in net outflows. Non-financial companies have been borrowing money from “the bond cult”. Some of those funds have been used for share buybacks and in that regard “the bond cult has been financing the bull market in stocks”.

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New Poll Reveals What Voters Want To See In The Fiscal Cliff Deal

Obama Boehner

Voters support raising taxes on incomes above $250,000 and on capital gains but support few cuts to entitlements, a new poll from Quinnipiac University shows

The poll comes as President Barack Obama and Congressional Republicans are attempting to broker a deal to avert the so-called “fiscal cliff.”

By a wide, 65-31 margin, they support Obama’s plan to impose higher tax rates on incomes above $250,000. And 47 percent of voters favor increasing taxes on capital gains, compared with 40 percent who are against it. 

When it comes to potential spending, however, the poll basically confirms that Americans support the blanket idea of entitlement cuts but relinquish that support when faced with specific entitlements that could affect them.

Here’s a breakdown:

  • 70 – 25 percent oppose cutting Medicaid spending;
  • 51 – 44 percent oppose gradually raising the age for Medicare eligibility;
  • 55 – 41 percent oppose cuts in military spending;
  • 67 – 23 percent oppose eliminating the home mortgage interest deduction

That said, 66 percent believe the best way to reduce the deficit is a combination of tax increases and spending cuts.

Because of their general willingness to increase taxes on higher incomes, Americans also believe that it’s a bad idea for their member of Congress to sign a no-tax pledge — the kind that anti-tax advocate Grover Norquist has used to hold politicians accountable.

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On Twitter, Obama puts question mark over mortgage deduction

U.S. President Obama gestures during a news conference at the White House in WashingtonWASHINGTON (Reuters) – Taking to Twitter to press his case in "fiscal cliff" talks with Congress, President Barack Obama said on Monday that tax breaks benefiting middle class families such as the mortgage interest deduction could be at risk if rates for top earners do not rise. Obama is locked in negotiations with Congress to prevent a year-end fiscal crunch. If the administration and lawmakers fail to agree, across-the-board tax hikes and spending cuts would go into effect that analysts say would tip the economy back into recession. …

Read more from:“Yahoo”

My Prescription For Future Durable Economic Growth

Turkey With Dave

Dear Readers,

We were inundated with feedback (mostly positive) on three pieces we published in the past couple of BWDs. So in the spirit of Thanksgiving, we decided to share them with you.

One has to do with the degree of success we had in our “2012 Year-ahead” in terms of the themes we highlighted at the time.

Next is our ten-point budget plan to put the U.S.A. back on the road towards fiscal stability.

And the third piece is all about the real deficit and how to address it. Education.

Enjoy the feast!

Dave

A LOOK BACK AT WHAT ROSIE PREDICTED A YEAR AGO (NOT TOO SHABBY!)

With this being Thanksgiving in the United States and such a slow market day here in Canada, I decided to dust off the year-ahead outlook piece I published around this time in 2011. I realize there is still weeks to go, and I’m not one to pat myself on the back, but … most of the calls actually came to fruition. Here are the bullet points on ‘Behavioural Change’ and the 2012 Investment Mission Statement below:

Eight Areas of Behavioural Change to Watch for in 2012

  1. Frugality on the part of the global consumer (living within our means; retirement with dignity)
  2. Austerity on the part of sovereigns (spending cuts/tax reform)
  3. Nationalism (an umbrella for protectionism and isolationism: mean reversion for globalization)
  4. Political movement along the ideological and fiscal spectrum (from gridlock to change)
  5. Geopolitical change (wars, elections and regime changes)
  6. Changes in inflationary/deflationary expectations
  7. Changes in growth expectations
  8. Changes in asset allocation preference (fund-flows/de-risking)

Investment Mission Statement
We believe that the dominant focus in 2012 will still be on capital preservation and income orientation, whether that be in fixed income (bonds and credit- related strategies), hybrids or alternative strategies such as long/short, and a consistent focus on reliable dividend growth and dividend yield would seem to be in order yet again. We see the range of outcomes in the financial markets and the economy to be unusually wide at the current time.

But one conclusion we should agree on is the need to maintain defensive strategies and minimize volatility and downside risks as well as to focus on where the secular fundamentals are positive, particularly in fixed income and in equity sectors that spin off a reliable cash flow primarily in noncyclical parts of the market, where earnings have a strong semblance of visibility and predictability.

Deflation has re-emerged as the dominant trend — not inflation — as the deleveraging cycle that is ongoing in the United States has now engulfed much of Europe. Frugality has also reared its head again as it pertains to the broad retail sector, another deflationary force, at a time when the U.S. unemployment rate remains stubbornly stuck above 9%. As such, it is absolutely imperative to remain focused on high-quality investments with preservation of capital attributes, and to use the inherent market volatility that is part and parcel of every post-bubble deleveraging cycle to one’s advantage by becoming ever more tactical and opportunistic in long-short “relative value” strategies.

2012 Outlook: A Year of Transition, Changes at the Margin


HOW TO FIX THE FISCAL MESS — A 10 POINT PLAN

  1. Do not raise top marginal tax rates on income and capital. This will perversely distort the incentive system. It is not good enough to say the Bush tax cuts were always meant to be temporary — anything that has been around for a decade is pretty well deemed to be permanent.
  2. Broaden the tax base. Limit deductions. This is the way to make the tax system more progressive and more efficient.
  3. Reduce corporate tax rates. This will help make the overall revenue neutral and help build incentives to invest, which in turn creates jobs.
  4. Means-test entitlement programs. Raise contribution rates, again with progressivity a primary goal too. As for Social Security, it is time to raise the eligible retirement age, especially considering that life expectancy is rising by just under one year every decade, and especially since life expectancy is no longer 60 (try 75) as it was when the program was initiated in 1935.
  5. Reforms to immigration that allow foreign students to live and work after graduation. This will help ease the skills shortage besetting small manufacturers. Generating more taxpayers is a better policy than raising tax rates on the most successful entrepreneurs.
  6. Promote oil and gas development (leasing on public lands; encourage more pipeline expansion; encourage more shale gas development).
  7. A national sales tax. Better to tax conspicuous consumption than incomes (Canada has done both this and entitlement reform, by the way. It can be done).
  8. Simplify and clarify financial regulation (as Roger Ferguson put it in the WSJ, “be careful not to create a one size-fits-all regulatory environment that could lead to instability”).
  9. A full-scale war on health care costs. According to the WSJ, three-quarters of the net $10 trillion in the nation’s debt will be due to the spiralling costs of Medicare and Medicaid. Incentives to contain costs are essential— no more of this fee-for-service. You can’t work on the deficit and not work on this — only 20% of the budget is discretionary, after all.
  10. A greater shift in resources towards education and R&D. This will do a far better job in stimulating sustainable job creation than maintaining a system that mobilizes finite taxation resources to the housing market. It would take at least as much political courage to phase out mortgage interest deductibility as it would to implement a national VAT.

    Canada does not have the former and has a higher homeownership rate than is the case state-side; and Canada has the latter and still manages to have an economy where consumers still comprise the largest share of GDP (and vibrant enough to be attracting the likes of Target which is poised to test the Canadian frozen waters).


BACK TO SCHOOL

I realized yesterday as I was putting my 10-point fiscal plan down on paper that there is an over-riding theme here in terms of what is really hindering the progress of the U.S. economy. It comes down to one word and one number.

Education. 40.

Why the 40? Because 40% of small businesses right now are saying they have job openings they can’t fill because of unqualified applicants (this has doubled in just the past three years). And 40% is the share of the unemployed that has been without work for at least a half year — before the Great Recession, the highest this number ever reached was 26%, and that was in the aftermath of the horrible downturn in the early 1980s. This is criminal. The longer these folks are idle, the harder it will be to redeploy them into the workforce. And if and when they do find a job, their productivity will be hampered by the fact that they had been out of the labour market for so long.

All the focus is on the fiscal cliff. Fair enough. But not enough on a long-term strategy to generate national income growth on a sustained basis. Far too much emphasis is on GDP, which is all about spending, and not enough on GDI (Gross Domestic Income), which is the true measure of a country’s standard-of-living.
Education means skills. Skills bolster productivity. Productivity is a key ingredient for economic success. And the greater the skills, the higher the wages.

Here are the embarrassing statistics. The United States scores 14th in the globe in terms of education rankings in mathematics, sciences and reading. The 13 countries ahead of America have an average unemployment rate of around 6%, close to two percentage points lower than in the States. The U.S.A. is now down to 10th in terms of global innovation. And after four years of relative decline, America now ranks 7th in terms of competitiveness.

For whatever reason, after decades of increase, the share of the workforce that has a college degree has stalled out at around 33%. This educated share of the workforce has a 3.8% unemployment rate. Imagine then if we could get that share up and have everyone with that jobless rate. The rest of society has to grapple with an unemployment rate of over 9%. They simply do not have the skills set that employers need in this fast-changing tech-driven world.

Not only that, but look at where the jobs in America are being created — an ever- growing share in leisure/hospitality and retail. These two sectors now account for a record 21% of the U.S. employment pie and that share is rising over time. This explains why this goes down as the mother of all wage-less recoveries, because the average hourly wage in the leisure/hospitality sector is $13, and in retail it is $16. But in manufacturing, as an example, the average wage is $23 an hour. But manufacturing is just 9% of the employment pie and has not been 21% — where the leisure and retail sectors are today — in over 30 years. We actually have more than double the number of busboys, bell captains, barmaids and cashiers than we have in industries that actually make things.

If this is the information age, then I’m sad to report that information services represent a mere 2% share of total U.S. employment. And this is the highest paid part of the labour market — 40% above the national average and about double the pay in the leisure and hotel sectors. Professional and technical services account for 6% of the jobs pie and this is the second highest income group. We just don’t have enough of these folks, and according to all the small-service business surveys, it’s not because the demand for people with the necessary skills isn’t there. We have a country where there are more real estate agents than there are engineers — now how did that ever happen?

We all talk about deficits and debts relative to income. Perhaps a very big part of the solution is how to boost the denominator in those ratios. How can the government help the private sector generate the income that in turn can help defray the costs of public sector initiatives? Since better education equates to lower rates of unemployment, since better education equates to improved skill sets that are in demand, since better education equates to stepped-up productivity growth, and since better education equates to higher incomes, this is where the government should be directing its efforts.

The war on credit appears to have been won with banks ready and willing to lend. The war on housing appears to have been won as well with housing starts and household formation rates on the rise. But the war on the fiscal front is inextricably linked to the war on unemployment and that war on unemployment can only be won with additional resources being directed towards the education sector. Full stop. This file is not receiving enough attention, in my view. So much focus is on the fiscal deficit when the real deficit is in the labour market — the true unemployment rate (U6) is close to 15%, and the principal cause of that is a widening and troublesome deficit in education services.

Instead of mobilizing more resources into education, the government sector has actually been withdrawing its relative support in this critical part of human capital stock. As a share of total public expenditures, educational outlays have fallen to 25.8% share, versus the peak of 30% a decade ago. No doubt there are competing pressures on the public purse, especially with regard to defense, pensions and healthcare, but education and training are essential drivers of the future income growth that will be needed to fund these other critical initiatives, so withdrawing support for these drivers is actually self-defeating.

Last but not least — education needs a revolution from kindergarten on up. We need to reboot to a true education culture and replace the dysfunctional systems that were developed during the post-Vietnam War era and the credit bubble. We need the student body to be more broadly energized and motivated by their educational experience. Public elementary and secondary education, particularly in urban areas, needs a whole new measure of support from parents, teachers and government — both state & local and national. On college campuses, the number of non-teaching employees exceeded the number of teachers beginning in 2006. In many cases, universities focus so much on research in the sciences that teaching is a secondary role for many professors. Credit in the form of student loans and parent-funded debt has dramatically inflated the cost of post-secondary education while accommodating an ever- poorer student experience. A large part of solving the education dilemma lies in restructuring the institutions along with investing in them.

To sum it all up: I said yesterday that the trail towards greater economic growth can be blazed with more emphasis on high-quality education. But that education has to be funded somehow with tax revenues. Tax is not some dirty three-letter word if the proceeds are going into a productive endeavour that will more than pay for itself over time. Tinkering with top marginal rates creates disincentives to save and invest so this is not the way to go. But broadening the tax base and introducing a tax on consumption is far more efficient and does not lead to as much resource misallocation — incredibly, the United States is the only advanced country without a national sales tax system.

We have choices in this country and the one that has been made for some time now is to subsidize consumption (which is over 70% of GDP), not to mention housing (mortgage interest deductibility AND tax-free capital gains!), at the expense of education which has to compete with other essential areas like health care and social security for precious and finite taxpayer resources. It makes no sense. A sales tax to fund education and redress the skills shortage is my prescription for future durable economic growth. The income that will be created via the stepped-up pace in higher-skill, higher-paying jobs will end up swamping the short-term negative impact on household spending from having to pay a national sales tax on your next iGadget.

OVERVIEW OF THEMES AND STRATEGIES

rosenberg

 

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David Rosenberg’s 10-Point Plan To Fix America’s Fiscal Situation (SPY, DIA)

david rosenberg

Markets have enjoyed the recent optimism surrounding the fiscal cliff.

But the deadline is inching closer and Republicans and Democrats still have different demands.

As Congress breaks for Thanksgiving, Gluskin Sheff’s David Rosenberg has put together his own 10-point plan to fix the fiscal mess:

  1. Do not raise top marginal tax rates on income and capital. This will perversely distort the incentive system. It is not good enough to say the Bush tax cuts were always meant to be temporary – anything that has been around for a decade is pretty well deemed to be permanent.  
  2. Broaden the tax base. Limit deductions. This is the way to make the tax system more progressive and more efficient.
  3. Reduce corporate tax rates. This will help make the overall revenue neutral and help build incentives to invest, which in turn creates jobs.
  4.  Means-test entitlement programs. Raise contribution rates, again with progressively a primary goal too. As for Social Security, it is time to raise the eligible retirement age, especially considering that life expectancy is rising by just under one year every decade, and especially since life expectancy is no longer 60 (try 75) as it was when the program was initiated in 1935.  
  5. Reforms to immigration that allow foreign students to live and work after graduation. This will help ease the skills shortage besetting small manufacturers. Generating more taxpayers is a better policy than raising tax rates on the most successful entrepreneurs.  
  6. Promote oil and gas development (leasing on public lands; encourage more pipeline expansion; encourage more shale gas development).
  7. A national sales tax. Better to tax conspicuous consumption that incomes (Canada has done both this and entitlement reform by the way. It can be done.)
  8. Simplify and clarify financial regulation (as Roger Ferguson put it in the WSJ, “be careful not to create a  one-size-fits-all regulatory environment that could lead to instability”).
  9. A full-scale war on health care costs. According to the WSJ, three-quarters of the net $10 trillion in the nation’s debt will be due to spiraling costs of Medicare and Medicaid. Incentives to contain costs are essential – no more of this fee-for-service. You can’t work on the deficit and not work on this – only 20% of the budget is discretionary, after all.  
  10. A greater shift in resources towards education and R&D. This will do a far better job in stimulating sustainable job creation than maintaining a system that mobilizes finite taxation resources to the housing market. It would take at least as much political courage to phase out mortgage interest deductibility as it would to implement a national VAT.

Note: The 10-point plan is quoted verbatim.

SEE ALSO: The Ultimate Guide To The Fiscal Cliff >

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Read more from source:“Business Insider”

David Rosenberg’s 10-Point Plan To Fix America’s Fiscal Situation

david rosenberg

Markets have enjoyed the recent optimism surrounding the fiscal cliff.

But the deadline is inching closer and Republicans and Democrats still have different demands.

As Congress breaks for Thanksgiving, Gluskin Sheff’s David Rosenberg has put together his own 10-point plan to fix the fiscal mess:

  1. Do not raise top marginal tax rates on income and capital. This will perversely distort the incentive system. It is not good enough to say the Bush tax cuts were always meant to be temporary – anything that has been around for a decade is pretty well deemed to be permanent.  
  2. Broaden the tax base. Limit deductions. This is the way to make the tax system more progressive and more efficient.
  3. Reduce corporate tax rates. This will help make the overall revenue neutral and help build incentives to invest, which in turn creates jobs.
  4.  Means-test entitlement programs. Raise contribution rates, again with progressively a primary goal too. As for Social Security, it is time to raise the eligible retirement age, especially considering that life expectancy is rising by just under one year every decade, and especially since life expectancy is no longer 60 (try 75) as it was when the program was initiated in 1935.  
  5. Reforms to immigration that allow foreign students to live and work after graduation. This will help ease the skills shortage besetting small manufacturers. Generating more taxpayers is a better policy than raising tax rates on the most successful entrepreneurs.  
  6. Promote oil and gas development (leasing on public lands; encourage more pipeline expansion; encourage more shale gas development).
  7. A national sales tax. Better to tax conspicuous consumption that incomes (Canada has done both this and entitlement reform by the way. It can be done.)
  8. Simplify and clarify financial regulation (as Roger Ferguson put it in the WSJ, “be careful not to create a  one-size-fits-all regulatory environment that could lead to instability”).
  9. A full-scale war on health care costs. According to the WSJ, three-quarters of the net $10 trillion in the nation’s debt will be due to spiraling costs of Medicare and Medicaid. Incentives to contain costs are essential – no more of this fee-for-service. You can’t work on the deficit and not work on this – only 20% of the budget is discretionary, after all.  
  10. A greater shift in resources towards education and R&D. This will do a far better job in stimulating sustainable job creation than maintaining a system that mobilizes finite taxation resources to the housing market. It would take at least as much political courage to phase out mortgage interest deductibility as it would to implement a national VAT.

SEE ALSO: The Ultimate Guide To The Fiscal Cliff >

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Read more from source:“Business Insider”

Ben Bernanke ‘Delivers Nothing New’

ben bernanke economic club ny

Federal Reserve Chairman Ben Bernanke is speaking at the Economic Club of New York today.

In the Q&A, he noted that the Fed was looking “very carefully” at applying quantitative thresholds (e.g. an unemployment rate target) to its monetary policy.

In response to another question, he spoke about expanding mortgage lending.  He noted that a positive feedback loop from housing is the best path towards easing mortgage lending conditions.

The speech was released released earlier on the Federal Reserve’s website

And Wall Street’s reaction can be summed up in one statement: “Bernanke Delivers Nothing New.”

That’s the headline of an email blasted by TD Securities Eric Green.

Bernanke did not deliver anything new, did not suggest any change in the operating dynamic for more accommodation is afoot, and did not provide any more details on numerating the link between economic objectives and policy. This latter point suggests the Fed is probably not quite ready to agree on what they should be, and how to animate the response function should objectives operate at cross purposes. The speech is consistent with expectations for more QE in December and low for longer within an economy that is better, but nowhere good enough. Anyone inclined to reprice expectations received little to nothing to go on here.

Here are some highlights from the speech:

  • The fiscal cliff would pose a ‘substantial threat to the recovery’
  • There is ‘substantial slack’ in the U.S. labor market.
  • The Federal Budget is on an ‘unsustainable path’
  • Europe’s policy makers have taken ‘important steps’

“Currently, uncertainties about the situation in Europe and especially about the prospects for federal fiscal policy seem to be weighing on the spending decisions of households and businesses as well as on financial conditions,” writes Bernanke.  “Such uncertainties will only be increased by discord and delay.”

Here’s the full speech:
——————————

Chairman Ben S. Bernanke

At the New York Economic Club, New York, New York
November 20, 2012

The Economic Recovery and Economic Policy

Good afternoon. I am pleased to join the New York Economic Club for lunch today. I know that many of you and your friends and neighbors are still recovering from the effects of Hurricane Sandy, and I want to let you know that our thoughts are with everyone who has suffered during the storm and its aftermath.

My remarks today will focus on the reasons for the disappointingly slow pace of economic recovery in the United States and the policy actions that have been taken by the Federal Open Market Committee (FOMC) to support the economy. In addition, I will discuss some important economic challenges our country faces as we close out 2012 and move into 2013–in particular, the challenge of putting federal government finances on a sustainable path in the longer run while avoiding actions that would endanger the economic recovery in the near term.

The Recovery from the Financial Crisis and Recession
The economy has continued to recover from the financial crisis and recession, but the pace of recovery has been slower than FOMC participants and many others had hoped or anticipated when I spoke here about three years ago. Indeed, since the recession trough in mid-2009, growth in real gross domestic product (GDP) has averaged only a little more than 2 percent per year.

Similarly, the job market has improved over the past three years, but at a slow pace. The unemployment rate, which peaked at 10 percent in the fall of 2009, has since come down 2 percentage points to just below 8 percent. This decline is obviously welcome, but it has taken a long time to achieve that progress, and the unemployment rate is still well above both its level prior to the onset of the recession and the level that my colleagues and I think can be sustained once a full recovery has been achieved. Moreover, many other features of the jobs market, including the historically high level of long-term unemployment, the large number of people working part time because they have not been able to find full-time jobs, and the decline in labor force participation, reinforce the conclusion that we have some way to go before the labor market can be deemed healthy again.

Meanwhile, inflation has generally remained subdued. As is often the case, inflation has been pushed up and down in recent years by fluctuations in the price of crude oil and other globally traded commodities, including the increase in farm prices brought on by this summer’s drought. But with longer-term inflation expectations remaining stable, the ebbs and flows in commodity prices have had only transitory effects on inflation. Indeed, since the recovery began about three years ago, consumer price inflation, as measured by the personal consumption expenditures (PCE) price index, has averaged almost exactly 2 percent, which is the FOMC’s longer-run objective for inflation.1 Because ongoing slack in labor and product markets should continue to restrain wage and price increases, and with the public’s inflation expectations continuing to be well anchored, inflation over the next few years is likely to remain close to or a little below the Committee’s objective.

As background for our monetary policy decisionmaking, we at the Federal Reserve have spent a good deal of effort attempting to understand the reasons why the economic recovery has not been stronger. Studies of previous financial crises provide one helpful place to start.2 This literature has found that severe financial crises–particularly those associated with housing booms and busts–have often been associated with many years of subsequent weak performance. While this result allows for many interpretations, one possibility is that financial crises, or the deep recessions that typically accompany them, may reduce an economy’s potential growth rate, at least for a time.

The accumulating evidence does appear consistent with the financial crisis and the associated recession having reduced the potential growth rate of our economy somewhat during the past few years. In particular, slower growth of potential output would help explain why the unemployment rate has declined in the face of the relatively modest output gains we have seen during the recovery. Output normally has to increase at about its longer-term trend just to create enough jobs to absorb new entrants to the labor market, and faster-than-trend growth is usually needed to reduce unemployment. So the fact that unemployment has declined in recent years despite economic growth at about 2 percent suggests that the growth rate of potential output must have recently been lower than the roughly 2-1/2 percent rate that appeared to be in place before the crisis.3

There are a number of ways in which the financial crisis could have slowed the rate of growth of the economy’s potential. For example, the extraordinarily severe job losses that followed the crisis, especially in housing-related industries, may have exacerbated for a time the extent of mismatch between the jobs available and the skills and locations of the unemployed. Meanwhile, the very high level of long-term unemployment has probably led to some loss of skills and labor force attachment among those workers. These factors may have pushed up to some degree the so-called natural rate of unemployment–the rate of unemployment that can be sustained under normal conditions–and reduced labor force participation as well. The pace of productivity gains–another key determinant of growth in potential output–may also have been restrained by the crisis, as business investment declined sharply during the recession; and increases in risk aversion and uncertainty, together with tight credit conditions, may have impeded the commercial application of new technologies and slowed the pace of business formation.

Importantly, however, although the nation’s potential output may have grown more slowly than expected in recent years, this slowing seems at best a partial explanation of the disappointing pace of the economic recovery. In particular, even though the natural rate of unemployment may have increased somewhat, a variety of evidence suggests that any such increase has been modest, and that substantial slack remains in the labor market. For example, the slow pace of employment growth has been widespread across industries and regions of the country. That pattern suggests a broad-based shortfall in demand rather than a substantial increase in mismatch between available jobs and workers, because greater mismatch would imply that the demand for workers would be strong in some regions and industries, not weak almost across the board. Likewise, if a mismatch of jobs and workers is the predominant problem, we would expect to see wage pressures developing in those regions and industries where labor demand is strong; in fact, wage gains have been quite subdued in most industries and parts of the country.4 Indeed, as I indicated earlier, the consensus among my colleagues on the FOMC is that the unemployment rate is still well above its longer-run sustainable level, perhaps by 2 to 2-1/2 percentage points or so.5

A critical question, then, is why significant slack in the job market remains three years after the recovery began. A likely explanation, which I will discuss further, is that the economy has been faced with a variety of headwinds that have hindered what otherwise might have been a stronger cyclical rebound. If so, we may take some encouragement from the likelihood that there are potentially two sources of faster GDP growth in the future. First, the effects of the crisis on potential output should fade as the economy continues to heal.6 And second, if the headwinds begin to dissipate, as I expect, growth should pick up further as many who are currently unemployed or out of the labor force find work.

Headwinds Affecting the Recovery
What are the headwinds that have slowed the return of our economy to full employment? Some have come from the housing sector. Previous recoveries have often been associated with a vigorous rebound in housing, as rising incomes and confidence and, often, a decline in mortgage interest rates led to sharp increases in the demand for homes.7 But the housing bubble and its aftermath have made this episode quite different. In the first half of the past decade, both housing prices and construction rose to what proved to be unsustainable levels, leading to a subsequent collapse: House prices declined almost one-third nationally from 2006 until early this year, construction of single-family homes fell two-thirds, and the number of construction jobs decreased by nearly one-third. And, of course, the associated surge in delinquencies on mortgages helped trigger the broader financial crisis.

Recently, the housing market has shown some clear signs of improvement, as home sales, prices, and construction have all moved up since early this year. These developments are encouraging, and it seems likely that, on net, residential investment will be a source of economic growth and new jobs over the next couple of years. However, while historically low mortgage interest rates and the drop in home prices have made housing exceptionally affordable, a number of factors continue to prevent the sort of powerful housing recovery that has typically occurred in the past. Notably, lenders have maintained tight terms and conditions on mortgage loans, even for potential borrowers with relatively good credit.8 Lenders cite a number of factors affecting their decisions to extend credit, including ongoing uncertainties about the course of the economy, the housing market, and the regulatory environment. Unfortunately, while some tightening of the terms of mortgage credit was certainly an appropriate response to the earlier excesses, the pendulum appears to have swung too far, restraining the pace of recovery in the housing sector.

Other factors slowing the recovery in housing include the fact that many people remain unable to buy homes despite low mortgage rates; for example, about 20 percent of existing mortgage borrowers owe more on their mortgages than their houses are worth, making it more difficult for them to refinance or sell their homes. Also, a substantial overhang of vacant homes, either for sale or in the foreclosure pipeline, continues to hold down house prices and reduce the need for new construction. While these headwinds on both the supply and demand sides of the housing market have clearly started to abate, the recovery in the housing sector is likely to remain moderate by historical standards.

A second set of headwinds stems from the financial conditions facing potential borrowers in credit and capital markets. After the financial system seized up in late 2008 and early 2009, global economic activity contracted sharply, and credit and capital markets suffered significant damage. Although dramatic actions by governments and central banks around the world helped these markets to stabilize and begin recovering, tight credit and a high degree of risk aversion have restrained economic growth in the United States and in other countries as well.

Measures of the condition of U.S. financial markets and institutions suggest gradual but significant progress has been achieved since the crisis. For example, credit spreads on corporate bonds and syndicated loans have narrowed considerably, and equity prices have recovered most of their losses. In addition, indicators of market stress and illiquidity–such as spreads in short-term funding markets–have generally returned to levels near those seen before the crisis. One gauge of the overall improvement in financial markets is the National Financial Conditions Index maintained by the Federal Reserve Bank of Chicago. The index shows that financial conditions, viewed as a whole, are now about as accommodative as they were in the spring of 2007.

In spite of this broad improvement, the harm inflicted by the financial crisis has yet to be fully repaired in important segments of the financial sector. One example is the continued weakness in some categories of bank lending. Banks’ capital positions and overall asset quality have improved substantially over the past several years, and, over time, these balance sheet improvements will position banks to extend considerably more credit to bank-dependent borrowers. Indeed, some types of bank credit, such as commercial and industrial loans, have expanded notably in recent quarters. Nonetheless, banks have been conservative in extending loans to many consumers and some businesses, likely even beyond the restrictions on the supply of mortgage lending that I noted earlier. This caution in lending by banks reflects, among other factors, their continued desire to guard against the risks of further economic weakness.

A prominent risk at present–and a major source of financial headwinds over the past couple of years–is the fiscal and financial situation in Europe. This situation, of course, was not anticipated when the U.S. recovery began in 2009. The elevated levels of stress in European economies and uncertainty about how the problems there will be resolved are adding to the risks that U.S. financial institutions, businesses, and households must consider when making lending and investment decisions. Negative sentiment regarding Europe appears to have weighed on U.S. equity prices and prevented U.S. credit spreads from narrowing even further. Weaker economic conditions in Europe and other parts of the world have also weighed on U.S. exports and corporate earnings.

Policymakers in Europe have taken some important steps recently, and in doing so have contributed to some welcome easing of financial conditions. In particular, the European Central Bank’s new Outright Monetary Transactions program, under which it could purchase the sovereign debt of vulnerable euro-area countries who agree to meet prescribed conditions, has helped ease market concerns about those countries. European governments have also taken steps to strengthen their financial firewalls and to move toward greater fiscal and banking union. Further improvement in global financial conditions will depend in part on the extent to which European policymakers follow through on these initiatives.

A third headwind to the recovery–and one that may intensify in force in coming quarters–is U.S. fiscal policy. Although fiscal policy at the federal level was quite expansionary during the recession and early in the recovery, as the recovery proceeded, the support provided for the economy by federal fiscal actions was increasingly offset by the adverse effects of tight budget conditions for state and local governments. In response to a large and sustained decline in their tax revenues, state and local governments have cut about 600,000 jobs on net since the third quarter of 2008 while reducing real expenditures for infrastructure projects by 20 percent.

More recently, the situation has to some extent reversed: The drag on economic growth from state and local fiscal policy has diminished as revenues have improved, easing the pressures for further spending cuts or tax increases. In contrast, the phasing-out of earlier stimulus programs and policy actions to reduce the federal budget deficit have led federal fiscal policy to begin restraining GDP growth. Indeed, under almost any plausible scenario, next year the drag from federal fiscal policy on GDP growth will outweigh the positive effects on growth from fiscal expansion at the state and local level. However, the overall effect of federal fiscal policy on the economy, both in the near term and in the longer run, remains quite uncertain and depends on how policymakers meet two daunting fiscal challenges–one by the start of the new year and the other no later than the spring.

Upcoming Fiscal Challenges
What are these looming challenges? First, the Congress and the Administration will need to protect the economy from the full brunt of the severe fiscal tightening at the beginning of next year that is built into current law–the so-called fiscal cliff. The realization of all of the automatic tax increases and spending cuts that make up the fiscal cliff, absent offsetting changes, would pose a substantial threat to the recovery–indeed, by the reckoning of the Congressional Budget Office (CBO) and that of many outside observers, a fiscal shock of that size would send the economy toppling back into recession. Second, early in the new year it will be necessary to approve an increase in the federal debt limit to avoid any possibility of a catastrophic default on the nation’s Treasury securities and other obligations. As you will recall, the threat of default in the summer of 2011 fueled economic uncertainty and badly damaged confidence, even though an agreement ultimately was reached. A failure to reach a timely agreement this time around could impose even heavier economic and financial costs.

As fiscal policymakers face these critical decisions, they should keep two objectives in mind. First, as I think is widely appreciated by now, the federal budget is on an unsustainable path. The budget deficit, which peaked at about 10 percent of GDP in 2009 and now stands at about 7 percent of GDP, is expected to narrow further in the coming years as the economy continues to recover. However, the CBO projects that, under a plausible set of policy assumptions, the budget deficit would still be greater than 4 percent of GDP in 2018, assuming the economy has returned to its potential by then. Moreover, under the CBO projection, the deficit and the ratio of federal debt to GDP would subsequently return to an upward trend.9 Of course, we should all understand that long-term projections of ever-increasing deficits will never actually come to pass, because the willingness of lenders to continue to fund the government can only be sustained by responsible fiscal plans and actions. A credible framework to set federal fiscal policy on a stable path–for example, one on which the ratio of federal debt to GDP eventually stabilizes or declines–is thus urgently needed to ensure longer-term economic growth and stability.

Even as fiscal policymakers address the urgent issue of longer-run fiscal sustainability, they should not ignore a second key objective: to avoid unnecessarily adding to the headwinds that are already holding back the economic recovery. Fortunately, the two objectives are fully compatible and mutually reinforcing. Preventing a sudden and severe contraction in fiscal policy early next year will support the transition of the economy back to full employment; a stronger economy will in turn reduce the deficit and contribute to achieving long-term fiscal sustainability. At the same time, a credible plan to put the federal budget on a path that will be sustainable in the long run could help keep longer-term interest rates low and boost household and business confidence, thereby supporting economic growth today.

Coming together to find fiscal solutions will not be easy, but the stakes are high. Uncertainty about how the fiscal cliff, the raising of the debt limit, and the longer-term budget situation will be addressed appears already to be affecting private spending and investment decisions and may be contributing to an increased sense of caution in financial markets, with adverse effects on the economy. Continuing to push off difficult policy choices will only prolong and intensify these uncertainties. Moreover, while the details of whatever agreement is reached to resolve the fiscal cliff are important, the economic confidence of both market participants and the general public likely will also be influenced by the extent to which our political system proves able to deliver a reasonable solution with a minimum of uncertainty and delay. Finding long-term solutions that can win sufficient political support to be enacted may take some time, but meaningful progress toward this end can be achieved now if policymakers are willing to think creatively and work together constructively.

Monetary Policy
Let me now turn briefly to monetary policy.

Monetary policy can do little to reverse the effects that the financial crisis may have had on the economy’s productive potential. However, it has been able to provide an important offset to the headwinds that have slowed the cyclical recovery. As you know, the Federal Reserve took strong easing measures during the financial crisis and recession, cutting its target for the federal funds rate–the traditional tool of monetary policy–to nearly zero by the end of 2008. Since that time, we have provided additional accommodation through two nontraditional policy tools aimed at putting downward pressure on longer-term interest rates: asset purchases that reduce the supply of longer-term securities outstanding in the market, and communication about the future path of monetary policy.

Most recently, after the September FOMC meeting, we announced that the Federal Reserve would purchase additional agency mortgage-backed securities (MBS) and continue with the program to extend the maturity of our Treasury holdings.10 These additional asset purchases should put downward pressure on longer-term interest rates and make broader financial conditions more accommodative.11 Moreover, our purchases of MBS, by bringing down mortgage rates, provide support directly to housing and thereby help mitigate some of the headwinds facing that sector. In announcing this decision, we also indicated that we would continue purchasing MBS, undertake additional purchases of longer-term securities, and employ our other policy tools until we judge that the outlook for the labor market has improved substantially in a context of price stability.

Although it is still too early to assess the full effects of our most recent policy actions, yields on corporate bonds and agency MBS have fallen significantly, on balance, since the FOMC’s announcement. More generally, research suggests that our previous asset purchases have eased overall financial conditions and provided meaningful support to the economic recovery in recent years.12

In addition to announcing new purchases of MBS, at our September meeting we extended our guidance for how long we expect that exceptionally low levels for the federal funds rate will likely be warranted at least through the middle of 2015. By pushing the expected period of low rates further into the future, we are not saying that we expect the economy to remain weak until mid-2015; rather, we expect–as we indicated in our September statement–that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.13 In other words, we will want to be sure that the recovery is established before we begin to normalize policy. We hope that such assurances will reduce uncertainty and increase confidence among households and businesses, thereby providing additional support for economic growth and job creation.

Conclusion
In sum, the U.S. economy continues to be hampered by the lingering effects of the financial crisis on its productive potential and by a number of headwinds that have hindered the normal cyclical adjustment of the economy. The Federal Reserve is doing its part by providing accommodative monetary policy to promote a stronger economic recovery in a context of price stability. As I have said before, however, while monetary policy can help support the economic recovery, it is by no means a panacea for our economic ills. Currently, uncertainties about the situation in Europe and especially about the prospects for federal fiscal policy seem to be weighing on the spending decisions of households and businesses as well as on financial conditions. Such uncertainties will only be increased by discord and delay. In contrast, cooperation and creativity to deliver fiscal clarity–in particular, a plan for resolving the nation’s longer-term budgetary issues without harming the recovery–could help make the new year a very good one for the American economy.

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Ben Bernanke Reveals The One Thing That Could Really Get The Economy Going Again

Ben Bernanke

The text of Ben Bernanke’s speech to the Economic Club of NY has just come out, and at first blush it’s not a major game changer. He doesn’t, for example, go into specifics on new policy (such as what the Fed will do when Operation Twist expires at the end of the year). And he doesn’t go into too many specifics about what the Fed needs to see before it would start easing up on the gas pedal. He does hint about where the Fed would like to see unemployment settle, when he says:

“Indeed, as I indicated earlier, the consensus among my colleagues on the FOMC is that the unemployment rate is still well above its longer-run sustainable level, perhaps by 2 to 2-1/2 percentage points or so.”

But that’s not a huge gamechanger.

Perhaps the most interesting part is where he talks about specifics that are holding the economy back still.

Recently, the housing market has shown some clear signs of improvement, as home sales, prices, and construction have all moved up since early this year. These developments are encouraging, and it seems likely that, on net, residential investment will be a source of economic growth and new jobs over the next couple of years. However, while historically low mortgage interest rates and the drop in home prices have made housing exceptionally affordable, a number of factors continue to prevent the sort of powerful housing recovery that has typically occurred in the past. Notably, lenders have maintained tight terms and conditions on mortgage loans, even for potential borrowers with relatively good credit.8 Lenders cite a number of factors affecting their decisions to extend credit, including ongoing uncertainties about the course of the economy, the housing market, and the regulatory environment. Unfortunately, while some tightening of the terms of mortgage credit was certainly an appropriate response to the earlier excesses, the pendulum appears to have swung too far, restraining the pace of recovery in the housing sector.

This is really the big issue that Bernanke sees. Despite the aggressive loosening of policy, there hasn’t been a willingness on the part of lenders to loosen standards.

He also spoke to the same issue a few days ago in a speech specifically on housing market/mortgage policy, but the fact that that’s carrying over to this more general speech is telling.

Addressing this is key.

Of course, Bernanke goes on to warn about the Fiscal Cliff and the debt ceiling and all that, but that’s all pretty Pro Forma.

Read the full speech here >

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Read more from source:“Business Insider”