TV’s talking heads probably have got it wrong — again
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Dear Mr. Berko:
I was listening to several economists on TV discussing the economy and the Federal Reserve. They concluded that the United States will have a national deficit this year of less than $325 billion, and that the economy in the second half of this year will move ahead strongly due to the $1,200 per family cash infusion. They suggested this would be good for the stock market and the housing market and ramp up employment. So I’m seriously thinking about taking $97,000 from a certificate of deposit that matures next week and putting it into your favorite no-load mutual funds. They said that the public will start buying stocks again, and this will move the Dow Jones up to a record high. And unlike Alan Greenspan, whom I had difficulty understanding, they spoke clearly, and I could follow and understand their logic. They even felt that Greenspan might have overreacted and could be responsible for the housing bubble. Did you see this program? What do you think?
H.R., Delray Beach, Fla.
Dear H.R.:
I watch very little TV and don’t know the program of which you write. But wouldn’t it be great if those predictions came true?
However, the persona of many TV economists reminds me of the intensity and convictions of so many TV preachers. They (publicly) believe that the economy will pick up strongly in the second half of 2008, as the president’s $170 billion rescue package of rebates for the masses ripples through the economy. Then add the Federal Reserve’s interest rate reductions, a projected surge in exports, plus easier credit and, according to those TV lads, the second half of 2008 will be a jim-dandy.
Be mindful that economists, like professional witnesses at murder trials, will give you any conclusion you can pay for. Most economists are quite articulate at predicting future financial events and amazingly accurate at telling us why those financial events did not happen.
I agree with their assessment of Alan “The Mumbler” Greenspan, and I’ve been telling readers for 10 years that he will be noted as the worst Fed chairman in history. However, the remainder of their comments are pure horseradish, and when TV economists open their yaps, they dangerously subtract from the sum of human knowledge. Their mothers should have thrown them away and raised the storks.
I probably know more about economics than any of those characters, including Greenspan, and I’m telling you that this year’s deficit won’t be $325 billion but rather closer to $415 billion.
It’s simple as Simon. First recognize that for most members of Congress, spending money is a form of eating and sex. And this year your Congress will boldly write checks for at least $415 billion more than the Internal Revenue Service will collect. I’ve seen the numbers and they ain’t pretty, but Congress’ Janus-like accounting will blur the damage.
By 2009, if the new president fails to raise taxes, the deficit will exceed $520 billion because Congress is pathologically unable to reduce spending. So it’s a good bet that we will have an increase in taxes on dividends, capital gains, estates, earned income, a new luxury tax, a surcharge on personal incomes exceeding a certain amount and hosts of other revenue ideas that the presidential candidates have on their “after-elected” burners. This may not bode well for the Dow.
Though employment may increase, most new jobs will be in the low-paying service sector. Many of our better-paying manufacturing jobs, technical positions and engineering and research positions are moving overseas. But Starbucks, McDonald’s, the Olive Garden, Walgreens, Wal-Mart and health care will continue to add new people.
These jobs pay bupkis, and the niggardly salaries aren’t enough to make mortgage payments on an average-priced home. Consider that a median-priced home with a $250,000 mortgage at 6.5 percent will cost the buyer about $2,300 a month in principal, interest, property assessments, insurance, maintenance and utilities … after taxes. Then there’s got to be enough spendable income remaining for auto loans, gas, food, health insurance and Christmas presents. Holy Geronimo! You gotta have a pretax income of $4,500 a month just to tread water.
The values of today’s homes have increased absurdly more than the incomes of the home buyer, and they’re still too high by half.
I’m not as sanguine as those preaching economists. I won’t discourage you from investing your $97,000 CD money in those no-load funds, though I’d recommend that you invest only half that cash now. I understand your enthusiasm, but be mindful that losing an opportunity is a much less regrettable alternative than losing money.
The last year of a presidential term has had a positive impact on the market during the last 174 years. Since 1833, we’ve had 43 presidential elections, and those election years produced a net cumulative gain of nearly 750 percent. However, I think this 44th election year could prove to be a bummer.
You should realize that the public’s appetite for stocks is not a factor in the performance of the Dow. Today the Dow is controlled by the hedge funds, money center banks, institutional traders, derivative investors and power brokers like Goldman Sachs, Credit Suisse, Merrill Lynch, Lehman, etc. These are the guys who determine what the Dow will do. Individual investors are wallflowers who are usually invited to dance when the party’s over.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.© Copley News Service
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