Did Our Politicians Doom The Economy
60Did Democrats and Republicans set up the Economy to Fail?
Friday, August 5, 2011
I've been in cash for about a month as I strongly suspected the stock market was about to move down due to the economy slowing even more in the future. A key event happened in late July and into early August that allowed me to confidently take some 'short' positions in the market. A 'Short Position' simply means I am making money if a certain investment/stock/ETF/Commodity is going down. Why did I profit on a day when the Dow had a 500 point drop? The politicians in Washington allowed me to easily determine that our stock market is heading for a strong dip and our economy might do the same.
I'm not going to get into all of the technical stock market indicators, reports that move the market, etc. I do take a lot of factors into consideration but I want you to understand one major event that unfolded. We heard Republicans and Democrats both say that if we do not raise the debt ceiling, the result would be catastrophic for the economy. As you are aware, they eventually did raise the debt ceiling before the US defaulted on our financial obligations but they made one massive mistake that assured me the economy would be heading lower.
If you have followed the debt ceiling debate, you no doubt have heard talk of a 'downgrade' of US debt. The ratings agencies (Moodies, Fitch, S&P) all said that if the US didn't come up with a plan to cut at least 4 trillion over 10 years from our deficit and raise the debt ceiling, they would have no choice but to downgrade our debt. The debt ceiling was raised and some spending cuts were enacted but only about 900 billion. A panel was also created to find another 2 trillion in cuts over the next 10 years. Did the ratings agencies make good on their threats to downgrade? They certainly did not and it was clear that they were under tremendous pressure from congress, corporate American, and foreign countries not to do so.
I immediately knew that the market was going to experience a downturn and took positions to profit from it. Remember, the stock market is always 'forward thinking.' It goes up in anticipation of growth, it goes down in anticipation of a contraction. The big money that moves wall street knows what I am about to tell you... It is now imminent that unless something drastically changes, the US debt will be downgraded. This will raise the interest rate we have to pay on our debt (causing more debt), it will raise the interest rates for anyone that borrows money including business loans, mortgages, car loans, etc. Businesses constantly need to borrow money to cover short term cash needs, borrowing at a higher rate will hurt profits.
What Will Happen in the Near Future?
More evidence will come out this morning when the unemployment numbers are released. It is certainly possible that this will continue to fuel the downside if the numbers are flat or below expectations. In either case, I think we will see wild swings in the financial markets. The volatility will be extremely strong.
Both parties in congress walked out of the debt deal claiming victory. John Boehner said he received 98% of what he wanted, Reid and Pelosi told their constituents that they 'saved' entitlements like medicare and social security. The bottom line is that both of these parties left washington for vacation without addressing our severe debt problem thus leaving our economy vulnerable to a downward slide.
You don't need to take a political side or position, I can tell you that both sides failed. A positive note is that corporate profits have been relatively strong but the uncertainty of paying higher borrowing costs in the future is preventing companies from expanding, hiring, etc. Eventually these things will 'shake out' and the economy and financial markets will continue upward. There are things you can do to protect your job, your assets, your stock and bond portfolio's, etc in the interim. A few days ago on a fellow hubbers blog, I told people that they will want to position themselves to profit from the uncertainty and swings we will see in the economy. I'd be happy to share my thoughts with anyone who has questions.
Read more about why I think the Economy is slowing
- Why the US Economy is Stalling
The US economy is faltering but this may actually be a good thing for American citizens in the long run.
CommentsLoading...
LRC, a good call, but for people who have no money to invest except in rent and food and gas, knowing that the market is going up or down is not going to make a difference for them (us). The travesty that was thrust on us with this great "deal" is the killer of jobs and incomes. As it all sinks in and we start to see the results of it this may be the entrance to the 2nd Great depression in the last 100 years we will have to endure. Thanks for the warning, Peter
Thanks for sharing this info and communicating it in Layman's terms. It does not take a genius however to connect all the dots in this circumstance.No one really won, not even those who got to keep Social Security and Medicare, as I believe the bandage is going to come off and bring some hair with it. A few months ago it was forecast Social Security will be broke by 2032, I see a lot sooner. I want to know if any country decides to pull in the markers so to speak where will we be? anything in these times is possible.
This just seems like the latest demand for certainty from the, "job creators." First, they wanted an extension of the Bush tax cuts. Then, they wanted spending cuts. Now this. Don't expect to see any jobs any time soon, even if we do not get downgraded.
LRC - Outstanding hub my friend. If it will make anyone feel better, I hired a new employee today. Nope, not a replacement employee, a new employee to expand my business. I live in a city with a population over 1 million people, and I finally was able to get a guy from Louisiana to drive 1470 miles to take this job. None of the local applicants were interested unless I would pay them under the table so they would not lose their unemployment benefits and the associated entitlements. Have we finally crossed the line where it is more attractive to be unemployed than to go to work? The job I hired for pays from $750 to $1000 per week. I have never collected unemployment benefits so I have no idea what they pay. My experience with trying to find workers makes me suspect the unemployment numbers being published today. I suspect a large percentage of these people have no intention of going to work until their benefits are exhausted.
Great article, LRC, but I am like Peter, alas on a fixed income, there is not much for me to aspire to. I was involved in the securities day trading a great deal during the 1990's and learned my lesson after getting burned. I was a fan of 'short selling', But, you know, I believe that I have learned enough to take a modest risk or two holding a carefully selected stock over a longer period of time.
Ideological rigidity and failure to look at the big picture has cost us all, the true ramifications of which we have yet to see.
OP:The job I hired for pays from $750 to $1000 per week.
Is that vacancy still open. Unemployment benifits generally do not pay a great deal and is more like a stipend. But there are costs associated with going to work, while it is lazy, many may not lose as much staying on the dole.
Credence2 - It took me over a month to find someone to take this job. Some of my employees have been with me over 10 years, so it can't be that bad of a job. It is hard work, but when necessary, I can still do this job and I am 73 years old. It also comes with a company provided vehicle that those with suitable secure parking get to take home at night.
You would be amazed at how many applicants would only take the job if they could be paid under the table so as to not lose their benefits. I even provide company shirts, so all they need to go to work is a pair of shoes and pants.
This may give you an inkling into some of the reasons I think the way I do. Now unfortunately, I need yet one more employee, and get to start the search all over again.
AV, that is a nice compensation package. It is a nice salary and if I were in a different reality, I would apply in a heartbeat. No one likes lazy people, nobody...
Credence2 - I have a small retirement income, and I draw a pittance from Social Security. I made up my mind I would rather work until I die than squeeze by on what my lifetime of work pays me in retirement. In the process of running a business, I also provide a damn fine living for 10 other people and their families. They in turn pay income tax on the wages they earn. I am a firm believer in profit sharing, so the more the business earns the more the employees earn. Yet I take 100% of the risks. When the price of gas, insurance, and taxes goes up, that comes out of my share. The employees never see a decrease in their wages. I have told them all that when the day comes that they are the only ones getting a paycheck from the company, I will close the doors. At that point in time I will change from a "Giver" to a "Taker." The talk about increasing the taxes on the so called rich will force others to make this transition from "Giver" to "Taker." Why take all the risks and work for nothing when it would be so simple to just jump on the entitlement train and kick back and relax?
A lot of great comments and I'd like to address them all starting with Old Poolman:
@ Old Poolman- I'm tired of hearing the words "Job Creators" used to describe CEO's of large companies, the ultra wealthy hedge fun managers, etc. America's job creators are small businesses. Old Poolman is a JOB CREATOR. I also agree with him on finding quality employees. I have seen many union workers who work on construction type of projects will collect unemployment between projects. They'll work for 8-9 months, and make 65-75k and then collect unemployment for the summer (in CT, the rate is almost $2k per month) and finish the year with 70-85K in earnings and unemployment wages. People can collect unemployment for 2 years, that is not a good system, although I do sympathize with some people who have been truly out of work for long periods of time and are trying hard to find jobs.
There are 6 million small businesses that have employees. Do you want to spur the economy? Give these JOB CREATORS incentives to help them. How about we stop giving oil companies making record profits billions more in subsidies and we give small businesses 0 interest loans for 5 years. Or how about we give huge insurance discounts or other incentives to small businesses that hire new employees. OR how about we stop taxing small businesses at a higher rate than we tax the fortune 1000 companies?
The government should be helping people like Old Poolman and not by making programs available that take 262 pages of paperwork to participate in. Kudos to Old Poolman, if we could help grow our small businesses and each one was able to hire one additional employee, we'd add 6 million jobs to our economy.
@ HSchneider- astute observation, we focus a lot in the US on our own economy but the world economies (particularly Europe) are extremely fragile right now and could cause another global recession.
@ Peter & Credence - I certainly understand where you are coming from. In another hub I wrote, I explained people are spending less. This is good for those who are saving more but unfortunately, many people are spending less because they are making less, or have no job, etc. As I said in my previous comment, the best solution in my opinion is to try and help incentivize people like Old Poolman to continue hiring.
@ Anna - thanks for stopping by, I agree 100% with your comments on Social security
@ Brages - it looks like my hub was right on. I said there would be a downgrade but I didn't expect it to come this quick. A debt downgrade just raised taxes on everyone (Higher interest rates are coming). Do you think it is ironic how hard some politicians fought for the bush tax cuts which cost 4 trillion over 10 years and now we find out our debt was downgraded because we couldn't come up with 4 trillion in spending cuts over 10 years.
LRC - Thanks for the mention in your last comment. You are so correct, it is small business owners who could put this country back on track with job creation. It is interesting, but banks will only loan money to business's that don't need it. The old catch 22 when it comes to new business ventures. They need to see two years of profitable operation before they will even consider a business loan. This of course is impossible for anyone wishing to start a new business.
I could easily expand my business, and I have the capital available to do so, but finding good employees is very difficult. Most who are drawing unemployment are not interested, even though the job would pay more than they are getting in unemployment benefits. Your also correct that there are presently no incentives at all for small business to expand their operations and hire new employees. Most of my employees have been with me for 10 years or more. Many working for Corporations live in fear that every Friday may be their last day of work. That is no way to run a business. Any plan that would give some incentives to small business would do wonders for getting this country up and running again. Six million new jobs would certainly jump start this failing economy.
LRC,
Since you won't come back to my hubs, I'll come to yours! :) Actually, I have been involved in a WWII series instead of political hubs as of late. As for small businesses, I know you don't want to see this, but Obamacare is going to kill the small businessman. There is simply no way around it. Combine that with a much higher minimum wage and the corporate giants are going to make a killing.
I think I need you for my stock broker. Are things going to continue to go south?
Hi David,
I always enjoy your hubs, I have not been on HP as much. The stock market has kept me very busy. I really like watching "WWII in color' on the military channel, I'll definitely check out your series. History is one of my favorite things to learn more about.
Regarding the market, very tough to say. For the first time in a very long time, our economy will actually depend more on Europe than what is happening domestically. A lot of people don't realize that 1/2 of all the sales our S&P 500 companies get are from overseas.
If key countries in Europe (Italy for example) can get tough cuts to get on the path of fiscal sanity, Europe will stabilize. If not, we'll see another Global recession.
Best thing to do with your money is hedge. If we start seeing stabilization in Europe, it will be smart to be long stocks, long Oil, and probably short Gold. If it continues to fall apart, Gold/Silver will hit new highs, stocks will tumble and Oil will also fall....just my opinions.
HSchneider Level 6 Commenter 9 months ago
I believe the markets have plunged because they see both European governments and ours as being ineffective. Ours because the Tea Party faction in the House wants to tear everything down. Failing that, they block everything. In Europe, debt is so bad and pressing in many countries that all their efforts fail. Panic has been holding sway all over. Great Hub.