It does not look good for America right now, ladies and gentlemen.
After securing a second term, President Obama was greeted by a three-day, 452-point drop on the Dow.
Apparently, investors were disappointed by something…
Maybe it’s that incomes taxes are about to rise across the board. Maybe it’s the imminent hike in the capital gains tax. Or maybe it’s that all of our paychecks will be 2% smaller as the employment tax cut reverts.
The potential rise in dividend taxes from 15% to as high as 43% might be a bit of a disappointment, too.
I’ll apologize for the sarcasm, but frankly I’m getting ticked off at what our government is doing… or not doing, as the case may be — and actually is.
The looming fiscal cliff will reduce child and dependent care tax credits, bring back the marriage penalty, and lower gift and estate tax exemptions.
The Tax Policy Center estimates the end of virtually every tax cut enacted since 2001 would boost taxes an average $3,500 per household.
In all, something like $500 in billion in tax hikes is coming if Congress does nothing about the fiscal cliff.
The Tough Choices
Of course, the fiscal cliff isn’t just about tax hikes…
The Federal government will also do its part by cutting spending by about $65 billion in 2013. (Gee, thanks for doing your part!)
The basic message from Congress is pretty simple: You, the American people, will pay more and we, the government, will spend a teeny, tiny bit less.
Case in point: defense spending.
Defense spending is scheduled to to drop by $30 billion in 2013 — a measly 4% cut to the $711 billion defense budget.
The U.S. budget deficit will be $1.08 trillion this year. Last year it was $1.297 trillion. Defense spending is 57% of the entire discretionary budget.
In 2011 U.S. defense spending accounted for 41% of total military spending of the entire world.
Yet it can only be cut by 4% a year?
Libertarian Ron Paul has said the doubling of military spending in the past decade “should be extremely troubling for those claiming to be fiscally conservative.”
Yes, I am a fan of Ron Paul. The man makes sense. But sense is up against people like Joe Lieberman, who says, “Because so much has already been taken from the U.S. military, I will oppose any deal that cuts $1 more from our national defense… America’s security cannot afford it.”
The real question is: What can we afford?
Until we figure out the answer to that question — until we make the hard choices about what we really can afford — I’m afraid the U.S. economy is going to hell in a handbasket.
Because I don’t believe this Congress or this administration can make the choices that are in America’s best interest.
Our elected leaders will continue to lie right to our faces from the laps of their biggest campaign contributors.
Now It’s the Republicans’ Turn…
When George W. Bush was elected to his second term, the outrage from the left was deafening… seems like every liberal Hollywood actor and rock star threatened to move to Canada or France.
Now it’s the conservatives’ turn: Donald Trump is calling for revolution; one radio host compared the election to Pearl Harbor; and yes, some are threatening to emigrate.
In the end, it doesn’t matter who is president. The only real difference is which segment of the population is angry.
Nothing important will change.
Friday morning Ron Paul did a Bloomberg TV interview that had a couple of interesting points:
My goal has always been to change people’s minds because as long as people demand more government, they will get it. Government reflects the people…
We’re so far gone. We’re over the cliff. We cannot get enough people in Congress in the next five [or] 10 years who will do the wise things.
When Paul says we’re “over the cliff,” he’s talking in fiscal terms.
As government is currently structured, it’s going to be very difficult to take back what’s been given and get the nation’s finances in order…
So let’s focus on some things we can control — like our investments.
Sell Everything? No Way!
First and foremost, it’s silly to just give up on investing at the prospect that capital gains taxes will rise.
With that said, it would be prudent to take some portion of long-term gains off the table, especially if you were planning to do so in the next year.
And it’s not time to give up on dividends, either. Dividend taxes may rise, but there’s also a good possibility that companies will announce the payout of some special dividends to shareholders before the end of the year — and you won’t want to miss that.
Let’s not overlook the fact that American companies have been far ahead of the government in dealing with economic issues…
Corporate profits are at record highs, and so are cash levels. That’s not a mistake; it’s the result of careful planning and attention to detail. And that will not change. The stocks of America’s best companies will continue to be among the best stewards of your money.
As investors, we should also be operating under the assumption that not much is going to change fiscally — that is, while we may cut some of the government deficit, the political will to have a balanced budget simply does not exist. And that will have ramifications for interest rates and the value of the U.S. dollar.
There are a number of ways to account for this. Of course, you must find ways to invest to offset the twin forces of devaluation and inflation…
Rental property is an attractive option given current interest rates.
I will also say that every investor should own gold. Gold is probably the very best hedge against a declining dollar you can find. And it doesn’t require a large up-front investment.
In case you missed it, gold has been one of the few assets that’s increased in value since the election.
My colleague Christian DeHaemer recently released an important report on a few of the best ways to be invested in gold.
He’s uncovered a significant catalyst for gold prices that few investors are aware of.
In fact, Christian is the only analyst I know of talking about this little-known catalyst for gold prices…
It could be well worth your time to check out his report.
Until next time,
Briton Ryle
@BritonRyle on Twitter
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
