Friday, August 17, 2012

Some random thoughts:

My equity market exposure is down to about 9% because my the calls that I sold are capping my upside.  While this can be painful, I have to stick by my belief that earning in the 4-8% range is an excellent result.  I am around 4 for the year right now and think the market may be in for a small correction so I am in line with that view.

Government bonds have had a big sell off.  I am annoyed at myself for not having shorted them, but I will have to be satisfied that at least I sold them at good levels.  The 30 year TIPS that I sold at 40 some odd basis points of real yield are back up to low 60's.  I will be looking for 75 bp or more to buy some back.

I am not a particularly political person except as it impacts the markets.  There has been a lot of discussion about companies being on hold because of lack of clarity in the political scene.  I am not so sure this is the case as I don't think there will be any more clarity 3 months from now (or even 1 year for that matter).

Why does Romney's camp allow taxes to be an issue?  Am I wrong in thinking that the ONLY legitimate question is whether Romney cheated on his taxes, or not?  I have not heard anything that would suggest that.  So, if the American people have a problem with having a two tiered (long term/short term, or cap gains/income) tax system, then the discussion should be about that, not whether Romney's effective tax rate was 13% or whatever.  Romney didn't set the rates, so take it up with the Senate and Congress!  In my view there are legitimate reasons to tax long term capital gains at lower rates (lengthening investor horizons) so they should be incentivized.  Whether 15% is too low, or not, well that is just a number plucked out of the air and it could easily be 23% or 31%.  Let's not complicate the tax code even further by adding a layer of "minimum tax".  Let's just discuss the right topics and move forward.

Currently, tax receipts are low (% of GDP) mainly because economic activity is slow, raising rates won't really bring it back too much, but could help a bit, so let's do some of that. While we are at it, let's find out what the PEOPLE want to incentivize and have the code reflect that.  Energy independence?  If yes, add subsidies.  Home ownership?  If yes, keep the interest deduction, if not, then let's abolish it.  We want to keep more corporations here?  Simplify the code, reduce loopholes and lower the rate.

Government expenditures are too high (historically in % of GDP) mainly because of increased defense spending, so maybe we can't afford to be quite the police force for the world we once were.  But mainly the problem with spending is the future.  Spending is projected to get much worse because we are living longer and want good medical care.  Well, maybe we as a country can't really afford all of it, so let's decide where to reduce our future promises.

But this discussion of deficits and government debt brings up an interesting point:

Why do we care about the national debt?  The answer is similar to the question at the personal level.  We care, because if we keep increasing debt, then one day we may find we can't get any more loans and the carousel stops turning.  Most likely what happens is that our borrowing rates will keep going up to the point where we just can't afford it.  This is what has been happening to Greece and then Italy and Spain to different degrees.

But, what may be different with our situation is that the reason we can demand higher rates is that investors have alternatives!  USA principal among them.  In fact why isn't China an option? The 800 pound gorilla in the room is that it is still a communist country with very different views about what constitutes private and public.  The USA is still the ONLY place with the size, legal and social infrastructure to have any confidence in.  Germany?  Sure, but it's small and they don't really have a great social history.  England, close, but not large enough.  Japan, yes and they already have over 200% debt to GDP so they keep borrowing and yet their rates are the lowest in the world!

Bottom line, let's stop the handwringing and get on with it.  The US is still the only game in town and the world has voted with it's currency by continuing to buy our debt.  Let's simplify the tax code, increase taxes a bit, cut spending a little bit, curtail our future promises and get on with innovating and doing business.