In this series of articles, we include important or interesting
videoclips with our comments. This is an article that expresses our
personal opinions about comments made on Television and in Print. It is
NOT intended to provide any investment advice of any type whatsoever.
No one should base any investing decisions or conclusions based on
anything written in or inferred from this article. Investing is a
serious matter and all investment decisions should only be taken after a
detailed discussion with your investment advisor and should be subject
to your objectives, suitability requirements and risk tolerances.
1. The Only Question
There is only one question before the markets right now. Will they get a deal done by year-end? Erskine Bowles answered this question in his conversation with CNBC’s Maria Bartiromo on Thursday (see clip 1 below):
- “there’s about a
one third probability we’ll get a deal in lame duck….About a one
third that we’ll go over the cliff and be able to reach a deal right
afterwards and that’ll be okay. But there is that one third chance that
we won’t. And we’ll end up in chaos.“
Is a punt ok or do we need a real deal next year? Alan Greenspan answered in his interview with BTV’s Betty Liu (see clip 2 below):
- I think the markets are getting very shaky. And they are getting shaky because I think fiscal policy is out of control. And I think the markets will crater if we run into any evidence that we cannot solve this problem.
Any fiscal deal will lead to a slowdown and possibly a recession. Is the deal worth it? Greenspan said:
- “The presumption that we will solve this problem without paying I think is grossly inappropriate. If we get out of this with a moderate recession, I would say that the price is very cheap.”
Why is it so critical to cut the debt? Erskine Bowles answered:
- “today, even at these low interest rates, we’re spending about $230 billion a year on interest….That’s more than we spend at the Department of Commerce, Department of Education, Energy, Homeland Security, Interior, Justice, State…. combined. And Maria, if we do nothing, by the year 2020, we’ll be spending over a trillion dollars a year on interest cost alone.
That’s a trillion dollars we can’t spend in this country to educate our
kids or to rebuild our infrastructure or to do high value-added
research….And unfortunately, it is a trillion dollars that’s gonna be spent
principally in those countries that we’re borrowing from. You know, that
means will be building the infrastructure in Asia. It means we’ll be
educating those kids over there. And it means we’ll be building their
universities, so the research is done over there, so the next new thing
is created over there, so the jobs of the future are there not here.”
The Erskine Bowles-Alan Simpson interview (see clip 1 below) with Maria Bartiromo is just awesome. When you hear these gentlemen speak so clearly and passionately, we wonder how stupid we were as a society to not accept the deal these two guys struck last year. Alan Greenspan praised them in his BTV interview:
- “I thought the genius of the Simpson-Bowles plan to identify a trillion dollar’s worth of tax expenditures which Republicans can a look at as subsidies, and the Democrats can look at as increased taxes to upper income groups.“
2. The U.S. Stock Market
Interesting how good news comes just when the market is near its most oversold point. The market was down and looking really ugly when Speaker Boehner looked into the cameras with Harry Reid, Mitch McConnell and Nancy Pelosi to tell us how comfortable they were about getting a deal done well before the end of the year. The stock market jumped by about 100 points in 15 minutes or so.
Our fearless leaders also told us that their work will not begin until they return after Thanksgiving. So we should have an expectation-free or fear-free week next week with the stock market still oversold. Does that suggest a rally next week? Lawrence McMillan of Option Strategist writes:
“In summary, the market is getting very oversold. At this point, all that
would indicate is a perhaps sharp, but short-lived counter-trend rally.
For a true intermediate-term bottom to form, we would need to see some
actual buy signals originate.”
For those who think Apple drives the stock market, stock trader extraordinaire Jeff Gundlach told CNBC viewers that Apple made a near term bottom on Friday morning in its flush down to $502ish. Gundlach said Apple can go up 50 points before falling again. Within his bullish call, Gundlach sort of backed away from his bearish call on Treasuries.
The most interesting news of the week was the fight between ECB and IMF about Greece. They all meet next week to decide on the next payment to Greece. That might make an otherwise boring week interesting.
3. The Middle East
The Israeli campaign in Gaza might also make next week interesting from a strategy angle if not from a market angle. As Stratfor said:
- To begin to make sense of the escalating conflict in Gaza, we need to go
back to the night of Oct. 23 in Khartoum. Around 11 p.m. that night,
the Yarmouk weapons facility in the Sudanese capital was attacked,
presumably by the Israeli air force.
That was the beginning of the campaign to remove the Fajr-5 rockets from Gaza. True to middle eastern form, the campaign that began to destroy Iran-supplied weapons may end up benefiting Iran. In fact, as Stratfor writes:
- “All in all, this [Israel’s Gaza attack] may turn out to be a relatively low-cost, high payoff maneuver by Iran.“
This stuff is upsetting Robert Kaplan, Stratfor’s geopolitical guru. He expressed his frustration in his article The Middle East Distraction. His concluding statement:
- “These above trends [China-Japan, China-India, South China Sea] are not fanciful; in fact, they are developing as we
speak, however slowly. The only thing required for their fruition is
continuity. The lesson is to concentrate on the wider world by adhering
to a sound geopolitical wisdom and to not fixate on the handful of
countries in the Holy Land that happen to be the foreign extensions of
the American media’s obsessions.“
Kaplan is talking about you, BTV & CNBC. Stop obsessing about Gaza’n stuff and follow what the President is doing next week – going to Myanmar – that magical land of Pagodas, huge resources and the key to the new silk route – from India to Myanmar to Thailand & SE Asia.
A year or two ago, Myanmar was given up as China’s suzerain but now Japan is stepping in with development and President Obama is demonstrating American commitment to Myanmar. Secretary Clinton urged a deeper relationship between Australia and India and spoke about the congruence between America’s Asia Pivot and India’s Look East policy.
So forget about the Middle East, as long as the conflict stays between Israel & Palestinians. And we are confident it will remain so. Egypt is broke and militarily decrepit. Turkey is engrossed with Syria and Iran is loving the respite the Gaza conflict provides. Frankly, this is not a conflict, it is a clean-up, at least so it looks right now.
- Erskine Bowles & Alan Simpson on CNBC Closing Bell on Thursday, November 15
- Alan Greenspan on BTV’s In the Loop on Friday, November 16
1. Alan Simpson & Erskine Bowles with CNBC’s Maria Bartiromo – Thursday, November 15
This is a great interview. Both Erskine Bowles and Alan Simpson speak their mind. Below are excerpts from the CNBC Transcript of the entire interview. .
- ERSKINE BOWLES: And if, in fact, you focus on what’s right for the country, you’re always gonna come down to solutions that reforms the tax code and makes the entitlement programs sustainably solvent..
- ALAN SIMPSON: and you could tax the rich into oblivion and it’ll run the country for about five months. I mean, who is kidding who?
- ERSKINE BOWLES: Yeah, the– the interesting thing is if you look at the amount of income tax that is paid to the country, it’s about $1.3 trillion. $1.1 from individuals, $200 billion from corporations. And people always ask me, “How can our marginal rates be so nominally high and us net such a relatively little amount of money?” ‘Cause remember, we’re spending $3.6 trillion….And the reason is we have $1.1 trillion of backdoor spending in the tax code. That’s for deductions for credits. And what we said is, “Look, let’s start by wiping out all of those. Let’s broaden the base, simplify the code. Let’s use 92% of that money that we’re usin’ from getting’ rid of the tax expenditures to reduce income tax rates and 8% of the money or about $100 billion a year to reduce the deficit.” Eight– $100 billion a year over ten years is where our $1 trillion of our $4 trillion comes from in our deficit reduction plan.
- MARIA BARTIROMO: So you’re saying just closing the loopholes alone brings you at least a trillion.
- ERSKINE BOWLES: Yeah, if you’re– if you’re willing to wipe out all of ’em, and that may not be politically feasible, but you can definitely solve the problem by broadening the base, simplifying the code, and getting rid of the tax expenditures.
- ERSKINE BOWLES: I actually am more hopeful. You know, I think this is a magic moment. We got a Democrat president, who is in his second term, who has been willin’ to put entitlement programs on the line. We got a speaker, a Republican, who really gets it, who understands that we have to have some additional revenue.
- ERSKINE BOWLES: Both of them are saying we have to have revenues. The president says, “Look, I want that revenue to be real. And the only way I know for sure to make it real and come from the top 2% is to take rates from 36% to 39.6%.” The speaker on the other hand is sayin’, “There’s a better way to do it. And that better way is by reducing this spending in the tax code.” And I think he’s probably willing to confine it to the top 2%. So what we have to do is find that middle ground where we make sure that the president knows that we’re gonna get that money, but we’re gonna get it in the most productive, economic way we can.
- ALAN SIMPSON: Yeah, I am really worried that we won’t get to a deal….What’s worrisome is if we get over the cliff, we don’t have a deal, and the market doesn’t anticipate that we’re actually gonna be so stupid as to go over the cliff, and I think you’ll see the market really crash. And I think you’ll see the rating agencies downgrade our credit again. You’ll see Fitch and Moody’s join S&P. I think you’ll see corporations lose confidence that we know what we’re gonna do, where we’re gonna go. I think you’ll see ’em slow down hiring. I think you’ll see ’em stop capital expenditures, capital go on strike. It will be a hell of a mess.
- ERSKINE BOWLES: Yeah, I think there’s about a one third probability we’ll get a deal in lame duck….About a one third that we’ll go over the cliff and be able to reach a deal right afterwards and that’ll be okay. But there is that one third chance that we won’t. And we’ll end up in chaos.
- ERSKINE BOWLES: Well, they’re talkin’ about getting’ somewhere between $80 and $100 billion a year, which is no small number from revenue. But when you consider the fact that we have a $1.1 trillion deficit, you can see, “Oh, that’s not gonna solve our problem. We must also reduce spending if we’re gonna put our fiscal house in order.”
- ERSKINE BOWLES: We spent 10% of the budget in 1981 on health care. Today we spend 25% of the budget on health care. By 2020, we’ll be spending a third. And it won’t be long before all we’ll be able to do in this country is take care of a couple of old kooks like me and Al, you know, and buy a few tanks.
- ERSKINE BOWLES: To– today, even at these low interest rates, we’re spendin’ about $230 billion a year on interest. If interest rates were at their median level they were in the 1990s or the first decade of this century, we’d be spending $650 billion a year on interest. Now let me just put kind of a relative perspective what $230 billion means….That’s more than we spend at the Department of Commerce, Department of Education, Energy, Homeland Security, Interior, Justice, State. In fact, it’s more than we spend in all of ’em combined. And Maria, if we do nothing, by the
year 2020, we’ll be spending over a trillion dollars a year on interest cost alone. That’s a trillion dollars we can’t spend in this country to educate our kids or to rebuild our infrastructure or to do high value-added research.
- ERSKINE BOWLES: And unfortunately, it is a trillion dollars that’s gonna be spent principally in those countries that we’re borrowing from. You know, that means will be building the infrastructure in Asia. It means we’ll be educating those kids over there. And it means we’ll be building their universities, so the research is done over there, so the next new thing is created over there, so the jobs of the future are there not here.
- ALAN SIMPSON: Well, the sinister thing is is that there are leaders of both parties who think that would be to their advantage to go off the fiscal cliff. What a wonderful trait that is. That we can win more as Democrats if we let it go over. We can win more as Republicans. This whole game is about win or lose. It’s not about America. It’s about how do we make the Dems lose and how do we make the Republicans lose. People are sick of that.
- ERSKINE BOWLES: Maria, if– if we go over this fiscal cliff and don’t get a deal immediately, what’s the economic effect next year? You know, we’ve talked about some of the qualitative effect. Quantitatively, you know, economic growth will be reduced by about 3%. We’re only growing at 1.5%. That means by definition we’re automatically back in recession. You know, another two million people will lose their job, unemployment will go to over 9%. Why would we do that? That’s a bet of a country. Why would we do that when we know that we can come together and get a deal if we just put the partisanship aside.
- ERSKINE BOWLES: I think that if we do get our house in order, the future of America is really bright and we can compete with the best and brightest, wherever they are. If we don’t, we’re well on our way to becoming a second-rate power.
- MARIA BARTIROMO: Second-rate power. Could the U.S. go bankrupt?
- ERSKINE BOWLES: Absolutely. Absolutely, we could go bankrupt. You know, you can’t go on with a trillion dollars of deficit–year after year after year. And don’t forget, we only take in $1.3 trillion in tax income. And we could be spending a trillion dollars on interest alone by the year 2020. We can’t go on like this.
2. A moderate recession is a very cheap price to pay – Alan Greenspan with BTV’s Betty Liu – Friday, November 16
This is an excellent interview. Mr. Greenspan is more passionate than usual and clear in his comments. The detailed summary below is courtesy of Bloomberg TV PR.
Greenspan on the fiscal cliff:
- “We have to recognize that this is going to be extraordinarily difficult to solve. All of the simple low hanging fruits have been picked and the presumption that we are going to resolve the big issue on spending by making a few little twitches here and there I think is a little naive. If we get out of this with a moderate recession, I would say that the price is very cheap. The presumption that we will solve this problem without paying I think is grossly inappropriate.”
On Simpson and Bowles saying that the markets could crash if a deal isn’t made:
- “I think it is not only Simpson-Bowles. I think the markets are getting very shaky. And they are getting shaky because I think fiscal policy is out of control. And I think the markets will crater if we run into any evidence that we cannot solve this problem. And I think the notion that the issue of the impact on the economy is strictly the spending tax issue, is also the market. I think we underestimate the extent to which the market value of assets has a very important impact on real GDP.”
On whether the U.S. is headed into a recession even if a deal is made:
- “Not necessarily. I am just saying that we may get a deal, which will take us for next year or so. But the question isn’t that. I think the question is essentially how are we going to stop what is a critical problem here, an extraordinarily rapid rise in what the department of commerce calls government social benefits to persons, which has been rising very rapidly bipartisanly in the sense that it has been rising even faster under Republican administrations than Democratic administrations. And they are all very closely involved in these new benefits, the only problem is that it is eating into the savings of the society and our long-term growth. And yes, we can continue for the next year or so without any really serious problems emerging. But I think it is a highly risky endeavor. The problem is, if we are going to come to grips with this thing, we are going to have to recognize that even if we have got to pay the cost of a significant rise in taxes to get a significant slowing and then decline in social benefits, that is a very cheap price in the sense that a large increase in taxes required to fund what is currently on the books is going to cause a recession. But I think that if we can get away with that is the only cost to this whole problem, I think that is a pretty good deal.”
On where Republicans and Democrats will find common ground on cutting entitlement programs:
- “It is going to be extraordinarily difficult. The issue is that words matter. If you ask the average person in the street about, for example, their social security benefits, they will say we have paid in, it is our money, we have earned it, I am getting it back. It is not welfare, it is not charity. It is equivalent to a private, fully-funded pension fund. It isn’t. It is essentially extremely underfunded. In fact, if we were to go to a fully-funded system, comparable to those fully-funded private systems, we would have to cut benefits by the equivalent of 4% points of payroll taxes or raise payroll taxes by the equivalent amount. Those are very large numbers and would suggest that yes, indeed, people have put money in, but certainly not enough to fund what they are getting back. The notion that we have to confront is that people do not think that this is any different from a private fund. The trouble is that it is.”
On tax policy:
- “The problem basically is that we have tried for decades to somehow manage our budget in such a way that, yes we can run deficits of this or that size, and we use it sophisticatedly for fiscal policy. It turns out we cannot do that well. It gets out of hand and this is not an accident. There is no question that raising taxes will turn the economy downward. Ideally I would like to just cut spending. I do not think politically that is feasible because the problem, no matter how you look at it, is fundamental
ly this extraordinary rise in social benefits to persons. That is the core of the problem. But the issue is, if we can solve it the way I would want to solve it, if we go back to where we were earlier at a much lower level of those benefits because I think what is then going on in recent years, we have not been able to afford.”
On whether tax rate increases or eliminating deductions and closing loopholes will get the revenue agreement:
- “I agree with those who argue that marginal tax rates really do matter. And I thought the genius of the Simpson-Bowles plan to identify a trillion dollar’s worth of tax expenditures which Republicans can a look at as subsidies, and the Democrats can look at as increased taxes to upper income groups. The problem is you are looking at the same issue and you can compromise on that. But look, if the issue here is whether you do it tax rates or you do it by taking loopholes out so to speak, obviously the latter is the better choice by far. The issue here is in both cases, you lower the rate of savings in a society and that will curtail capital investment, curtail the rate of growth and productivity, and essentially slow down the rate of real resource creation, which at the end of the day is what funds social benefits.”
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