Money Managers Live

Unusually Uncertain?

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Written by Dave Young, President of Paragon Wealth Management

Yesterday, Federal Reserve Board Chairman Ben Bernanke said that the outlook for the economy is "unusually uncertain".

He stressed that the economy was growing at a moderate pace. He mentioned that employment and consumer retirement sentiment were weak. 

When he said, "unusually uncertain" the market sold off. What a surprise.

So why is this recovery "unusually uncertain"? What is unusual about it?

I've been through a few economic cycles and have never heard the fed chairman use those words. 

I don't know what he was thinking, but I'll take a guess. After an economic slowdown/meltdown "usually" the economy goes through a normal cycle of recovery. He said this one is "unusually uncertain" indicating it is not "normal".

What is "unusual" this time?

I believe it is the impact that politics is having on our economy and the markets. Usually politics do not have that big of an effect on the economy. This time is different. 

Is it unusual for government to completely overhaul the private sector health care system, which makes up around 17 percent of our economy? Is it even more unusual to do it during such difficult economic times? Maybe it's unusual to do it when surveys show that most Americans oppose it. 

Or maybe it's embarking on a complete overhaul of the financial system? Maybe it's that the financial overhaul is based on the theories of senators like Chris Dodd and Barney Frank that have no "real world" financial experience and therefore those living in the "real world" have no confidence in them. Maybe it is because congress passes these monster bills (2500+) pages on a purely partisan basis without reading them. 

Why as he said, is unemployment high and why are consumers scared?

If you are a business that needs to make a profit, (unlike a government agency), there are costs and risks involved in hiring new employees. Maybe you aren't sure how much the new health care regulations are going to cost your company. Possibly you aren't sure how much of your money you will still have left to pay a new employee with after the upcoming new tax proposals are implemented. Now that unemployment costs go on for 99 weeks, maybe you don't want to accept that unknown liability you have if you need to lay someone off in the future. Or maybe it's simply because as a business owner you have a target on your back that says "Need Money? Tax Me!" and you don't feel comfortable with that. 

Why would you hire a new employee?

Why would you take the risk? You wouldn't. And most employers aren't. They are making things work with the employees they have. The government tells us every day they are saving us, but they are actually having the opposite effect. They have created incredible uncertainty. That uncertainty translates into high unemployment and low consumer confidence. 

Not to worry.

Today congress cleared the way to spend another $33,000,000,000 (that's billion) of our grandchildren's money, and extend unemployment benefits once again. This administration seems to be taking the law on unintended consequences to a whole new level. Maybe higher tax rates and permanent government expansion are not the solution after all.

Maybe we'll have a chance in the voting booth to start repairing this mess in November. Time will tell. 

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Some Thoughts on One of Life’s Certainties

Written by Dave Young, President

For people who invest (and even people who don’t), taxes have always been a hot topic. Unfair taxation caused many of our forefathers to abandon England and start their own country—and eventually hold a certain famous tea party in Boston Harbor.

Fortunately, we don’t have to resort to such drastic measures today, but taxes are still an emotional issue. Just look at what you’re up against: You work hard to earn a paycheck. But before you ever see the check, you give a portion of it to pay state and federal income taxes. Then you pay social security and Medicare. After you deposit the rest in your bank account, you still have to pay sales tax on anything you buy. Then, you’ve got property taxes, taxes on your cars, taxes on gasoline, and the list goes on and on. Finally, when you die, you get taxed on whatever is still left of your estate. In other words, you get taxed when you earn it, spend it, and ultimately die with it.

We’ve all participated in more than a few heated debates about who should pay more taxes and who should pay less. The only agreement I’ve ever heard regarding taxes is that someone else should pay them. With all of the rhetoric and emotions surrounding taxes, I decided to find out who really pays the most taxes. Here’s what I found out:

The Top 1% of income earners pay 34 % of all taxes
The top 10% of income earners pay 66 % of all taxes
The bottom 50% of income earners pay 3 % of all taxes

Studies by the Tax Foundation show that about 136 million income tax returns were filed in April. Of these, about 43 million families will show no tax payable. Since another 15 million families file no returns at all, about 58 million Americans will pay zero tax.

This means that 40 percent of all Americans pay zero taxes.

I found this interesting, because many popular media outlets love to preach about how the rich are not paying their fair share of the taxes in this country. There has also been a great deal of discussion about how recent tax cuts are unfair, because they benefit the rich. The reality is that they do benefit the rich, but that is only because the so-called rich (anyone with a middle-class income or better) already pay the bulk of all of the taxes.

This write-up from Growth Stock Outlook reprinted in The Chartist service was an interesting presentation. I hope you find it entertaining.

Let’s put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this. The first four men — the poorest — would pay nothing: the fifth would pay $1; the sixth would pay $3; the seventh $7; the eighth $12; the ninth $18. The tenth man — the richest — would pay $59. That’s what they decided to do.

The 10 men ate dinner in the restaurant every day and seemed quite happy with the arrangement — until one day, the owner threw them a curve. “Since you are all such good customers,“ he said, “I’m going to reduce the cost of your daily meal by $20.” So now dinner for the 10 only cost $80. The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six -- the paying customers?

How could they divvy up the $20 windfall so that everyone would get his ‘fair share’? The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would end up being “paid” to eat their meal. So the restaurant owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so the fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of his earlier $59.

Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings. “I only got a dollar out of the $20, “ declared the sixth man. He pointed to the tenth. “But he got $7!” “Yeah, that’s right, “ exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got seven times more than me! “ “That ‘s true!” shouted the seventh man. “Why should he get $7 back when I got only $2?” The wealthy get all of the breaks! “

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!” The nine men surrounded the tenth and beat him up. The next night he didn’t show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. They were $52 short!

It’s an interesting story that provides food for thought. The one positive takeaway from this article is that if you are paying too much in taxes, then you must be doing something right.