Download The REAL Story By - Seamount Financial Group

The REAL Story
By: Leon Colafrancesco, CFP®
September 30, 2016
As I reflect on the final revision of the second quarter Gross Domestic Product (GDP) reported at
a 1.4% annual growth rate, I cannot help but conclude that the weak recovery that we are
experiencing is not the result of the severity of the Great Recession or that its root cause was a
banking crisis, which by nature is more difficult and complex to resolve, but rather a direct result
of government policies. These policies of the past several years, in my opinion, have directly and
adversely had an impact on our nation's productivity and disappointing level of economic
growth. In fact, the rate of domestic economic growth has been held below 1.5% for the past
three consecutive quarters affirming the slowest expansion since 1949.
With history as our guide, global economic recoveries on average recoup about half of the GDP
lost during the downturn. The recovery period is usually pretty quick with an average duration of
two years. Hence, this recovery, based on these historical statistics, should be on pace for
approximately 3% per annum versus the 1.5% that has materialized.
Thus, I would like to share my recommendations about policy changes that need to take place in
the future that could result in both increased and sustained economic as well as productivity
growth for this great nation of ours.
Reversing the Moral Decay
History has proven that economies flourish when traditional values, strong work ethic and rule of
law and property rights are honored. It does not take a rocket scientist to comprehend that our
country's moral standards and ethical code of values has significantly diminished over the past
several years. In addition, the swiftness of this deterioration has occurred at an unprecedented
pace. Just examine our current Presidential candidates and their respective moral character as a
prime example. We need to formulate policies that support and encourage family formation,
have respect and protect all human life and allow communities to flourish.
Roll Back Inefficient and Cumbersome Regulations
In an attempt to primarily combat systemic abuse and exorbitant risk that occurred throughout
the financial and economic system leading up to the Great Recession in 2008-2009, the Obama
Administration has just imposed its 600th major rule (a major rule is defined as a cost to the
private sector to comply of more than $100 million). That is an average of 81 new major rules
per year during this administration's tenure or an average of one for every three days that the
government is open. According to the American Action Forum, the economic costs of all these
rules add up to $743 billion or a "regulatory tax" of $2,294 per American. These costs
eventually show up in higher prices or fewer jobs created and finally in reduced corporate profits
and wages for those fortunate enough to be employed. These dollars and labor-related costs
would have been much better allocated towards innovation, manufacturing and providing
education and services towards the betterment of our country rather than the costs to adhere to
the ever growing complex web of government regulation.
Comprehensive Corporate and Individual Tax Reform
Simply put, the amount of words in our current tax code is greater than the Bible! The
complexity of the tax code allows for tax-advantaged loopholes for the privileged and increased
taxation for those not as fortunate. We need to implement laws and regulations that will reduce
the corporate tax rate to a level that is competitive to the rest of the world while at the same time
minimize and eliminate corporate tax loopholes. We also should aggressively pursue a tax
efficient strategy that will encourage U.S. corporations to repatriate profits currently situated
overseas so that this record level of cash can be brought back into the U.S. and used domestically
in areas such as infrastructure spending.
For individual tax reform, simplification is of utmost importance. Once again and similar to the
corporate side of the tax laws, we need to reduce the tax rates and consolidate marginal tax
brackets while minimizing and/or eliminating some deductions only available to the privileged
few. We should have a taxation system that does not require on average over 50 pages of forms
to be filed to the IRS each year by an individual or family. Finally, there needs to be less
emphasis on social engineering within the tax laws allowing each individual American to
determine how best to retain, handle and allocate their own hard earned dollars!
Reduce Future Dependency on the Government
Ronald Reagan had a famous quotation during a speech while President that sums this issue up
perfectly: "The nine most terrifying words in the English language are I'm from the government
and I'm here to help."
The primary fiscal policy used to counter the effects of the Great Recession was increasing
government transfer payments. Social benefits as a percentage of GDP expanded from 8.7% in
2007 to 11.7% in 2010 and in 2015 reversed course, hopefully permanently, to 10.9%. The
transfer payments include but are not limited to Medicaid, Medicare, Social Security and food
stamps. Unfortunately, increased government transfer payments do not improve the level of
productivity growth that results in greater overall economic growth. We need to implement
policies that will enhance educational skills and job training, improve labor force participation
and match worker's job skills with the level required in today's sophisticated and technologically
advanced marketplace. Finally, we need to insist that our leaders in Washington D.C. pursue
budgetary policies that aim to reduce the growing federal deficit that has nearly doubled in just
the last eight years quickly approaching $20 billion dollars.
In addition, the Federal Reserve Board needs to reestablish monetary policy of normalizing
interest rates that began in December 2015. While near zero interest rates and the aggressive
purchasing of government bonds, known as Quantitative Easing, was necessary for the initial
several months and perhaps years after the recession, sustaining these policies much further into
the future carries the risk of speculative asset bubbles that will eventually pop causing undue
harm to the economy, financial markets, the housing industry as well as the labor force. We need
to allow for the private sector to adjust to current as well as future economic and market
conditions without the Federal Reserve Board's unprecedented influence. In addition, we need to
encourage Americans to save by reinstating reasonable interest rates to be earned on bank saving
accounts and government, corporate and municipal bonds while discouraging the future use of
debt because interest rates remain unsustainably low. We also should prioritize and reverse the
current thinking in the financial industry and investment community which encourages investing
in bonds for growth, in anticipation of lower future interest rates, and purchasing stocks
primarily for their dividend income.
Promote Free and Fair Trade
The U.S. cannot evolve into a isolationist country with protectionist policies and regulations.
Continued and sustainable prosperity depends on participating in a world dominated by
globalization. Therefore, we need to negotiate and execute fair trade policies with other nations
that allow for our ability to efficiently export our goods and services while permitting a level of
imports that is commensurate with our needs. We need to place trade restrictions and sanctions
on foreign nations that pursue currency manipulation in order to gain an unfair trade advantage
and work on an aggressive strategy of reducing our cumbersome trade deficit. Finally, we need
to initiate immigration policies which allow for secured borders, removal of known illegal
immigrants that have proven criminal behavior and establish a pathway towards citizenship that
will be challenging but rewarding for those wishing to pursue it.
Dealing With An Aging Population
Few remain of the "Greatest Generation", those living during World War II, and the Baby
Boomer generation is pursuing retirement in ever increasing numbers. Policies need to be
evaluated and implemented that will efficiently allow for excellent health and assisted living care
to this aging group of Americans at reasonable costs. Thus, entitlement reform will be required
to assure the long term solvency of both Social Security and Medicare programs. Finally, we
need to adapt and pay attention to the evolving mindset of the Millennial Generation, that
exceeds in numbers to that of the Baby Boomer Generation, because based on historical statistics
and perspectives, demographics do play a significant role in economic progress and future
market conditions.
With three months left in 2016, your portfolios and the financial markets, on a year to date basis
and for the most part, have been profitable. While this is no guarantee of future performance, we
are heading into the fourth quarter or the home stretch of 2016 with a decidedly shaky backdrop.
The global financial markets could reflect anxiety over a plethora of issues of which I will list a
few below.
•
The central bank's monetary policies around the world seems to be reaching a point of
less effectiveness. Never in the history of man has a negative interest rate environment
been so prevalent with approximately $30 trillion of bonds outstanding globally yielding
less than zero percent or around 29% of total bonds issued.
•
As a result of increasingly ineffective monetary policy, there is an awareness and need
for mostly debt-laden governments around the world to begin exploring and
implementing fiscal stimulus policies that will accelerate global economic growth.
•
The geopolitical tensions in the Middle East, including but not limited to the civil war in
Syria, and Russia's seemingly growing boldness of being involved, even militarily, in
worldwide affairs.
•
The growing erosion of the middle class around the world and both the adverse social and
economic implications thereof.
•
The U.S. Presidential election on November 8th will certainly bring its own level of
concern and anxiety among not only the electorate but also the financial markets.
There is a lot to pay attention to and maneuver around over the next several months. However, I
assure you that we here at Seamount Financial Group will work passionately and diligently to
measure up to the task. Capital preservation is of course always paramount but the anticipated
market volatility will present buying and value opportunities that we will attempt to profitably
exploit on your behalf.
We hope you have a wonderful Fall season and please feel free to contact us if any concerns or
questions rise to the surface. We thank you for your continual trust and confidence in our firm as
we make every attempt to assist you in accomplishing your long term financial objectives. And
please vote on November 8th. The future of this great country of ours depends on every citizen's
participation and involvement!
Sources: Census Bureau, Wall Street Journal, Standard and Poors.
This material may contain an assessment of the market environment at a specific point in time. It may also contain forwardlooking statements regarding future events or future financial conditions. Actual events or conditions may differ materially from
those expressed in this material. These statements are based on our current beliefs or expectations and are subject to
uncertainties and changes in circumstances, many of which are beyond our control. This information should not be relied upon
by the readers as research or investment advice nor should it be construed as a recommendation to purchase or sell a security.
Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less
than when originally invested.