When we are born, we see things
upside down for the first few days. A major task of our brain
is
to turn these images right side up. This is accomplished through
the optic part of the brain. Psychological studies have shown
that the brain can be retrained to see things upside down.
By wearing glasses with inverting lenses, everything appears
upside down, but after a few days even with the glasses on,
the brain is retrained to see things right side up. After
taking the glasses off, vision becomes upside down again,
but a few days later without the glasses, vision returns to
right side up again.
So, one has to wonder, do some people at times see the world
upside down and at other times right side up? And which is
which? Some see raising interest rates as a means to stop
inflation. Others see rising interest rates as contributing
to inflation. Some see lowering tax rates leads to higher
deficits. Others say lowering tax rates increases investing
and spending thus higher revenues. Do we all at times wear
inverting glasses to see what we want to see? Maybe reality
is an illusion. However, if it is or it isn’t, it’s
what we have to deal with in present time.
This wordy discourse brings us to the economy and investing.
We are constantly bombarded with
economic data on a day-to-day basis, and of course, there
are always differing visions, of what that data means or will
mean in the future. Case in point, the Congressional Budget
Office (CBO) recently released statistics on capital gains
tax collections. When this administration reduced the tax
on capital gains from 20% to 15%, opponents predicted that
this would reduce tax revenue. This 25% reduction in the tax
rates prompted investors to sell existing asset holdings and
reinvest in other assets with a potential for newer and more
rewarding assets. The Treasury also benefited. In 2002, at
the 20% tax rate, tax liabilities were $49 billion. They rose
to $51 billion in 2003 at the 15% rate, then $71 billion in
2004. The CBO projects 2005 to yield $80 billion. This is
one of many examples of some wearing the wrong glasses. It
is also why it is important to look beyond the day-to-day
noise and smooth out this data over time to get a clearer
vision of what is really happening.
The stock and bond markets tend to fluctuate on day-to-day
data. This presents opportunities to
buy or sell depending on the longer term outlook for stocks
and bonds. A trend in motion tends to stay in motion, so it
is best to keep your vision on the long- term trend. In the
early 1980s, when the prime rate reached 22%, it was obvious
that corporations could not continue to borrow money at those
rates, and the long-term upward trend in interest rates was
broken. The downward spiral continued until rates reached
1%, and the Fed commenced raising rates. That upward trend
is still in effect, and investment decisions should be made
with that new trend in mind. The stock market began a long-term
upward trend in 1982 that did not terminate until 2000 when
savvy investors noted the extreme valuation in the high technology
sector. A longer-term view of the stock market precludes the
market in general moving on to new heights soon and the beginning
of a new upward trend.
Now, having said all that, we will look at some near-term
economic data while keeping our vision
focused on the longer-trend. The markets reacted Friday (February
3) to news of unemployment dropping to 4.7%, hourly earnings
rising 3.3% year-over-year, labor costs rising 2.4% (biggest
gain since 2000) and productivity gains slowing to 2.7%. All
of this data was considered inflationary, and the markets
reacted accordingly. We look for the longer-term trend of
inflation to be up and will continue so but at a measured
pace. New non-farm employment was reported at 193,000 for
January below economists’ expectations. However, these
numbers are very erratic and are readjusted every month. The
longer-term pattern shows we are creating over two million
new jobs every year.
Corporate America also sees the world in a vision opposite
the federal government. The corporate
world has seen the error of deficit spending and has been
cutting and downsizing the last five years to become lean
and mean. The federal government on the other hand has a hard
time keeping their hands out of the cookie jar (tax receipts).
The government needs to rein in spending and become lean and
mean also.
We have mentioned in the past how corporations have seen
the negative impact on their income statements brought on
by defined benefit plans and are moving to contribution plans.
Social Security will have to remove the inverting glasses
lest we bankrupt the country.
Random thought for February 2006:
Turtles can breathe through their butts. They must be wearing
inverted glasses.
|
