Forbes on Fox Saturday 3/3/07
(3/2/2007)
(3/2/2007) This weekend I will join Steve Forbes, Jim Michaels, and all my friends at Forbes on Fox to discuss what last week's crazy stock markets mean for investors. Topics include how a tax hike would impact the stock market, whether there is a recession ahead, ideas for recession-proof stocks, and how to deal with our fading friends in Europe. The show airs at 11AM in New York and 8AM in Los Angeles on the Fox News Channel as part of Neil Cavuto's Cost of Freedomblock. I hope you can join us.
Last week’s big drop in the stock market was a wake-up call. The economy, profits, and interest rates are all in great shape today. But global investors are skittish about the things they see coming out of the US congress—An early Iraq pullout, tax rate increases, the end of secret ballots on unions, new, heavy-handed regulations on the Internet, and massive protectionism.
The talking TV heads have blamed this week's Chinese stock market air pocket on everything from Alan Greenspan's speech to rumors that the Chinese government may impose a capital gains tax (the current rate is ZERO!). I take it as a signal that a signal that US politics, through protectionism and currency-meddling, could destabilize their economy too . Knock it off, Congress, before you wreck the fastest growing global economy in a hundred years.
And another thing...why can't we get a Treasury Secretary that still has hair? Which reminds me--if you don't watch the show this weekend your hair will fall out. I'd tune in just to be safe.
On the effect of the deficit on the stock market: No one has ever made a dollar using deficits to forecast interest rates or the stock market, not even THE RICH. The relationship is not just weak, it is non-existent. The historical correlation actually has the wrong sign. There are two reasons for this. One is that movements in the deficit are mainly a reflection of growth--people who make money pay taxes. the other, deficits are chump change relative to the asset markets where they must be absorbed. We have more than $165 trillion of privately-owned assets in the U.S. Selling a hundred billion more less of any asset doesn't even move the dial.
As America beefs up its presence in Iraq, European countries continue to pull troops out Iraq and Afghanistan. Should we boycott their products and cancel EU vacations in protest?
This is a truly dumb idea. Boycotting Europe would not help gain their support, it would further alienate them. This is the next chapter in “The Neocons Fabulous Adventure.” We don’t need a surge in Iraq. Their government will not be able to take over in any reasonable time. There is simply too much wealth and strategic power buried under Iraq for this mess to go away. I am sorry to say tbhis, but the only permanent solution for Iraq, a permanent multi-country peacekeeping force there. Iraq is, and always has been, about oil. The world economy won't go around without it.
This week the house voted for the Employee Free Choice Act, a proposal which would allow unions to organize workplaces with public rather than secret ballots. Will the plan help or hurt our job market and economy?
Taking away a worker's right to a secret ballot is a tragedy. It will hurt the economy, not quickly though. It will be a long, slow painful erosion, just as has happened in Europe over the past 20 years. The Employee Free Choice Act is a payoff to the unions for their support in the November elections. American workers are feeling the effects of global competition and the accompanying wage erosion.
Capital was once trapped inside the borders because it was expensive and cumbersome to move. Advances in communications technology have changed that. Today, an investor can move capital from any country, to any country, at virtually no cost. And you won’t know that he did it.
Capital owners have been systematically redeploying their capital in high-return, capital-starved, places like China and India. That’s one of the reasons profits are an all-time high as a share of GDP, up by more than half from 8% to 12+%.
But a higher profit share of GDP means a lower wage share. That’s why workers revolted in November, and why we see a union bill in Congress. The problem is, this solution won’t work. Instead of helping the workers, it will just drive capital faster offshore, reducing productivity and real pay for workers even further.
It’s good short-term politics in short term, but bad policy. Growth and incomes will suffer.