Rational Investing: Bill puts Band-Aid on deep wound

President Bush just signed a bipartisan economic stimulus package. The concept, however misguided it may be based on past experience, is a proposed package of monetary giveaways that might best be described as provided by the Political Populist Pandering Partnership.

Appealing to every possible voting group with the “can you top this?” bidding battle, the parties are working feverishly to treat the symptoms rather than the cause. It’s an easy task pleasing the instant gratification segment of the public – far easier than convincing them that solving long-term problems with solutions that do not provide instant results will have a much more beneficial effect.

Tax talk

Such behavior causes that pot on the back burner to start bubbling. You know the one I mean. It’s been written about here a couple of times in the past several months that an underlying market concern is the economic impact that could be a result of the upcoming presidential and congressional elections.

Making the tax cuts permanent is important. To do otherwise is, in effect, a tax increase. While the U.S. economy is slowing, many foreign countries have lowered their tax rates, resulting in those economies growing at a faster pace. Want to see a market decline greater than that of this past January? Watch what happens if the tax rate goes up on long-term capital gains and dividends.

And don’t expect to see the frequently talked about flat tax. There’s a field full of oxen that would have to be gored for that to happen. Think insurance companies, tax lawyers, accountants, et. al., who rely on the complex tax code to generate revenues, not to mention the real estate industry and its demands for favorable tax treatment of the sacrosanct home mortgage interest.

Voting this fall will call for thinking about the candidates’ stands on taxes.

Think also about the health care proposals that the candidates present and whether you believe in and understand the ramifications of those proposals. Jettison campaign rhetoric and consider whether you believe that government or the private sector is the solution.

Political prowess

The politics of energy may take a back seat in this election. It is in the candidates’ best interests to not bring up oil and gasoline prices, as they have steadfastly refused to allow new drilling offshore or in Anwar; have made refinery capacity difficult to increase; legislated ethanol production levels that take 20 percent of domestic corn, raising food costs; and in a paradoxical move, kept Ted Kennedy’s view of the Atlantic unobstructed by preventing wind-powered energy generation. Will Exxon be a whipping boy because it set an earnings record, or will media report the reality that that record amounts to only an approximate 8 percent profit?

What will the law of unintended consequences produce if the winning candidate has congressional backing for a freeze on subprime mortgage rates or for a government bail-out of borrowers on the verge of losing their homes? If a bank or mortgage company sees government change the rules and interest rates go up, do you think that they will continue making mortgage loans at low rates if their cost of money is higher than the mortgage rate? What happens to the housing market then? What happens to the market value of the financial institutions?

If shades of isolationism start popping up in the political discourse, remember this: Just as you and I shop for the best value, so it goes with trade. In our international economy, money goes where it is most productive and most secure. It will stay there as long as the conditions and rules that created the opportunity remain in place. Thus, if sounds of isolationism enter the stump speeches in the form of trade tariffs or barriers because some other country isn’t fair, remember that economic conditions are fluid. What appears to be one country’s advantage today may belong to another country next year – and tinkering with economic laws for the short-term goal of being elected can, and often does, make it difficult for us to compete.

Clark Davis is a 37-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company. He can be reached at cdavis@slia.com.

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