Mr. Reitmeister Returns to Washington - Investment Ideas

 

I just flew back from Washington and boy my arms are tired (insert rim shot here ;-)

 

Actually my hands are tired from all the typing. That’s because I just spent 4 hours in meetings with the President and other senior administration officials getting more insight on the economy, budget deficit, tax reform, gas prices, jobs and more.

 

The event was the White House’s Personal Finance Summit where I was joined by writers from other leading investment websites. You may remember that I was also there last June for the inaugural Summit. (Read about those original conversations in this article: Mr. Reitmeister Goes to Washington).

 

There were simply too many vital topics covered that it would be an injustice to just give you a short, boiled down version. Instead I want to share with you my full notes. Most of the information is quotes or paraphrased versions of what the speakers said. And on occasion I throw in my own personal comment. Those are displayed in parenthesis with italic text that start like so (Reity:…).

 

Before we get started here are the ground rules:

 

1)    Don’t Shoot the Messenger: Zacks is not a political website. And I am not a politically slanted writer. I am simply sharing with you what these people said. Certainly some of their comments are politically motivated knowing that another election is right around the corner. So please remember that these are their views and not mine.

 

2)    Read #1 Again: The last time I wrote this article I got far too much heat from customers as if I had become a pawn of the Obama administration just for going to the summit. So please read the above again. Then let me tell you that other Conservative/Republican leaning organizations were at these meetings as well like Forbes, Barrons and NewsMax. Certainly they are not pawns for showing up. I think you get the point.

 

3)    Main Theme of the Day: They covered a lot of ground, but the most consistent theme echoed by most of them was…“We are recovering…but not recovered.” Meaning there have been improvements, but the job is not yet done. Need to stay vigilant on that front.

 

4)    Skip Ahead to the President’s Comments: President Obama was the last speaker on the day. And since I list everything in chronological order, then his comments come last. So feel free to skip ahead. But be sure to come on back to the top to glean the rest of the days many insights.

 

And away we go…

 

Sarah Bernard, Deputy Director of the Office of Digital Strategy

·         Introductions and set up for the day.

·         What is on the record…and what is off record.

·         Who is speaking. Plenty of time for Q&A.

·         On with the show. (Reity: followed by 5 minute delay as Alan Krueger was running late. He actually said he went to room 230 instead of 430. And thus he was huffing and puffing as he came in because he was running to get there).

 

Alan Krueger, Chairman of the Council of Economic Advisors

State of the American Economy

·         How did we get into this mess in the first place?

1)    Stagnation in middle class incomes: Too much borrowing to keep up spending at the cost of savings.

2)    Too easy access to credit...and what that also meant for the housing bubble.

3)    The problem came bit by bit…and then ALL OF A SUDDEN

·         Impossible to expect immediate recovery given all the years of structural problems.

·         +2.4% average GDP growth over last 10 quarters

·         +3.4% if you back out the Government component. Which is better than the +2.9% we had in the last recovery. Meaning that government spending is going down. In particular, State and Local government spending. (Reity: My home state of Illinois is a prime example. Simply the state is near broke. So they keep coming up with new taxes that are starting to scare businesses away. And the lack of funds for schools and other public works is becoming far too apparent).

·         First showing for the main theme of the day…“We are recovering…but not recovered.”

·         Tsunami in Japan and Thai Floods show how interconnected the world economy is and how it affected some of our key industries.

·         Areas that are still sluggish

1)    State and Local governments are scaling back because of budget problems.

§  590,000 state and local government jobs lost since the Great Recession began.

2)    Residential construction. We had an excess of homes because of overbuilding. Now working off that inventory. That’s why new construction is lagging behind.

§  Believe that on average across the country the housing inventory overhang has been worked off and that should be on the rise going forward. And that is beneficial for the economy as a whole.

3)    Discretionary spending is down. Like dry cleaning. Car repair. And other services that can be put on hold.

·         Payroll tax cut has been beneficial to the recovery. (Reity: A little political posturing here…can’t blame them for trying ;-)

·         He is “cautiously optimistic” about the economy going forward.

·         Best private sector jobs growth in 6 years. And 3 times faster than the last recovery.

·         Recommends that we stay on this path…but job not done.

·         Efforts in the pipeline to improve housing market

1)    Treasury has purchased $300 billion in mortgage backed securities.

2)    Over 1 million mortgage loans modified because of government programs.

3)    Lower treasury rates = lower mortgage rates = housing more affordable.

·         Markets can deviate from fundamentals on the way up. And can do the same on the way down. And that is why the housing market cannot be “left to its own devices”. Meaning that a 100% free market approach is not advised here. And that is why they continue to have policies in place to help resurrect housing.

·         American JOBS Act. They talked about this program several times throughout the day. It was intimated that if it already passed then we would be talking about unemployment rate in the 6’s and not the current 8.3%. And yes they positioned it as House Republicans blocking the legislation. (Reity: It is an election year. Lots of comments like this one on tap).

 

Gene Sperling, Director of National Economic Council.

Economic Policy Priorities

·         (Reity: He made a lot of political digs. Some obvious. Some less so. It’s to be expected because Gene is the guy always at the center of the very divisive debates about the budget deficit. Again, his comments. Not mine. You may proceed).

·         He stressed the importance of the American Jobs Act was stressed just like Krueger.

·         The economy is recovering well. But would be doing better if more of the American Jobs Act was installed earlier. (Reity: Another political shot across the bow).

·         Things outside anyone’s control made this recovery more difficult to maneuver (higher gas prices, Tsunami, European debt concerns etc).

·         Payroll tax cut helped smooth some things over. In particular, extra income to pay for higher gas prices.

·         Stressed again that the congress is not working well with the White House right now (Reity: I’m sure the Republicans in the Congress see it the other way around. Who is right??? Or simply that is just modern, divisive politics where “compromise” is a dirty word.)

·         At 8.3% unemployment we are going in the right direction…but still a LONG WAY TO GO.

·         $17.9 trillion in retirement accounts held by US citizens. This is now finally above the highs from before the Great Recession. About 3% higher.

·         Medicaid under the house Republican budget is cut by 30% after 10 years. He believes this is excessive given that Medicaid costs are going up be a lower rate than the nation’s healthcare costs as a whole. So how can it be cut that deep when it’s not a cost ineffective program? And if you cut out all 30+ million children on the program…it’s still just a 21% reduction in costs.

·         Question: Many economists are panicked about 2013 because so many stimulative programs are set to come off the books like Payroll Tax Cuts. What is the solution?

1)    Answer: Need a “Grand Compromise” on government revenues and expenditures to keep the economy moving forward. Since the current situation is so “odious” to each political party, then the two sides need to come together to find a path forward that works.

2)    “Shared Sacrifice” is a theme he keeps repeating. Meaning that the wealthiest should help out more by paying higher taxes to help the middle and lower class who are struggling.

·         Doesn’t want to play “private sector forecaster”. Rather he will stay focused on policies that are beneficial to the economy. And that there are some things under our control and it’s just bi-partisan bickering that gets in the middle.

1)    Construction jobs if infrastructure spending bills would pass

2)    More teachers. Ditto to above.

·         (Reity: I remember Gene from the 1st summit back in June 2011. He called himself a “budget wonk” because his head is teaming with budget numbers. That is clearly true. But he did seem more embittered this time around given the combative nature of the budget talks. And that certainly flavored his comments today).

 

Jason Furman, Principal Deputy Director of the National Economic Council.

Buffett Rule in Depth

·         (Reity: Remember Rules #1 and 2 from earlier. Continue on…)

·         Buffett Rule is about fairness. The highest income earners in this nation should not be paying a lower tax rate than middle income Americans.

·         The average tax rate on the wealthiest has been cut in half over the last 50 years. And the rest of the public have seen a modest increase in tax rate.

·         Why is it lower? Because of all the loopholes like long term capital gains and dividend income that is many for the benefit of the wealthiest who have large investment portfolios.

·         The current budget plan DOES not have any aspect of the Buffett Rule in place.

·         But they do intend to let the Bush tax breaks for capital gains and dividends expire.

·         Says that the Ryan plan for FY2012 actually shows $49 billion more in taxes than the President’s plan. Meaning that the President is requesting more tax cuts than the Republicans, but in the public debate they are spinning it to sound the other way around. (Reity: There seemed to be heavy spin by the Dems on this last point. Can’t blame them for trying ;-)

 

Brian Deese, Deputy Director of the National Economic Council.

Housing In Depth

·         Still too many barriers in place for people to refinance and get more affordable mortgages.

·         Want to create laws/incentives to help people who are underwater on their mortgage (owe more than the home is worth)…but current on paying their mortgage, to get a lower rate of interest. But NOT necessarily a forgiveness of the principal.

·         Debate about whether the economy will bring the housing market back. Or will a rebounding housing market bring the economy back?

·         (Reity: Right now it looks like the former is true. But when housing does come up from bottom it most certainly will have a very positive impact on economic growth.)

·         Does believe that principal reduction is another piece of the puzzle.

·         One of the best cases for helping people modify loans is because foreclosures hurt local housing prices. So to bolster housing market there is great benefit in having less foreclosures.

·         (Reity: You could say that the government should let market forces take care of the housing market. But their concern is the overall economy. And home values have a great deal to do with a consumer’s sense of net worth and how comfortable they are spending money. So their efforts to date have prevented a crash in housing prices. It’s been more of a steady decline that is a shade more palatable. And now we are probably not that far from bottom. The benefits of higher home prices in the future would indeed be significant to the economy. Especially if it coincides with an increase in home building).

 

Heather Zichal, Deputy Assistant to the President for Energy and Climate Change

Gas and Energy Policy

·         There is no silver bullet solution to lower gas prices. And much is outside the control of government.

·         3 Key Things They Are Focused On

1)    Safe and responsible domestic oil & gas production.

§  Each year President in office domestic production has gone up

§  Tripled # of rigs for new exploration.

§  Both public and private lands open to exploration.

§  Horizontal drilling and hydraulic fracturing “game changers” to increase production.

2)    Renewable Energy (wind, solar etc).

§  Not just clean energy. But clean energy jobs.

3)    Energy Efficiency: Fastest and easiest way to bring down consumption.

§  Over 1 million homes have been weatherized with savings over $1,000 per family per year.

§  Higher efficiency standards for cars and trucks. Pushing car companies to double miles per gallon by 2025.

§  Average car now is 20% more efficient than back in 2007.

·         President is proposing incentives to move more transportation vehicles to natural gas given the plentiful supply. (Reity: Gladly the private sector is starting to mobilize on this front.)

 

President Obama enters the room 3:11pm ET

·         Warm greeting to all. Says he recognizes many of us from the last time. (Reity: What he means is that his eyes are still hurting from the glare coming off my head).

·         Education of the nation about the truth on tax policies.

1)    Where the money comes from

2)    Where it’s going (ex. Misconception about how much US spends on foreign aid is less than 1% yet average American thinks much, much higher).

3)    To spotlight unfairness and to correct it. (Read: Buffett Rule)

·         Entering the “silly season” aka political season. But the debate on taxes must continue.

·         Stresses Buffett Rule. If you make greater than $1 million then you should not pay a lower tax rate than your secretary/middle income earner.

·         Overarching message

1)    “Eager for transparency”

2)    “Entirely interested in accountability” (for congress and the White House)”

·         Question: What are the odds of a major jobs bill passing in the next few years?

·         Answer: “Depends what you call major”.

1)    The extension of the payroll tax cut was such a step

2)    Jobs Act that they are signing this week. Easier capital formation for young companies. And infrastructure.

·         Housing: Need to expand the efforts on refinancing mortgages. And in general there is decent bi-partisan support on this.

·         Question: Release of strategic oil reserve to lower gas prices.

·         Answer: No silver bullet line repeated.

1)    All options on the table. But does not take release of the strategic reserves lightly.

2)    But not going to do anything imminently

3)    (Reity: Oil inventories continue to ratchet higher. So that means demand is coming down a notch because of higher gas prices. On this news oil prices did come down. So hopefully we can find a better equilibrium that does not hamper the overall economy).

·         Question: About Rogoff and Reinhart’s study on the problems of too high of a debt burden and how that can hurt the economy.

·         Answer: He spun it to a conversation on health care costs. And savings from his programs.

§  The only way we stabilize the debt and bring it down is to talk about budget cost reductions and healthcare and appropriate tax revenues.

§  He believes we can’t just cut our way out of the problem. Need to raise revenues as well.

·         Question: Romney says that Obama is out of touch because he has been in the White House. How does he respond to that?

·         Answer: He focused on all the ways his past is like that of the middle class

§  Took him 9 years to pay off student loans.

§  First home was modest condo where he had to scrape the money together for down payment

§  Rusty first car. Says he bought it on purpose to make sure that his wife wasn’t marrying him for the money. (mild chuckles around the room).

§  Credit card debt problems early on.

§  Things didn’t improve financially til recently (well delivered joke).

§  Then came a long pause. He says he is trying to be diplomatic with his answer to the question. But when you boil it down, for the most of his life he has endured struggles that most in the middle class have experienced. Those struggles are still fresh in his memory. And he believes that has him more in touch with the average American than Romney who obviously has NOT been a middle class citizen (now or ever).

§  (Reity: I hope Romney realizes this argument has no legs and best to stay far away from it.)

 

Closing Thoughts

 

The economy is in much better shape now than during the last summit in June 2011. Clearly the administration wanted to flex some muscle about improvements in hand because it’s an election year. But as they kept stressing, there is much more that needs to be done. The American JOBS Act is a big piece of that platform and they want to make sure the electorate knows that their hands are tied at the moment because of the Republican Congress.

 

This last point brings me back to the current problem in America. Both political parties are too interested in making a fool out of the other to win future elections when they should be creating solutions to the serious problems that face the nation.

 

“Compromise” is not a dirty word. Anybody married for more than 2 weeks knows that to be true. It’s how parties with sometimes opposing views work things out to progress forward. I would like to see more of that applied in Washington D.C.

 


 
To read this article on Zacks.com click here.