Market Commentary

Where to next?
March 23, 2010

Where to next?  Will health care continue to dominate headlines?  Will the debate intensify?  What about the costs and the deficits associated with such extensive coverage?  How will the additional revenues paid to the government, approximately $409.2 billion by 2019 as per Bloomberg, affect economic activity?

Several times during the last two years I wrote this crisis has the potential to change the perspective of the electorate and perhaps even governments/societies.  I reiterate my long held view the President has reawakened the American electorate.  Whether or not the Administration is able to properly indentify changing attitudes and to harness this change is yet to be determined.

Perhaps the only definitive aspect of the current health care debate is when the plan is fully enacted it will probably cost more than CBO scoring, a view shared by over 90% of Americans as per recent polls.

If the plan is enacted as expected taxes will be increased on individuals and households earning in excess of $200,000 and $250,000, respectively.  This relatively small demographic group comprises about 3% of society as per the nonpartisan Tax Foundation.  Is the President gambling that this group is too small to overly influence elections given the possible good will he would earn with the disenfranchised comprising about 20% of society? 

Incidentally as per this same nonpartisan organization, the top 5% of wage earners defined as earning more than $150,000 pay 60% of all federal income taxes.  The IRS states 78% of taxes are paid by 10% of society, defined as anyone making more than $110,000.  While I cannot give attribution to my next point, some believe for the first time in history never has so much of the tax burden been carried by so few, the inverse of taxation without representation.

As per the National Bureau of Economic Research, a tax increase of 1% of GDP lowers real GDP by roughly 2% to 3%.  In other words higher taxes lower GDP, an environment perhaps magnified as so few pay the vast majority of taxes.   I ask is the CBO scoring realistic as its models are static not robust.

I have commented many times I believe the American electorate are a lot smarter than many pundits suggest.  As written above 90% of society believes health care will cost more than the CBO suggests.  A recent CNN poll stated 67% viewed deficit spending as the major issue facing the economy, an incredible statistic given 9.7% unemployment. 

Wow!

Perhaps the debate is just beginning.  Waxing philosophically, did not those who lambasted TARP the biggest proponents of the health care bill?  Whoever said democracy was easy.

Enough of the socio economic diatribe, markets advanced yesterday as the dollar erased earlier gains, commodities reversed losses and a rally in drug and technology shares overshadowed concerns of higher interest rates from swelling public debt, the result of unbridled federal spending.

Last night the foreign markets were up.  London was up 0.50%, Paris up 0.45% and Frankfurt up 0.23%.  Japan was down 0.47%and Hang Sang up 0.26%.

The Dow should open quiet. Existing home sales and the Richmond Fed are on released at 10:00. The 10-year is up 1/32 to yield 3.66%.