US MARKETS

            President Bush’s plan to partially privatize Social Security will raise interest rates and adversely impact financial markets. That is the exact opposite of what an editorial in the Washington Post says. The propaganda barrage has begun. Actually, it is a copy of a quote from Treasury Secretary John W. Snow. We then get his verbal foolishness, “Any additional debt should be accounted for openly, transparently, above board, not hidden ‘off budget’ for political purposes.” Republicans wanted it accounted for off budget. This is not an unnecessary fix for Social Security; it is a bailout of the stock and bond markets. It is another delaying tactic. Who would want to divert their Social Security into an overpriced stock market that is about to fall 50%? This insane plan will drive up the federal budget deficit for several decades. It would have to drive up interest rates. Then there is the question, can a $1 trillion issue be sold and who would buy it? This is an unfunded obligation. Another albatross around the necks of the taxpayers.

            In the realm of tax simplification we expect cuts or elimination of tax preferences, credits, deductions and business tax depreciation schedules. The move to privatize Social Security and change taxes will be before Congress by March and voted on by June. They want to get this out of the way, so people will not remember what they have done four years from now.

            Economists expect the number of jobs to drop 1.4 million in 2005. That does not sound like a booming economy to us. The administration believes there will be a 2.1 million-job increase. That is either in reality, or just plain lying. N. Gregory Mankiew, chairman of Bush’s Council of Economic Advisors says, “The economy is in very solid shape.” He must be talking about a different economy than we are.

            We hear about all the Bush tax cuts but never a word about the 27 million more Americans slated to pay higher federal income taxes. We might add a subscriber wrote in that because of the increase in the Medicare deduction, and the increase from Cola, her Social Security check was $1.00 larger. Anyway, over the next six years as taxpayers become subject to a tax provision unusually aimed only at the wealthiest Americans, they will now be subject to the alternative minimum tax. In fact, by 2010 it will strike 30 million Americans including many earning less than $100,000. In states with high-income taxation, such as New York, Connecticut, California and Massachusetts it will be brutal. That is because under the AMT the biggest factor in triggering the formula is the state and local tax deduction. The problems the AMT lacks are an inflation index and that makes it a most unfair tax. By 2010, 26% of those in heavy state tax states will be paying the AMT, those generally making over $75,000 a year. We do not see Mr. Bush pushing hard to end the issue because the hardest states hit all voted Democrat. That is a given, knowing how vindictive he and his neocons are; besides they cannot get rid of it at this point, because they will have an enormous revenue issue. They could kill it and also end the deduction for state and local taxes.

            In Massachusetts employers sliced payrolls for the third time in four months. There were 2,000 job losses, not a lot, but we are supposed to be in a recovery. Jobs have been lost in four of the last nine months. The state still has 195,000 fewer jobs then at the February 2001 peak. The greatest job losses have been in the real estate sector some 1,100. The big dig ended canceling 600 jobs, and manufacturing lost 400 jobs for a fourth consecutive monthly loss. Professional business services lost 600 jobs. All the gains came from the low paying hotel-restaurant, retail, health and education industries. This is not a very positive report.

            We now have the Anti-Atrocity Alien Deportation Act, which closes an immigration law loophole, by ordering the Justice Department’s Office of Special Investigations to treat war criminals as it has long treated former Nazis; systematically tracking them, barring them entry to the country, revoking their citizenship and deporting them. The problem is they have done a terrible job and the office has been used as a political tool.

The latest catch by the OSI is Marko Boskic, a Bosnian accused of participating in a 1995 massacre of 1,200 Muslim civilians. This is a difficult prosecution, in as much as the US backed the Muslims in the civil war.

            The act was attached to the Intelligence Reform and Terrorism Prevention Act, which was passed to unify and coordinate and the gathering of intelligence data to make sure nothing illegal or embarrassing reached the American people. Now the big hunt is on for war criminals. We recommend they start at the White House, cabinet, and work downwards.

            In a very strange turn of events the ACLU is being accused of being a privacy rights violator. They are using sophisticated technology to collect a wide variety of information about its members and donors that has ignited a bitter debate over its leaders' commitment to human rights.  The data collection makes a mockery of the ACLU’s frequent criticism of banks, corporations and government agencies for their practice of accumulating data on people for marketing and to oblige government requests. It is data mining and it is not legal.

            In a week we will have been involved in economics, finance, foreign markets, gold, and silver for 46 years. We closely have watched foreign markets, and lived in many foreign lands for many years, in order to be able to anticipate what goes on in American markets. In our studies, we have come to the conclusion that the British market most parallels the US market, and precedes it by some six to nine months. Investing is an art form and our approach has always been a fundamental one.

            Based upon what we have seen over the years, 2005 is going to be the beginning of a difficult time for Americans and the economy. The British housing market topped six months ago in part as a result of higher interest rates. House prices have been trending lower. Not a sharp sustained fall, a meandering reduction. Unemployment is 2.7%; inflation about 2%, but in the third quarter wages grew 4.4%, which means inflation should head higher. Like in the US, yes, there is a housing bubble. Interest rates are up 1-1/4% and refinancing has fallen off, which means that extra money to move the stock market is up, consolidate debt or to lower monthly payments has past. Government spending has increased in each of the last seven years, and government has been responsible for virtually all employment growth since 2001. The central bank needs to raise interest rates again; with a strong pound and an inverted yield curve, they cannot now do a thing.  British residents should be exiting the British stock market selling residual real estate, going long gold and sliver coins, shares, and buying pounds, euro and Swiss franc dominated bonds. An inverted yield curve is when short-term interest rates are the same or higher than long term rates. This time it will be the same, not different. Trade deficits of both England and the US are unsustainable and they are worsening because they both have lost their industrial bases. They have been moved to the third world. Smart investors in America are closely watching the UK market. That is why we cover it closely. Whatever happens there, will happen here. America cannot devalue their way to prosperity. Our leaders are delusionists.