President Obama's Economic Options....And It Ain't Gonna' Be Pretty

President Obama….as we’re just getting use to how that sounds, it will eventually roll off our tongue. But, here’s the big question, how will the Obama presidency affect the way that you manage your assets?

While there’s always a disparity between the promises that a politician makes when running for office and what a politician actually does once in office, this time around the potential for a larger disparity than we might normally expect from a politician looms large.

Why?

Take a look at our current economy and compare where we are financially as a country to where President Obama wants to take us.

During the campaign, candidate Obama promised tax cuts for working families, expanded, affordable, quality healthcare and a speedy withdrawal from Iraq to name a few of the candidate’s promises. Now that he’s in office, these promises, if to be kept, need to be transformed into new policies.

Possible?

The jury is still out, but many analysts agree that we’re currently in a recession that could linger into late 2009. Additionally, many analysts project that the budget deficit could officially reach $1 trillion annually during Obama’s tenure as President.

Bottom line in my view: there’s simply no money for the new programs that Obama wants and promised. (Note: John McCain would have found himself in the same boat—not enough money for his new programs either.)

So what will be Obama’s choices?

He could not deliver on all his promises, a move that would likely upset the left wing of his party. Or, he could cut government spending and implement only programs that we, as a country, could afford. (Not the usual course of action for many politicians.) Or, he could elect to raise taxes in order to pay for his new programs and help reduce the deficit.

My prediction?

Deficit spending will continue. Spending money we don’t have may not hurt us short term as long as investors are willing to line up to buy our debt, also known as US Government Bonds, but what happens if these investors, particularly foreign investors, stand up and say, “Enough is enough. You have more debt than you can service and you’ve seen the last of my money!”

If no one will loan us the money we need to cover our deficit spending, politicians will have no choice but to print money. To a certain extent, this process has already begun. If it intensifies, it will likely spell bad news for the US Dollar and trigger another bull market in commodities.

Before you dismiss such talk as fantasy or as being ‘out there,’ look at the current facts regarding the US Debt. According to the US Government Debt Clock, the current US National Debt is $10,636,555,736,159.91, although it’s gone up about $5 million in the time that it took you to read this short blog. The national debt has continued to grow at a rate of $3.87 billion per day since September 28, 2007.

When you consider that the entire population of the United States is 305,000,000, each citizen’s share of the national debt is between $34,000 and $35,000. Every family of four in the US owes about $140,000 in order to retire the debt—and that’s only if deficit spending stops NOW. It won’t; we’re still spending.

These huge numbers don’t consider the fact that the US taxpayers have now guaranteed the solvency of both Freddie Mac and Fannie Mae. In my view these liabilities alone could increase the national debt another trillion or so at a minimum.

When you look at and ponder these numbers realistically, you quickly come to the conclusion that there are many families of four who couldn’t afford to pay ‘their fair share’ – there are a lot of families of four in this country who have a negative net worth. So, as usual, those who have incomes and assets will likely eventually be called on to ‘ante up.’ If that were to happen, what would your share of this monster debt be?

According to a November 2008 article on Bankrate.com that quoted a Federal Reserve survey, if you have a household income of $40,000, you’re doing better than ½ the households in the US. If your net worth is $86,000, you’re again exactly in the middle; half of the US citizens have a net worth less than you and half have a net worth more than you. The 80th to 89th percentile of Americans relating to net worth have a median net worth of $263,000 according to the same federal reserve survey.

So, for discussion’s sake, let’s assume it takes a net worth of $200,000 or more (including all assets, your home equity, bank accounts and investments combined) to make the top 20% of the population as far as net worth is concerned. It’s this group that has enough in assets to potentially help pay down this massive debt, most of the bottom 80% couldn’t help with this debt even if they wanted.

That means that only 20% of the 305,000,000 folks living in this country have enough in assets to pay down the national debt. A little simple math will tell you that number is 61 million. If you find yourself among that group, your share of the national debt is now about $175,000 (the $35,000 number used earlier times 5; or, for you math geeks, $35,000 divided by 20%).

Now, using what I believe are more realistic assumptions and calculations, a family of 4 in the ‘top 20%’ now finds themselves owing $700,000 as their share of the national debt. (If you find what I’m saying to be unrealistic, just research where most of the tax dollars come from; it validates this argument.) $700,000, a staggering number, more than many of these families probably paid for their home and every car they’ve ever driven combined—yet that’s the mess our politicians have left for us and regrettably, our children and grandchildren.

Assuming $700,000 was a mortgage, that’s like giving each of these families another $5,000 per month bill to pay.

So, when you hear this talk about tax cuts and new programs, keep this in mind. If our country was a company, we’d be on the verge of bankruptcy. New programs and new tax cuts will likely only make the problem worse than it already is.

In spite of these facts, I expect politicians will continue their predictable manner, spending and legislating while ignoring the price tag. Eventually, and that day may not be as far off as you think, we’ll reach the ‘enough is enough’ point and foreign investors will shy away from buying US government bonds and then avoid US debt completely. When that day happens, the US politicians will be forced to print money, the US dollar will fall and commodities will soar.

So what does this mean for you? What should you be doing now with your investments?

My strong view is to utilize only investment strategies that incorporate exit strategies allowing you to buy and sell as market conditions dictate. My view is that buying and holding in unstable economic times can lead to losses, often significant losses. ‘Buy and hold’ has become ‘buy and pray.’

To meet this need, I’m working on a report that I’m titling “Prospering in This New Economy” and the design of a new investment portfolio which employs four different assets classes and utilizes exit strategies to gain more and lose less. I’m in the documentation and testing stages of this portfolio design and plan to make it first available to those who step up to the plate and express an interest. (If you are a current client, I can’t just start investing your money in this new portfolio. First, you would have to meet certain criteria and sign a new Investment Policy Statement.)

If you’re interested, let me know and I’ll put you at the top of the list.