'Tis the season to be a pessimist?
November 26, 2012
by Brian Wolf

What kind of blasphemy is this? This is the “holiday” season. This is the “joyful” season.

What am I thinking; talking about the season to be a pessimist? Didn’t we just go through a painful exercise in mud-slinging politics? We heard all the lies from both parties, America made a decision, and it’s time to move on. Isn’t it time to be encouraged? Isn’t it time to be hopeful? After all I’m a true red-white-and-blue died-in-the-wool optimist.

Well, unfortunately, my optimistic nature has to live within reality, and reality screams trouble ahead. Not trouble ahead as in, “abandon ship,” but rather, trouble ahead, “let’s baton down the hatch and see how bad the storm gets.”

Let’s take a quick look at why I’m so concerned about the upcoming year and beyond.

First, we have a real problem in Washington, DC with our budget. Over the past four years, our government collected about $8 trillion in tax; you can think of that as our government’s income. During that same period, they spent around $14 trillion. In other words, they weren’t even close to balancing the budget.

The national debt when President Obama took office stood around $10 trillion. Today, it is $16 trillion. From one perspective, you could say that our debt increased by $6 trillion over four years. From another, you could say our debt increased by 60 percent in four years.

If we don’t make major changes four years from now we might expect our national debt to be somewhere between $22 trillion and $24 trillion. Is it possible that President Obama could be responsible for more than doubling our deficit during his two terms?

While all this is going on, our second upcoming challenge is that our tax system is about to go through some major changes that can greatly affect the markets. One example of a change that could very likely be made is the capital gains tax.

Right now, you pay 15 percent. Obama would like that to be 20 percent or higher. Now, what happens to the stock market if this succeeds?

Well, let’s think about what a stock is worth. In “Finance 101” we learn that a stock is worth the current value of future cash inflows that are expected from that stock. In other words, a stock is worth today what you would expect to get over time from a combination of dividends and capital gain.

If tax rates go up on dividends and capital gains, those future values are worth less overnight. An increase from 15 percent to 20 percent on capital gains and dividend income reduces all future cash flows from your stock by 5 percent minimum, and probably more when you actually do the math.

The net result is that the stock market goes down in value overnight.

Then, you stack on top of this our third problem, President Obama’s healthcare plan starts to kick in. Neither side of Congress is happy about how this thing is set up, but that’s nothing compared to how corporate America feels about it.

Corporations are already talking about eliminating jobs by the thousands, due to the cost of what this legislation imposes upon them. How do you think that will end up affecting the economy?

With all of this hitting in 2013, (Note: I only covered three of about a dozen major issues), you can start to see why I have my reservations for the markets.

So, I ask you – what are you doing right now to protect yourself in 2013 and beyond? I hope you are doing something, because friends, it’s going to get interesting out there.

Keep in mind that regardless of the above-mentioned issues, in 2013 your portfolios could go up or down,; no one knows for sure. However, I prefer my clients to be “investment safe” as we watch the storm roll in.

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