Sovereign Debt is a Ponzi Scheme .....written by Greg Gann

The outstanding national debt of the United States as of May 2010 is just under $ 13 Trillion. The estimated population of the United States is approximately 300 million. This means that each citizen’s share of the current national debt is about $42,000. Since September 2007, the national debt has increased at an average rate of $4.10 Billion per day. [1]

Author, Martin Bell provides some great visual images to clarify the magnitude of the problem. He finds that the U.S. dollar is 0.10922mm thick. A stack of just $1 trillion would extend one quarter of the way to the moon. The dollar covers an area of 0.01034 square meters. One trillion dollars would cover the combined area of Washington, D.C., Rhode Island, and Delaware. So, to give a realistic image of our existing debt, multiply these images by a factor of 13.

In studying eight centuries of sovereign debt problems, Professors and co-authors Carmen Reinhart and Kenneth Rogoff cite in their book, This Time Is Different, that when the debt of a nation reaches 100% of its GDP, there is a reduction in potential GDP growth of approximately 1%. Today, the existing debt of Greece is 120% of its GDP. Italy’s is approaching 115%. Portugal’s debt is approximately 85% of its GDP. The United States is rapidly approaching a debt level close to 100% of our nation’s GDP. [2]

John Hussman, Ph.D., one of our clients’ investment managers, describes what is happening today in world markets as a Ponzi scheme. He describes that the price of an asset should reflect the future stream of income that the asset will generate, what is known as discounted cash flow. Ponzi schemes are created when assets are assigned greater values than their expected future cash flows can justify. Asset prices continue to rise when the purchaser believes that he will find a subsequent purchaser who will pay an ever higher price for the asset than he did regardless whether cash flows justify the higher price or not. When prices are no longer pegged to value, and value is no longer determined through reasonable expectations of those future cash flow payments, a bubble is created. This is exactly what we experienced in the late 1990’s dot com bubble. Stock prices were divorced from cash flows, and buyers were confident that there would continue to be future purchasers in line to continue to jack up prices. The trend continues until it ends. Everyone makes money in the Ponzi game until there is no one left in line willing to participate. The same thing happened with real estate.

As long as there is an assumption that the assets which support the debt will continue to rise, then no one believes that debt is the problem. Countries like Greece don’t have the luxury of devaluing their currencies. As the perception of sovereign defaults magnifies, investors will demand higher interest payments to justify the risk. An increase in interest rates on trillions of euros or dollars for that matter translates into a spiraling of the crisis. There is a problem when you have to borrow more just to cover the additional debt service costs.

The euro was an experiment. Unifying currencies of different nations with diverse cultures and values and work ethics and liabilities is a recipe for challenge and conflicts. On top of all these issues, Japan, countries in the Eurozone, and the United States are facing aging populations and growing unfunded liabilities. The Greek bailout will cost the U.S. dearly in terms of our contributions to the IMF. The United States and countries around the globe have simultaneously circulated a lot of money to combat systemic problems which have been brewing for years. The U.S. Treasury virtually nationalized our mortgage market. While debt can serve as a temporary band-aid, eventually growth must lead the way. Eventually there reaches a point of no return. You cannot resolve mountains of debt by issuing more debt. Eventually your credit worthiness gets called into question, and when that happens there become less parties interested in taking the risk, and the Ponzi game ends. And the problem is that there is no easy way out of the mess. Plans for greater fiscal responsibility, now termed austerity plans, mean that growth may slow. If there is fear that a currency may be devalued, well then who wants to risk being paid back in that currency.

When states like Pennsylvania and California are bankrupt and major countries around the globe are as well, it is hard for me to believe that we are in a long-term bull market. The problem now, from a trader’s vantage point, is that we are getting big spikes up in the market on certain days which are followed by craters. If we bet against the market, we are hurt during those up days. And, if we bet in favor of growth, we are hurt on those down days. To navigate in these waters, we are deploying additional technical indicators to assess market risk. We are also monitoring holdings with even greater scrutiny, and quite frankly, we are doing a lot of trading on both the buy and sell side. We are also allocating to investments that have cushions to help protect from the downside.

We are one world. And we are truly a small world. What happens in Europe has a direct, even if delayed, impact on the United States. As the euro weakens, the dollar strengthens. A stronger dollar is positive to some extent, but a stronger dollar makes exports collected by American companies more expensive because it costs more for the buyers of those exports to pay for the goods in dollars. In my humble opinion, any investor who feels complacent today because his investments have rebounded to a large extent from losses incurred during 2008, is either naïve or not getting the research to which we are exposed. This is a period where you should work to protect and preserve gains, and to actively monitor your holdings and the market and trade according to what the market dictates rather than what a pre-established, computer-generated asset allocation model outlines.

I am privileged to have earned the confidence of clients to proceed accordingly as a fiduciary on their behalf.

The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.


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[1] www.brillig.com/debt_clock

[2] Hedgeye Risk Management

Market Update - 5/7/10.....written by Greg Gann

I hate to lose money. And I especially hate to lose money for clients. As you know, my position has been that the market has been overbought and has been ripe for a pullback. What the S&P 500 returned in the last twelve months should have taken a decade. The fundamentals of the economy are still shaky, and unemployment has not improved much at all. The stock market has acted on its own volition, and it has ignored the economic realities. We have had very, very little allocations to stocks in the last year, finding other assets that provided good returns with much less risk and volatility. Because the market has ignored the economy, I decided to acquire some individual equities in specifically targeted areas last week after the initial market pullback. Over the last week, the stock market has been ugly. At one point in the Thursday’s trading day, the Dow was off 9% from its daily high. My computer screen showed the market going down like the Titanic. My first goal is to cause no harm and not lose principal. I frantically reset sell-stops and also sold out of some positions. There was so much trading commerce that the computer was operating extremely slowly and it was difficult to get a trading representative on the phone line. I don’t know where the market is heading. Whoever thinks markets are rational should sit by my computer and read my research. The point is that now I regret making last week’s trades. Hindsight truly is 20/20. However, I’d rather be bruised than burned. I want to make sure that we survive to see another and better trading opportunity.



Being nimble means not being beholden to any position and shifting to a protective, defensive stance when the market changes course. Being nimble also means acknowledging defeat, and realizing that if we step up to the plate with any degree of frequency, we are bound to strike out. It means cutting your losers short and letting your winners run. You will be receiving confirmations of the purchases and sales, and I just wanted to give you a heads up and appreciation for the moves. None of these positions represent a significant percentage of your portfolio, but I still hate losing any money for you.







The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.

Learning from the Best....written by Greg Gann

For an avid baseball fan, I can now imagine what it would be like to be all together at one time in a stadium with Babe Ruth, Willie Mays, Hank Aaron, Cal Ripken, and Brooks Robinson. I can now imagine this level of excitement and awe because I am intrigued with different economic perspectives and investment models, and last week, I attended an exclusive conference in La Jolle, California where many of the world’s greatest spoke. Normally, a conference will have one or two headline personalities. This one had more than ten. In future emails I may detail their exact viewpoints and predictions, but for now, I merely want to offer the bios of some of the presenters and give a very general overview of their wisdom. In addition to being world-class economists, most are also well- regarded authors. The conference was limited to approximately 300 individuals, and it was very humbling to receive insights in such a personal forum from the very same people whose books have helped me manage clients’ assets over the years, and who are regularly interviewed on CNBC, Bloomberg, Barron’s, The Wall Street Journal, the New York Times and the like. Allow me to welcome:



1) Niall Ferguson

Niall is an Oxford-educated author and world renowned speaker. He has written The World’s Banker: The History of the House of Rothschild and The Ascent of Money: A Financial History of the World. In 2004, he was named by Time Magazine as “one of the world’s hundred most influential people”. He is a professor of history at Harvard University as well as a professor of business administration at Harvard Business School.



2) Claudio Macchetto

Claudio is the Director of Global Platforms for Paulson & Co., the company that was featured in the book, The Greatest Trade Ever describing how Paulson ingeniously defied Wall Street betting against subprime mortgages to earn a spot in financial history.



3) Jason Cummins

Jason is head of economic research for Brevan Howard, one of the world’s largest hedge funds. Prior to joining the company, he was a Senior Economist at the Federal Reserve Board.



4) Dr. Lacy Hunt

Lacy is the author of two books as well as numerous articles in leading magazines, periodicals and scholarly journals. He is an internationally known economist and the Executive Vice President of Hoisington Investment Management Company, a firm that manages $5 billion for pension funds, endowments, insurance companies and others.



5) John Mauldin

John is a New York Times best-selling author and the editor of the highly acclaimed Thoughts from the Frontline e-letter which is read by more than 1.5 million readers weekly.



6) George Friedman, Ph.D.

George is an internationally recognized specialist in security and intelligence issues. He is the author of numerous articles and books on international affairs, warfare and intelligence. His most recent book, The Next 100 Years: A Forecast for the 21st Century is also a New York Times best seller.



7) Dr. A. Gary Shilling

Gary is well regarded for his forecasting record and his numerous books relating to economic themes and investment strategies. Since 1983, he has been a regular columnist for Forbes. He was also an informal economic advisor to President George Bush.



8) Dr. Michael West

Michael is the CEO of BioTime, Inc. and Embryone Sciences, Inc. The companies are focused on developing an array of research and therapeutic products using human embryonic stem cell technology. He has focused his academic and business careers on solutions for age-related degenerative diseases.



9) David Rosenberg

David is Chief Economist and Strategist for the Toronto-based investment firm of Glushkin Sheff. David ranked first in economics in the Brendan Wood International Survey for Canada for the past seven years and has been on the U.S. Institutional Investor All American All Star Team for the last four years, and ranked second overall in the 2008 survey.



10) Paul McCulley

Paul is Managing Director of PIMCO, one of the world’s largest fixed income managers. He is the author of the monthly research publication Global Central Bank Focus.



There were many other presenters who also provided great economic and investment insights. All but two of the presenters painted a very bleak economic picture in particular for the United States and Europe. There were serious arguments made why this past recession was not a normal recession and why a double dip is certainly within the realm of possibilities. All were concerned about record-breaking world deficits, taxes, increasing debt service expenses and the fact that just like Greece is experiencing today, there is no real easy way to unwind the mess that’s been created. The defensive stance that I have taken was very much affirmed. The bottom line was that markets are not always a gauge of the underlying economy. The economic stimuli have helped to cushion the fall but we are far from out of the woods and we are likely to face many, many headwinds moving forward.

Stay tuned. It will not be boring.



The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.

Are Your Expectations Realistic? ...written by Greg Gann

On several occasions, I have heard realtors say that clients lie. Realtors say this because their clients say that they will only buy a home that specifically meets a variety of stipulations, but then they see a house with none of the required features, and they buy it. This got me thinking about investors and what they say and do.



Investors commonly tell me that they are “conservative”, yet their holdings are the complete opposite. Investors say that they want to incorporate defensive strategies to protect and preserve wealth, yet when the market surges, they question why their assets are not appreciating at the same rate as the “market”. Investors say that they don’t want to invest in stocks when the stock market is down, but then they question why their results are less than the stock market when they are not invested in stocks and the stock market is in the stratosphere. Investors say that they want investments that over time have strategies to make positive returns irrespective whether the market is up or down, but some today can’t fully grasp why their portfolio isn’t keeping pace with a stock market that has surged 75% in just one year.



Since March, 2009, the stock market, as measured through the S & P 500, is up 75%. I do not know of another time in history when this index has surged to this extent, especially in light of the fundamentals in the economy being as tenuous as they are and unemployment hovering around 10%. Dorsey Wright & Associates, a leading investment research organization, on April 14, 2010, recorded more new 52-week highs for stocks in that one trading day than in any single trading session since January 2004.



Based on irrefutable measurements of supply and demand, Dorsey Wright showed that the stock market was very much oversold March 2009. A year later, we are experiencing a market which is very much overbought. Markets can continue trends for periods that defy rationality, but when a market becomes overbought, caution and defense should be the call to action. Warren Buffett admonishes investors to be greedy while others are fearful, and fearful while others are greedy. Many investors become greedy when the market surges and becomes overbought. They develop symptoms of FOMO, an acronym and investment diagnosis known as “Fear of Missing Out”. And when we are in the red zone, as we are as of April 15, 2010, FOMO manifests itself by enticing investors to get back in the game at the absolute worst time. Markets are like rubber bands. They are flexible and can stretch and stretch and stretch. But, eventually they can only stretch so far before there is a snap.


For the decade that ended December 31, 2009, the S&P 500 was down over twenty-four percent. Therefore, $10,000 invested January 1, 1999 was only worth $7600, a full ten years later. The 75% surge in the S&P 500 since March 2009 has been a huge gift. It should be treated as a gift, not only because the fragility of the economy, but also because if an investor’s long-range expectation is to generate growth of say 7% per year, then the returns that have been reached actually in less than one year, should have taken ten years to accumulate. Also of significance is that fact that even after this maybe once in a lifetime 75% one year surge, the S&P 500 is still approximately 22% below its value as of March 2000.



I regularly speak with investors who tell me that their investments took a blood bath in 2008. They also referred affectionately to their 401k’s as “201k’s” in 2001 and 2002 because of the losses in that period. In 2008, the 201k was walloped and became a 101k. These same investors today tell me that they are no longer concerned about the status of the portfolios because they are “back”. When someone tells me that he is back, I know two things immediately. I know that he has tremendous exposure to the stock market and I know that he does not have adequate defenses in place to help secure the net worth from the next correction or “snap”. A year ago, there were serious discussions taking place as to how to prevent a second great depression. Unprecedented government involvement and spending has helped to thwart an imminent crisis. Analysts’ earnings expectations last year were so depressed that in hindsight, it has not required too much for corporate America and beyond to exceed those projections. While it is easy to catch a ride on the euphoria train today, the world still has not presented an exit strategy to unwind government spending and correct unprecedented non-global wartime deficits. Nor is unemployment or housing showing real signs of improvement.



As an asset class, bonds are considered safer than stocks because when we acquire a bond, we become a lender, and in the event of failure, lenders get paid before stockholders, who are the owners. Lehman Brothers was a huge guarantor in world markets. When the government allowed Lehman Brothers to fold in 2008, confidence in the entire financial structure was called into question. If you couldn’t trust Lehman to survive, who could you trust? Because of the uncertainty and fear that this and other failures created in the market last year, bond prices got slashed. Bonds provided stock-like returns, but with significantly less risk. Because of this anomaly, I over weighted clients’ portfolios to individual bonds.



After the stock market has zoomed in one year at a rate at which most of us would be very content if it were realized over a decade, it is easy to forget that a year ago, all of us had real concerns just how deep the recession could go. I believe that stimuli of governments around the globe have significantly helped economies and alleviated panic. I also however believe that they have camouflaged the underlying problems and they have not proposed viable exit strategies or safeguards to prevent the next re-occurrence. For all of these reasons and a variety of others about which I have written in the past, I have exercised with caution over the last twelve months. We have used defensive strategies and a host of safeguards. We have very, very little stock exposure. It is impossible to incorporate these safeguards and defensive investment strategies and expect to earn anywhere near what the stock market does in a year during which the market provides a decade-like return in one tenth of the time. Until the fundamentals of the economy show prolonged and consistent signs of improvement and until unemployment is not near a double digit number, I believe that the prudent investor should remain cautious. Wars, deficits, unemployment, wages, deflation, tax increases, and tremendous regulatory uncertainties, all tell me that while fear and panic are no longer THE sentiments of the day, we are nonetheless not out of the woods. A huge part of increasing net worth is maintaining defenses to minimize losses.



The point is that we can’t have it both ways. The investors with whom I speak who tell me that their portfolios are “back” from the losses of 2008 also tell me that their losses in 2008 were 40% and worse. The S&P 500 gave these investors a gift in the past twelve months. I do not think that it is wise investment policy to only have an offense and to rely on “gifts” to grow wealth. And, one last point, just like car buyers always want to brag about the deal they negotiated on their auto to show off their negotiating prowess, investors at cocktail parties notoriously deflate their losses and significantly exaggerate their gains. So, the next time your friend tells you at the party or on the golf course that he is up 75% this year, take solace in the knowledge that he probably had huge losses in 2001 and in 2002 and in 2008 and probably hasn’t realized growth in over a decade.



I am writing this to give you the perspective that there are always periods during which a particular methodology will surpass another, and time periods can always be conveniently established to make one methodology look particularly beneficial. Offense-only, buy-hold strategies while rewarded with stellar performance in the last twelve months, have resulted in huge losses for more than a decade. Returns are temporary, but strategies are resilient. A fifty percent loss still requires a hundred percent gain just to break even. I rely on a number of both fundamental as well as technical research sources to negotiate the market and deal with whatever curve ball it throws. What all of this tells me is that this is not the time to get caught up in the rapture. It is not the time to take our eyes off the ball. It is however the time to take in the entire picture to set and maintain realistic expectations. For any investor who perceives 2008 as a once in a hundred year flood year, well then so too should they recognize the ensuing twelve months which followed.





The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.

Realized Versus Unrealized Gains and Losses....written by Greg Gann

A client recently was looking for clarification when reviewing the 1099 for her investment account before presenting it to her accountant. She couldn’t quite comprehend how her account could have had such gains while the 1099 was reporting so many losses. I used a metaphor to explain the difference between realized and unrealized gains and losses that she found helpful. This got me thinking that there are probably plenty other clients who might appreciate and benefit from the same discussion.



As you know, I am an active investment manager. I have no objection to holding onto investments indefinitely. However, if an investment loses value over a stipulated level, I am programmed to sell before the losses become intolerable. This is because to quote the famous economist, John Maynard Keynes, “trends can continue longer than any of us can stay solvent.” I am also not afraid to sell an investment that has had good growth once that growth trend reverses to preserve embedded gains. Most people acknowledge that they have no problems acquiring investments. Their frustration is that they did not have a game plan to sell, and especially during rough market periods, this inertia cost them dearly.



The 1099 documents investments which were sold in a tax year to determine if there was a long-term or short-term gain or loss that would have tax implications. The 1099 does not summarize account values. It only relates to sales of investments within the year. The motto by which prudent investors should live is to let your winners run and to cut your losers short. Just as even the most outstanding baseball player strikes out with greater frequency than he hits home runs, so too investment gains come from singles, doubles, and the occasional home run. Investment gains also come from cutting losers short. When an investment is sold at a loss, that loss is reported on the 1099 tax form. This is a realized loss. When an investment is sold for more than its purchase cost, this is reported as a realized gain. However, investments that have appreciated in value, but have not yet been sold have unrealized gains. Because investments which have unrealized gains have not yet been sold, they do not appear on the 1099 tax form. The analogy I used to clarify this distinction is home equity. Let’s say we own a house for which we originally paid $ 100,000. If the house today is worth $500,000, but we still own it, then we have unrealized earnings (equity) in the house of $ 400,000. However, we do not get a 1099 tax form for that equity, nor do we owe taxes on the gain if we have not sold the house and realized the gain in this tax year. If let’s say there were a dilapidated building on the property that we sold for a loss, then that loss would have tax relevance.



The gains in your investment account are indicated on summary statements, and the value on these statements is net of all losses that may have been realized from selling other investments. The point is that the 1099 shows realized gains and losses, but for account valuation purposes, we really need to pay greater attention to the unrealized gains and losses, similar to home equity. We might have losses reported for tax purposes, but gains that are more relevant, but for which there is no tax consequence in a particular tax year. And, this entire discussion only applies to taxable accounts. It is not pertinent to retirement or other tax-advantaged accounts.



Hopefully that clarifies how we can have “losses” in years in which we have gains.



The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.

Wonder what might be Driving this market?.....written by Greg Gann

As crazy as it may sound, TrimTabs, a highly regarded investment research company, catering mostly to institutions to which I also subscribe reported that rising mortgage delinquencies are actually providing a boost to the U.S. economy. On March 15, 2010, Lender Processing Services reported that 7.4 million residential mortgages are non-current. This equates to 13.5% of all mortgages. Of these 7.4 million mortgages, only 2.0 million are in foreclosure, leaving 5.4 million owner-occupied residences in which owners are not paying their full mortgages. In fact, there are surely numerous instances where homeowners are paying nothing at all. This means that there are a great number of homeowners who are living for free, which may account for why retail sales figures are as good as they are. Banks can book mortgages which are more than 90 days delinquent as assets that are non-paying but accruing interest until the property is foreclosed. Therefore, although the delinquencies are impacting the cash flow of banks, they are not yet translating into a loss of banks’ retained earnings or net worth. Annual mortgage payments average between $12,000 to $18,000 annually. Multiplying these dollar figures by 5 million, delinquent mortgages result in $60 billion to $80 billion of additional economic “stimulus”.

This is why it’s always critical to appreciate the facts beneath the facts.


The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.

New Health Overhaul: What’s Included and Who Pays....written by Greg Gann

It is certainly a noble goal to provide health coverage to more citizens. And who could argue that no one should be discriminated based on a pre-existing illness. I find it interesting that the details of a law that is being described by legislators on both sides of the aisle as one of the most sweeping changes in more than fifty years is so murkily understood. Hopefully, this will shed light on some of the issues that are most opaque.

1) Who is Affected

The law requires most Americans to have health insurance by January 1, 2014. Failure to procure insurance will result in penalties, unless they are issued an exemption due to financial hardship, religious beliefs or the like. Medicaid, the federal-state health program for the poor and disabled, would provide this insurance for those who fall within the established poverty levels. Individuals whose income falls between $14,400 to $43,320 and for a family of four whose income falls between $29,326 and $88,200, may be eligible for government subsidies to help pay for private insurance that would be sold in new state-based insurance marketplaces called exchanges. Initially, the exchanges will only be available to those who work for companies with 100 or less employees as well as the unemployed, self-insured, or retirees not yet eligible for Medicare. The exchanges are supposed to have four levels of care, each accompanied by a requisite cost.

The legislation does not require companies with fewer than 50 employees to offer insurance. However, they may be eligible for tax credits if they do offer the insurance, depending on average wages of the employees. Companies with more than 50 employees that fail to offer health coverage will be subject to a fee of up to $2000 per full-time employee if any employee opts for the government subsidized insurance options through the exchanges. The first 30 employees are waived in terms of calculating this penalty.

The law also enriches the Medicare Part D prescription drug benefit program that was enacted under President George W. Bush by providing richer prescription benefits through reducing the doughnut hole. However, in exchange for this addition, government payments to Medicare Advantage, the private plan part of Medicare, will be cut substantially. This means that the 10 million enrollees could lose eyeglass and hearing aid benefits.

Another provision of the law which has been glossed over relates to long term health care. Details definitely have to be spelled out, but the law establishes different tiers of long term care, and all employees will be covered unless they opt out. Yet, there are no mandates that employers, regardless of size, have to provide this coverage. The law requires the insured to pay into the system for at least five years, otherwise, she will receive no benefits. The government is hoping that by making it an opt-out, younger employees will participate, thereby offsetting the costs for the older participants covered under the plan. I still do not know what will happen to the individual who gets ill within the first five years because the law says there are no benefits for period. I also don’t understand how the government is going to protect itself from adverse selection, namely only the old who are more likely to collect having paid in for less time. In addition, there are provisions allowing the government to raise rates if it would otherwise be insolvent. Medicare and Social Security are on the brink of bankruptcy, so I would tread very, very cautiously before I would rely on a government “permanent” benefit that can always be enacted away by a future Congress.

2) Who Pays

The short answer to the question who pays for this quasi-universal health care are the people from whom the federal government can collect more taxes. In particular, the money will come from significantly higher Medicare taxes for individuals whose incomes are $200,000 and greater and for couples whose incomes are $250,000 and over. The Medicare tax will increase from the current 1.45% to 2.35%. This will affect approximately 1 million individuals and 4 million couples who file jointly. This legislation is sweeping in one other way. It represents the first time ever that Medicare taxes will be imposed on unearned income such as capital gains, dividends, interest, rents and withdrawals from IRA’s and 401k plans and the like. The rate of this tax will be 3.8%, and this will affect everyone regardless of income levels. The Obama budget also proposes allowing the current 15% tax rate on dividends and capital gains to rise to 20% as of January 1, 2011. This means that the new effective tax on these funds will rise to 23.8% come January.

The Medicare taxes superseded the tax on “Cadillac” plans. That 40% excise tax was delayed until 2018 when it will apply to benefits over $10,200 for individuals and $27,500 for couples. These thresholds will be indexed to inflation, which grows at a much slower pace than the cost of health care, meaning the tax will escalate more substantially over time.

The law also imposes significant restrictions on health savings accounts. Furthermore, beginning in 2013, the threshold to deduct medical expenses will change from 7.5% of adjusted gross income to 10%. And as crazy as it might sound, the cost of frequenting tanning salons will increase due to the 10% excise tax placed on the industry. While I don’t mind the tanning tax, the law also imposes a 2.9% excise tax on the purchase of wheelchairs.

3) Economic Ramifications

Christina Romer, Professor of Economics of University of California, Berkley, and Chair of Council of Economic Advisors in the Obama Administration, work shows that for every new dollar raised in taxes, it reduces economic growth three-fold. Markets generally do not respond favorably to increases in taxes. They certainly do not encourage job growth. Markets also do not generally respond favorably to uncertainties, and there are tons of issues that are unclear. While private industry has scaled back considerably, the government has grown. This is a critical time in the markets to have strategies to help preserve wealth because things can change quickly and catch many people who are unprepared in their wake. I’d like to believe that we could cover all Americans with adequate healthcare while growing the economy and stimulating job formation. Maybe Obamacare will work, and I wish for nothing more. But now is the time to make sure your financial house is in order. Now is the time to work towards financial goals irrespective of rules and regulations and tax changes. Although it is growing massively, now is not anymore appropriate a time to rely on the government because he who giveth can just as easily taketh away. I guess this is all part of the new normal.

Because U.S. Treasuries are backed by the full faith and credit of the U.S. government, they should and most commonly do provide a lower yield than corporate bonds, Bloomberg recently reported that bonds issued by Proctor & Gamble, Berkshire Hathaway, Johnson & Johnson, and Lowe’s Cos. provided lower interest than federal government bonds of comparable maturities. This indicates that the market considers bonds issued by these companies less risky than similar bonds issued by the USA. Maybe this is because, as predicted by Moody’s Investors Service, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K. America will use about 7% of tax revenues for debt service in 2010 and almost 11% in 2013, moving “substantially” closer to losing its AAA rating, Moody’s said last week.

We are in a new normal. That which was once unusual is becoming common. This market is not your dad’s Oldsmobile. It requires more proactive attention and a strong arsenal of defensive strategies.

The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.