FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
February 26, 2013
IN THIS ISSUE:
1. Sequester: Little Will For Cutting Government
2. Will the Sequester be a Disaster? No!
3. Fed Hints at End of Quantitative Easing, Maybe
4. Special Report: “7 Secrets of Successful Investors”
The Pew Research Center released a new national poll on Friday and the results are quite surprising. As the March 1 deadline for a possible budget sequester approaches, the new Pew survey finds limited public support for reducing spending for a wide range of government programs, including defense, entitlements, education and health care.
What the latest Pew poll shows is that while a majority of Americans say in various polls that they are in favor of smaller government, when it comes to specific spending cuts, they are opposed. The will to cut government spending is just not there. We’ll look at excerpts from the new Pew poll just below.
We’re just three days away from the dreaded “sequester” that will cut federal programs across-the-board starting on Friday. The Republicans continue to refuse to bow to President Obama’s demands for more new taxes on the “wealthy” in return for a deal to avoid the sequester. But is the sequester really as bad as Obama says? The answer is NO. I’ll tell you why.
The minutes of the Fed’s January 29-30 policy meeting were released last Wednesday and caused quite a stir in the stock markets. Basically the minutes revealed that some members of the Fed Open Market Committee are becoming concerned about the Fed’s continued record- large purchases of Treasury bonds and mortgage-backed securities. Some feel this program needs to be scaled back or ended altogether. This is very important so be sure to read it.
Finally, I want to let you know about a new Special Report I have written entitled, “7 Secrets of Successful Investors.” This Report doesn’t dwell on generalizations or old sayings, but rather actual habits of successful investors I have known. To receive this Special Report CLICK HERE. There is also a link to this Special Report at the end of today’s letter.
PEW RESEARCH CENTER
As Sequester Deadline Looms,
Little Support for Cutting Most Programs
As the March 1 deadline for a possible budget sequester approaches, a new national survey finds limited public support for reducing spending for a range of specific programs, including defense, entitlements, education and health care.
For 18 of 19 programs tested, majorities want either to increase spending or maintain it at current levels. The only exception is assistance for needy people around the world. Nonetheless, as many say that funding for aid to the needy overseas should either be increased (21%), or kept the same (28%), as decreased (48%).
The survey by the Pew Research Center, conducted Feb. 13-18, 2013 among 1,504 adults, finds little change in attitudes about government spending since 2011. One notable exception: somewhat fewer support reducing military defense spending, which would bear a major share of the sequester cuts.
In the current poll, 24% say that if they were making up the federal government’s budget this year they would decrease spending for military defense, down from 30% two years ago. More than seven-in-ten either support increasing defense spending (32%) or maintaining it at current levels (41%).
There continue to be sizable partisan differences in views of funding for government programs. For most, substantially larger shares of Republicans than Democrats support decreased funding. Yet there are only two possible reductions that draw majority support from Republicans – foreign aid (70%) and unemployment assistance (56%). There is no program among the 19 included in the survey that even a plurality of Democrats wants to see decreased…
Yet the survey also finds higher percentages support increases rather than decreases in spending for education, veterans’ benefits, entitlements and other programs. Six-in-ten (60%) say they would increase education funding, while 53% want funding for veterans’ benefits and services to grow and 41% say the same about spending on Social Security.
Partisans Differ on Gov’t Spending
In 16 of 19 areas, Republicans are more likely than Democrats to support cutting spending. Only in the areas of military and anti-terrorism spending are Democrats more supportive of cuts than Republicans. There are no partisan differences about decreasing funding for veterans’ benefits.
The largest partisan gaps are over aid to needy people both in the U.S. and abroad. Seven-in-ten Republicans (70%) say foreign aid should be decreased, compared with just a quarter (25%) of Democrats. Similarly, while 56% of Republicans say spending on unemployment assistance should be decreased, just 13% of Democrats agree.
By large margins, Democrats also are less supportive of cuts to health care, environmental protection and scientific research. While 44% of Republicans say federal funding for health care should be decreased, just 7% of Democrats do (in fact, a majority of Democrats – 58% – say federal spending on health care should be increased).
While Democrats are more likely than Republicans to favor cutting military spending, about as many Democrats say funding for the military should be increased as decreased (28% vs. 32%), and about twice as many say anti-terrorism funding should be increased as decreased (36% vs. 18%)
Conversely, while Republicans are more supportive than Democrats of cutting funding for Medicare, Social Security and food and drug inspection, these remain minority positions within the GOP. More Republicans want to increase, rather than decrease, funding for Social Security (35% vs. 17%). And Republicans are as likely to say funding for Medicare should be increased as to say it should be decreased (24% vs. 21%).
Numerous national polls have found that large majorities say they favor cutting the size of government, when asked that generic question. But when pollsters like Pew and others ask Americans specific questions regarding which services they would like to see cut, most respondents say they either want federal spending to be increased or at least remain the same.
Bottom Line: Americans lack the will to cut federal spending. While large majorities say they are for smaller government, when it comes to actually cutting specific government programs or services, they want them left as is or increased. That is truly sad!
Will the Sequester be a Disaster? No!
President Obama spent the last couple of weeks trying to convince the American people that the sequester will be a disaster for the economy and for peoples’ lives. At stop after stop, he surrounded himself with police, firefighters, first responders, etc. and claimed that almost all of the services we so cherish and depend upon will be undermined if the sequester spending cuts are allowed to kick in.
Last week the White House put out a report supposedly detailing the potential sequester impact in all 50 states. For example, the report warned that 350 teachers and teachers’ aides could lose their jobs in Ohio; nearly 4,200 children would not receive vaccines in Georgia; and 400 victims of domestic violence might not receive government services in Kentucky.
The Wall Street Journal responded on Monday to this new report as follows:
“The idea that $85 billion in cuts to a $3.6 trillion budget would mean that children would go without vaccines and battered women would have nowhere to turn is preposterous, but it demonstrates the rhetorical lengths to which the president will go to score political points. It also shows that the White House and Democrats are very confident that they will win this latest showdown with Republicans.”
As I’m sure you know by now, the sequester would cut an estimated $1.2 trillion from the budget over 10 years. Half of the savings would come from defense and half from domestic discretionary programs. Medicare providers would take a 2% cut. This “doomsday mechanism,” as some in the White House call it, was the fallback when the White House and Republicans couldn’t agree during the 2011 debt-ceiling negotiations.
The sequester that no one in Washington wants to see happen would cut an estimated $85 billion from the budget this fiscal year starting in March. Only recently we’ve learned that if you dig into that number a little deeper, you find that only about $44-$54 billion in cuts will happen between now and September 30 (depending on whose math you believe).
These cuts represent less than 1% of the federal budget. Even with the cuts, the government will spend more this year than last year. And the budget will be even larger next year! Be sure to read the first SPECIAL ARTICLE below.
Even so, Obama warns that the sequester would be “a huge blow to middle class families and to the economy as a whole.”
But fear not. Here are a few stats you rarely hear about. In Mr. Obama’s first two years in office, while private businesses and households were spending less and deleveraging, federal domestic discretionary spending soared by 84% with some agencies doubling and tripling their budgets, this according to the House Budget Committee.
Now read this carefully: The sequester, if it happens, would scale back just one of every six dollars in discretionary spending increases since 2008 – hardly a “huge blow.” In other words this isn’t really even a cut – “devastating” or otherwise – it’s a modest growth rate reduction following years of unnecessary, embarrassing and unsustainable excesses.
Obviously, I don’t know if a deal will be cut to avoid the sequester between now and Friday, but at this point, I think it will (and it should) go into effect. For now, the House Republicans are standing firm that any solution to the sequester cannot include any more tax hikes. President Obama is standing firm that there must be more tax hikes.
At this point, I think the president may actually want the sequester to happen. Think about this: Obama rants every day that taxes must go up again as a part of any deal to avoid the sequester. But to my knowledge, he hasn’t identified which taxes he wants to raise or how much he wants to raise them. I think he plans to let the sequester happen and blame the Republicans.
My point is, the sequester will not devastate the economy as the president has warned.
Be sure to read the first story in SPECIAL ARTICLES below. It is the best explanation I’ve seen on the likely results of the sequester.
Fed Hints at End of Quantitative Easing, Maybe
I wrote about this topic in my Blog last Thursday, but it’s getting a lot of play in the financial media this week. Last Wednesday, the Fed released the minutes from its January 29-30 Fed Open Market Committee (FOMC) meeting. Fed watchers always scrutinize these minutes closely, looking for any possible hints or surprises.
For the last couple of years, the minutes from these periodic FOMC meetings have continually confirmed that the Fed was intent on keeping up its “quantitative easing” (QE) program indefinitely. For most of last year, the minutes suggested that the Fed would continue these massive monthly purchases of securities well into 2014, if not longer.
Then in September, the Fed upped the ante by declaring it would significantly increase its securities purchases to a total of $85 billion a month, at least until the US unemployment rate falls to 6.5%. Even the most optimistic forecasters agree that the unemployment rate won’t fall to 6.5% for a couple more years.
So what was the big change last week? Basically the minutes from the January 29-30 Fed meeting revealed that there is growing disagreement among the 12 voting members on the FOMC as to how long to continue QE and how much more to swell the Fed’s bloated balance sheet. There was also some discussion as to when to end QE, perhaps even before the unemployment rate falls to 6.5%. Perhaps even by the end of this year.
That was the news that hit the stock markets so hard last week. The major stock market indexes turned sharply lower within minutes of the release of the Fed minutes, and there is continued angst over it this week.
Initially, I expected that the Fed news would blow over fairly quickly, especially since the FOMC did not decide anything definitive about ending or even curtailing its massive bond buying program. However, as noted above, this story is still getting a lot of play this week, and it is still keeping pressure on stock prices.
The Dow Jones Industrial Average has once again failed to break out above the 14,000 mark following several previous attempts. The all-time high in the Dow was 14,198. Thus, there is significant overhead resistance in this area.
The problem, as I discussed at length in last Tuesday’s E-Letter, is that if the stock market reverses downward at this critical juncture – just below the all-time high once again – a nasty selloff could follow.
While I do not believe that the sequester will be a disaster for the economy, it could well be enough to send the stock markets into another tailspin – especially given how President Obama has hyped it.
Don’t say I didn’t warn you…
Special Report: 7 Secrets of Successful Investors
There’s an old adage in the investment business that says: “don’t fight the tape.” It means that sometimes the markets go up without good economic or technical justification, so you should grab a ride while you can. The problem is that many investors who follow this advice get into the market just in time to get creamed. There’s got to be a better way.
With that in mind, I want to let you know about a new Special Report I have written entitled, “7 Secrets of Successful Investors.” This free Report doesn’t dwell on generalizations or old sayings, but rather it gives you actual habits of successful investors I have known. And it explains how you can use them in your portfolio. While none of these tips are “secret,” you would think they are, given how few investors actually employ them in their portfolios.
Click here to get my new Special Report.
Feel free to share this Special Report with anyone you feel could benefit from it.
Hoping you make it through the sequester,
Gary D. Halbert
The Fairy Tale on Sequester Spending Cuts (Must read!)
Sequester Cuts Are a Mere 1% of Budget
Concerns arise within the Fed about unlimited bond buying