Proceed with caution: be careful about over projecting the future

Posted on November 15, 2009 by Bill Faiferlick

There are areas of the economy that are showing initial signs of recovery; however, overall the real growth felt at the consumer level is still stalling. Growth will more accurately be judged in small steps and anything more will be circumspect. There are pockets of activity and frenzy. At the moment the S&P is up 18.09% YTD as of November 5, 2009. As a result some people are feeling a lot wealthier and more confident than seems sensible long-term.

“The only truly substantive change has been the rebound in consumer confidence and investor sentiment. In other words, investors are driving the rally with their hearts, and not their heads” – Maclean’s October 12, 2009

Despite the Troubled Asset Relief Program stimulus package creating an artificial economic stimulus bubble, the underpinnings of the economy are still in muddy water. Eighty million baby boomers are entering retirement with average assets excluding their home equity of is less than $100,000. They will be unable to financially support themselves throughout retirement without long term government entitlement program assistance.

Recently, it was announced that health care premiums for families could increase to over $20,000 per annum by 2018 – only nine brief short years from now. Real wages have been decreasing for families across America who are with increasing regularity working two jobs and still not receiving compensation at their previous levels. Many jobs are becoming extinct and more and more lower paying service jobs are replacing highly compensated positions creating high levels of underemployment. This was confirmed by a 35 country report on real wages in 35 nations by the International Labor Organization.

Structurally, about 48 million Americans pay no taxes (depending on the source). According to a CBS report in April 2009 “an astonishing 43.4 percent of Americans now pay zero or negative federal income taxes. The number of single or jointly-filing “taxpayers” …… who pay no taxes or receive government handouts has reached 65.6 million, out of a total of 151 million.” In California (which if it were a country would have the seventh largest population in the world), the top 1 percent or 3.7 million people of a population of 37 million pay 50 percent of all the revenue collected. There is now an inversion of the tax base and politicians would have us believe those with high incomes are not paying their share – strange twist of the facts.

Social Security for the first time is not increasing payments to beneficiaries in 2010. The real CPI that consumers experience is not the same as posted by the government because the bundles of goods and services are not an accurate reflection of what the average consumer experiences. Therefore, consumers’ experience will be drastically different as many services like local utilities, for example are not subject to people being able to shop for the best price.

On a global perspective, there were only 2 economies last year that experienced positive growth. Many countries are re-evaluating the US dollar as the currency of trade and most recently, Japan was posturing on this very issue and they are not the only country concerned about the US’ volatile economy.

Regardless of how you crunch the numbers, the US has a projected deficit in excess of $54 trillion plus another 11 trillion owed to other countries for government securities sold to finance our economy over  the last decade. This is a monstrously huge number; it’s unfathomable. . As a percentage of the US budget, entitlement expenditures are currently 35% of the total US budget and will rise to 65% within the next ten years. This dramatic change will result in the single largest realignment of federal spending the US has experienced since WWII.

One in every 136 U.S. housing units received a foreclosure filing during the third quarter of 2009 — the highest quarterly foreclosure rate since RealtyTrac began issuing its report in the first quarter of 2005 and there are high levels of default on commercial mortgages expected over the next 5 years when for refinancing.

This is a time to proceed with caution – to become extremely focused and eliminate any unnecessary expenditure with special attention on cutting tax liabilities by one half by converting tax obligations into new investment capital. For many business owners and professionals who continue to be successful, this is a time to re-examine conservative strategies to accelerate the accumulation of investment capital, protect wealth and ensure you are doing everything you can to maximize your opportunities.

Yes I’m going to take you to the next level, beyond standard accounting recommendations, since after their best efforts you’re still obligated to pay more than is otherwise necessary.