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If you’re a Moneytalk listener you know that we have repeatedly said that those that were forecasting runaway inflation, hyper inflation – whatever you want to call it, were completely wrong because they were basing their forecast on a bogus centerpiece……..high oil prices would result in runaway inflation – not true…….”
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INFLATION.....YOY over-all inflation, including 19% energy hike = 3.4; core inflation (excluding food and energy) = 2.0; For rank and file, year over year = 3.4% YOY -- about the same as inflation; core inflation = 2.0 YOY -- showing that the energy complex has not had much impact on core inflation. Brinker said: “The inflation hawks, that’s what they said would happen. They said that rising oil prices would cause rising core prices and it did not happen – they were completely wrong.”
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INFLATION EXPECTATIONS…..Brinker said: “When you look at the bond market……..you get a really good measure of what investors think, regardless of what Bob Brinker thinks, or anybody thinks, even Ben Bernanke for that matter……..So you take the 10-year Treasury Note, subtract out the real yield…….and the market tells you what investors are expecting from inflation for the next ten years – and that number is 2.3.”
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EMPLOYMENT REPORT AND ECONOMY…..came out on the first Friday of the month, which was yesterday; no big surprises; 80,00 job lost in March; added to January and February revised numbers = 70,000 monthly for first quarter; high probability of negative GDP figure in first quarter.
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UNEMPLOYMENT DEMOGRAPHICS…..White = 4.5%; Black = 9%; Hispanic = 6.9% Asian = 3.6%
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UNEMPLOYMENT BASED ON EDUCATION LEVEL….a valuable tool to encourage “youngsters” to get an education -- very dynamic figures: Bachelor’s degree or higher, which is about 25% of the U.S = 2.1% (National Unemployment Rate is 5.1%); some college, but no degree = 3.8% (still below national average); high school diploma = 5.1%; no high school diploma = 8.2%; teenagers at 16, 17, 18, 19 = 15.8%.
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POLITICAL TALK….. Polls show that it looks like a fairly close race, but lots can happen between now and Election Day; Moneytalk "cares" (and "talks about") the candidates stand on the economy and tax policy. Brinker said: “Cactus John has been very honest about the economy. He recently stated that he doesn’t know much about the economy. I want to give John McCain all the credit I can give him for being honest with the voters………
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Over on the other side, the most likely nominee based on the current polls, subject to change, is Barack Obama………Barack Obama stands firmly on raising the marginal tax rate on entrepreneurs to levels not seen since John F. Kennedy………..he’s talking about a potential marginal tax rate of about 60 to 63%........Now I think with a marginal rate of 60 to 63%, I think that a lot of entrepreneurs will take a page out the old Johnny Paycheck Songbook, ‘Take This Job and Shove It, I Don’t Work Here Anymore.’ That line made the late, great Johnny Paycheck famous and it may make Barack Obama famous too, to a lot of entrepreneurs who may take up golf. Because the bottom line is if you are confiscating 60% or more of somebody’s compensation, in a lot of cases, they’re just going to find something else to do with their time.”
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Brinker continued, saying that this was a gigantic misstep in Obama’s campaign, and that he may get away with it with people who don’t know any better or understand where the jobs come from, but he was not going to get away with it with him.
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Brinker went on to explain how easy it would be to construct this 60%+ marginal tax bracket for a lot of American entrepreneurs who create jobs. Firstly, Obama and Clinton will very quickly get the top rate up to 39.6 after inauguration – as soon as they can get it through congress.
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And Obama has made it clear that he likes this donut-hole Social Security plan that he has come up with. Brinker described Obama’s “donut hole” plan: “This is the plan where, right now you have the $102,000 cap on the Social Security tax. This is the 6.2 plus 6.2, which is 12.4 to the entrepreneur and business owner…….everything above that not subject. Well, he has this donut hole idea, where you create maybe a $100,000 up to $200,000………. where you don’t do anything right now………where you don’t make any changes. Then he sinks the battleship when the donut hole is finished. Because above $200,000, the Junior Senator from Illinois, in his naïve notion of how jobs are created and economics works, is talking about lifting the cap on Social Security……..So we have the 39.6 and we have the 12.4, so all of a sudden we’re up to 52%. And the 2.9, the cap is already lifted on Medicare…….now we are up to 55%. How many entrepreneurs do you think live in places that charge high state taxes………now you are up to 62%, depending on the state you choose. A 62% marginal tax rate on entrepreneurs. This is the policy that Barack Obama is talking about.”
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Brinker commented that he thinks Obama may get away with this because entrepreneurs don’t elect presidents – they are elected by “rank and file.” However, Brinker thinks it is one of the worst economic policies that he has ever heard out of a presidential candidate, and he believes that if Obama doesn’t change his “donut hole” policy, then he is running a “dreadful, dreadful” presidential campaign -- because he will be attacking the “core growth engine for new jobs in America.”
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CALLER….asked if the CPI was the Core Inflation rate. Brinker commented that there are two of them –one is better than the other. The CPI core inflation rate comes out every month, but another one that comes out on a regular basis is attached to Gross Domestic Products reports the Personal Consumption Expenditure Core rate. Brinker agrees with the Federal Reserve that the PCE is better. (Changes are made in the index as times change.)
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CALLER….pointed out that he didn’t know anyone who didn’t use heating oil, gasoline and eat food, and asked why they were not included in the core inflation rate. Brinker said: “Because the core index by definition excludes food and energy, so if you were to include food and energy in the core index, then instead of being the core index it would the headline, all inclusive number. We have talked about the all-inclusive number which is 3.4 using the Personal Consumption Expenditure Index……..The reality is even with that 19% year over year increase in energy prices, and even with that 5% year over year increase in food – and that’s up partially because we’re using so much of our feed stock in the production of ethanol – our corn stock. So what happens is people look for spill-over, how much has that spilled over into the core. So far, we really haven’t seen that spill over.”
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CALLER…. asked if FDIC had ever been tested. Brinker commented that it sure had – every time a bank fails and people want their money back. Then the caller told Brinker that he had $500,000 in a bank with only $100,000 of it under FDIC insurance and asked what he should do. Brinker said: "Well the first thing you might want to do is to make an appointment to see a psychiatrist.” (Honeybee EC: ROFLOL!) Brinker told him that he had $400,000 at risk for no good reason, and should diversify "around" to get the coverage. Caller explained that someone at the bank told him that it took 99 years to get money back from FDIC. Brinker indignantly stated that the bank representative should be fired – that it did not take long to get your money from FDIC.
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On a lighter note, Brinker reminisced about when he was “a youngster” and used to "drive out to visit his paternal grandparents in Greensberg, Pennsylvania." He talked about remembering the “Horseshoe Curve” landmark near Altuna, Pennsylvania. There are nice pictures (one from 1934) and description here:
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http://en.wikipedia.org/wiki/Horseshoe_Curve_%28Pennsylvania%29
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CALLER: “What I’m finding is, in a slow economy, a lot of companies are absorbing these costs with no pass-through because of top-line growth is very flat and it’s translating into margin compression. I just wanted your opinion regarding earnings outlook going forward for the S&P in general.”
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Brinker said: “Well as I’ve – you mentioned the investment letter that you subscribe to, and then you well know, I’ve written about this in the letter. And this is the reason that I’ve had very, very conservative 2008 earnings estimates for the S&P 500 -- very, very conservative number. My number for the S&P 500 for 2008 is way below, way below the Wall Street number for 2008. And the reason is because of the reason you said – because we have a sluggish economy.
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We expect the first half to be especially sluggish. And even though I expect some recovery will start in the second half, when you take a look at the year on a whole, hey, we’re looking at a sluggish year. Very low growth in real GDP for the full year is my projection.
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And consistent with that, and consistent with the inevitable margin compression you get in an economy like this, we have anticipated this in the investment letter by coming forth with a very, very conservative estimate for S&P 500 earnings for calendar year 2008.
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Now we do expect a nice recovery, a nice recovery in earnings in 2009. And I believe as we go forward that will become much more of a factor in the market as we move forward over the next 6 to 12 months. But in terms of calendar year 2008, you certainly have to be realistic and pragmatic about what’s going on in the economy and that’s what we have done. This is Moneytalk..."
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