Posts filed under “Podcast”
The most important election of our time! The fate of the free world hangs in balance! Yadda yadda yadda!
Every four years, the usual clichés comes out. I suggest you ignore them, and instead focus on the policies where there are unambiguous differences, where the policies of the candidates yield very different outcomes.
Reviewing the specific policy pronouncements made by candidates Barack Obama and Mitt Romney, what are the key differences in these policies that directly affect investors?
Asked differently, what does the outcome of the Presidential election mean for the investing public? I refer not to things that impact investors indirectly, like estate taxes or income tax brackets; rather, what are the specific areas of significant disagreement, where substantial policy differences exist, and where the candidates’ different approaches have a meaningful impact to investors.
1. Sectors: In particular, Energy, Healthcare, Defense Policy
2. Federal Reserve Philosophy and Appointments (re: Interest rate policy)
3. Investment Taxes (Dividend Treatment/Capital Gains Taxes)
4. Regulatory Approach / Legal
Before we begin, a caveat: What the candidates say and what they can and will actually accomplish are often two different things. I have no idea what policies either OObama or Romney as President will manage to get through Congress. What we are looking is the impact of their stated policies if enacted.
1. Let’s begin with a sector analysis. Three key areas where the policies of the candidates are so significantly different that the stocks in these sectors have begun to shift with the polls. They are Energy, Healthcare, and Defense.
Energy, a victory by Governor Romney will work to the benefit of Coal, Pipelines, and the Oil sub sector known as Exploration & Drilling. President Obama has been much friendlier to Wind, Solar and Electric Vehicles.
Romney would be a much easier administration in terms of allowing more drilling and exploration, especially in Alaska and on other public lands. Obama has been more environmentally protective. However, the President has been far friendlier to “Big Oil” than most of his supporters expected.
Ethanol: Neither candidate has committed to discontinuing Ethanol, a giant subsidy to Iowa farmers that has us burning food and befouling engines for no damned good reason.
One final energy note: Neither candidate has been especially aggressive about charging Oil or Mining companies full carry price for crucial resources they extract from public lands. Compared to nations like Norway, we grant licenses to the private sector far too cheaply. It would generate enormous revenues and help close the deficit if we charged closer to fair value for these assets than we do; instead, we subsidize these industries with giant giveaways at the taxpayers expense.
Healthcare probably has the starkest comparison between the two candidates. Under Obama, Insurers and Hospitals are likely to do well. Obamacare guarantees health insurance to millions of people who otherwise would not have coverage. This creates lots of new paying customers for the insurers (either privately or through the government); Emergency rooms will no longer act as free walk in clinics at Hospitals – their accounts receivable will improve immeasurably.
As far as big Pharma, I don’t see much of a difference. There is a possibility that a win by Romney could crimp stem cell research (again), but its less clear under Romney than under Bush how the research would fare.
Defense is simple: A Romney victory means more major weapons program purchases. A Romney win means you should look at the big providers of weapons systems, especially naval and aircraft manufacturers.
Finance: As much as Wall Street and big Banks are angry at Obama, he has been rather accommodating to them. I don’t see much of a difference between either candidate for finance, other than the tax loophole giving friendlier treatment of carried interest for hedge fund and private equity managers. (Obama would repeal it, Romeny would keep it). There has been some signs of Obama getting tougher on banks, suing Bank of America for its fraudulent mortgage underwriting. Relative to these other two sectors, however, there is only a small difference between the two when it comes to Wall Street. (see section on Regulations for greater differences)
For a list of companies in all of these sectors, see the Yahoo Finance Industry Browser (http://biz.yahoo.com/p/)
2. Federal Reserve: There is an enormous sated difference between the candidates when it comes to their announced policies and philosophies regarding the Federal Reserve.
Governor Romney has stated he is against quantitative easing (QE) and Zero Interest Rate Policies (ZIRP) of the past 5 years. He has stated he would not reappoint Ben Bernnake (who may be stepping down in 2014 regardless).
Some anaysts have noted that stock markets have been riding on a Fed induced sugar high. Jim Bianco, chief strategist at Bianco research, notes that the most recent market turmoil began after the first debate. Obama’s poor performance improved the odds of a Romney victory. After trailing badly in the polls, the possibility of a Romney appointed Fed chief, according to Bianco, spooked the markets who have become “addicted to an easy Fed.”
Romney is more likely to appoint a Fed chief who will normalize interest rates, and stop the extraordinary accommodations the Federal Reserve has provided to the capital markets.
Current Fed chairman Ben Bernanke has suggested he would step down when his term is up in Some of the names circulated as possible replacements by Romney have been John Taylor of Stanford and Glenn Hubbard of Columbia.
Addendum: We don’t know who will be Treasury Secretary (or other related positions) but we can assume these appointments will be similar philosophically to Fed appointments.
The president selects his Treasury Secretary, the head of the Council of Economic Advisors, along with other positions that can have a big impact on how policy gets executed. Important under normal circumstances, it becomes crucial during crises.
3. Investment Related Taxes
Obama versus Romney, Investor Related Positions
|Maintain current 0% and 15% tax rates on qualified dividends for couples with income under $250,000 (singles under $200,000);||Would maintain the current 0% and 15% rates on qualified dividends|
|For couples over $250,000 (singles over$200,000) Taxes on dividends treated as ordinary income||Maintains 15% rates|
|Capital Gains Taxes||Maintain current 15% tax rates on long-term capital gains for couples with income under $250,000 (singles under $200,000); Over those incomes, taxes go to 20%||Would eliminate tax on capital gains, dividends and interest income for any taxpayer with adjusted gross income below $200,000|
|HealthCare Tax||Would maintain the additional 3.8% Medicare tax included in the health care act on investment income.||Would repeal the 3.8% Medicare tax on investment income (as a result of repealing the health care act).|
|Municipal Bond Taxes||Would cap the tax benefit of municipal interest at 28%, effectively creating a tax of 8% or 11.6% for those in the top two tax brackets||No change in tax treatment|
|Corporate Tax Rates||Cut corporate tax rate from 35% to 28%; Would target oil and gas companies for higher taxes, would offer tax breaks for manufacturers||Cut them from 35% to 25%; Move to a territorial system, rather than taxing corporations on income earned overseas|
|Corporate Tax Deductions||Would ban unspecified tax deductions||Would eliminate unspecified tax loopholes|
* UPDATE: Top brackets changed to reflect dividends taxed as ordinary income
4. Regulatory Approach/Legal
The key difference between the two candidates: Obama is more regulatory oriented; Romney is more deregulatory.Obama prefers some regulation, and was a proponent of Dodd-Frank.
Romney would like to see less regulation, would overturn Dodd Frank.Obama supports the Volcker Rule; Romney does not.
Neither candidate supports a restoration of Glass Steagall or the full repeal of the Commodity Futures Modernization Act of 2000. Neither would treat derivatives as insurance products.
In terms of litigation, the Obama adminsitration has (very belatedly) begun suing banks for mortgage fraud and misrepresentation; he has not pursued any actions against Wall Street firms. Romney has stated he would not pursue litigation against money center banks or Wall Street firms.
This is rom the cover to this week’s Economist, which has the cover story “State of the Union,” looking not so much at the Federal deficit as the individual states debts. Some of the states names are fairly clever: Califorclosia, DOh! (Idaho), Debtaware, IOU Wa (Iowa), Nada (Neveda), Horrida (Florida) and perhaps my favorite, Brokelahoma!…Read More
Earlier this month, I interviewed famed investor Felix Zulauf on his professional background and investment outlook (Audio here). As per popular request, here is the interview transcript.
BARRY RITHOLTZ: Tell us about your background…
FELIX ZULAUF: I grew up in Switzerland, in a small town, I went to all the school. After college, I decided to go [with] a banking career. I regretted it after a year or two because it was so boring — commercial banking, then I finally hit the investment department. It became more attractive. I asked my bosses why stock prices moved up and down, and from their end — I could very soon tell that they had no clue. So I tried to figure out if there were some other people who knew why the markets were moving. And I found some leading opinion people like Bob Farrell. They were all in the US, there were no opinion leaders in Europe. And I decided that I wanted to learn that business and foresee market moves in big ways.
And then I went step-by-step. I started in the equity stock market department in a Swiss Bank in Zurich. And then I transferred to Paris to a stockbroker for a year. There, I really developed my speculative activity. As a young chap, the owner of the shop gave me a credit of half a million dollars. Which was a dramatic amount for a 23-year-old guy, and I started speculating. Went short on the market in the fall of 1973 and you know what happened thereafter into the end of ’74. So that year I made the first big money.
What was your actual first employer?
The Swiss Bank Corp. I was there for 2 years. And then I was sent off to Paris and to acquainted more with the French language and see another country and another culture and I didn’t want to go to a bank because I wanted to learn more about the investment business. So I went there, came back after a year, moved then to portfolio management (or what they thought was portfolio management), and then went to the US. So in 1976, or 1977, I stayed in New York, put together a trainee program for myself using all of the concept of Swiss Bank Corp. and I trained with Charlie Maxwell in energy and Bob Farrell in Market Analysis and Ed Hyman in Economics and trading in a shop called Salomon Brothers at that time. So I went through Wall Street and all of those firms and it was like paradise.
I’m still friends with many of those people.
It was fantastic. And then the bank called me back to Switzerland in ’77. And then I changed horses and joined UBS because I wanted to learn money in a more aggressive way, and Swiss Bank didn’t offer me that job. That was ’77 — I joined UBS and the mutual funds management department and research. And I ran the US equity funds and global equity funds and a raw materials fund and became a global strategist for the whole UBS group. And later I ran the institutional portfolio management department at UBS and then came 1987. I was very instrumental to push UBS equity allocations to the highest in all of Europe. At that time, 65% equity in balanced accounts was extremely aggressive in European standards. And in ’87, during the summer, I tried to reduce that because I was also part of the investment committee, and I convinced the committee but general management then vetoed it and that upset me so much that I stopped there and liquidated all equities ahead of what thereafter became the crash of ’87.
And it didn’t make many friends. By hindsight, I think it was the most difficult thing I ever did because I never got the credit for it. I got the blame because all of my friends and colleagues looked terrible next to me. You know, from a political point of view, it was not a good move. But from a trustee point of view, it was the right move and also from a professional point of view, it was the right view.
Then I decided I needed to join a smaller money management operation where I had more freedom and I joined a subsidiary of Credit Suisse at that time as an executive vice president in charge of the whole investment policy. And then came ’89. The leading portfolio managers were very successful with Japanese equities and I turned very bearish on Japan and they took it as a personal insult that I turned very bearish on Japan.
At 39,000 and something, and I think it was January of 1990…I turned very bearish and pulled… And it then happened and it made it clear to me that I had to go on my own to manage money the way I thought was right.
Before you launched your firm, you had essentially rotated at some of the biggest banks in Europe and you had come to New York and worked at some of the biggest banks in the city. And the takeaway from all of this is that there are institutional impediments for a money manager and a trustee to operate on behalf of the clients.
So I became an entrepreneur and started a new financial management firm. I was 40 with two small kids and no client so the first six months were very tough because I could not attract any clients…which was very nerve-wracking. But after that, the ball got rolling and I managed individual accounts. i just wanted a limited number of individual accounts that I could manage in my own fashion so I could go long and short but not leverage. Which was basically the ways I ran my own money in earlier times. But later on, I moved away from leverage because too much leverage is where you make the most mistakes.
Welcome to the Big Picture interview. This is the first in a series of interviews with the most insightful and influential money managers, traders, economists and strategists. We will be doing this at least once or twice per month, and already have a stellar line up of guestsin the queue. (We had some technical difficulties…Read More
> How much do you really understand about the the world of money, banks, and global trade? These podcasts take you beyond the screaming headlines and wobbling stock prices to show how the economy really works: NPR: Planet Money Bloomberg: On the Economy Marketplace Whiteboard The World: Global Economy The Big Money The Economist BBC’s…Read More
English economist John Maynard Keynes, seen here circa 1940, believed no one in America was smart enough to run it. Walter Stoneman and Samuel Bourne
click for audio
Obama Gives Keynes His First Real-World Test
Adam Davidson and Alex Blumberg
NPR, All Things Considered, January 29, 2009