CPA Gone Mad Issue 1: December 5, 2016
Is President-elect Trump really saving 1,000 jobs? And is this a sign of an improving economy in the near future under the new president?
This week the biggest news I’ve been hearing about is how President-elect Trump saved 1,000 jobs in Indiana. Carrier, a subsidiary of United Technologies, had previously announced that it was moving 1,000 jobs to Mexico.
Not because the workers were doing a bad job but because the labor was much cheaper in Mexico.
The talk on right-leaning news was how Trump kept his promise. He’s changed the lives of 1,000 people who can now have a happy holiday season. Great things are ahead for America.
The talk on left-leaning news was how this is smoke and mirrors. This was decided a few months ago, and they just waited until now to announce it. That President Obama would have done the same thing, but Republicans wouldn’t let him. And that the only reason the jobs were saved is due to providing tax breaks.
I don’t want to be political. I’m a Libertarian. I think all government intervention is bad.
I’m happy people aren’t losing their jobs, but that’s not the discussion that matters for us in trying to build long-term wealth.
Is this a sign the economy is better? No, it’s not at all. I’ve heard conflicting reports on whether it really saved 1,000 jobs. And I haven’t seen all the details. I’ve heard different rumors about what was “given” to Carrier for them to stay in Indiana. But that’s not important for our discussion.
There are two things we do know. First, tax incentives were given. Second, the parent company, United Technologies, has 10% of their business in government contracts. That’s all we need to know.
Jobs should be created because there is sufficient demand in order to warrant the work to be done. Carrier was planning to move the jobs for a reason. They wanted to increase profits. Why? I don’t know their exact motivation.
My guess would be because the company understands the economy is weakening and on the verge of recession. And that earnings have been decreasing. If the company can’t get growth or increase profits due to a weakening economy, they can do so by lowering costs.
Government intervention doesn’t change those underlying factors. Most likely, Carrier and United Technologies decided the tax breaks and the threat of losing 10% of government contracts were more important than the cost savings from moving jobs to Mexico.
None of this means the economy is improving. It actually may hurt the economy. The tax breaks will drop government revenues. And the government will feel obligated to maintain spending money with United Technologies. Less revenues and the same amount of spending equals more government debt.
Essentially all President-elect Trump did was bail out these 1,000 employees. You can argue it’s great for the 1,000 employees the same way you can argue welfare programs are good for those who need them. My purpose isn’t to debate that.
I just want you to understand the government is using additional debt to create the appearance of good things occurring.
This is only kicking the can down the road, just like the bailout that occurred in 2008-2009 was. It’s not improving the economy; it’s trying to hold off the pain for as long as possible. But the longer you push the pain toward the future, the bigger that pain will be when it finally breaks through.
And with government debt already at all-time highs, continued use of government debt to push the pain forward has less and less impact. We’re already seeing that.
With as much debt as was added over the past eight years and the eight years before that, and with interest rates at all-time lows for almost eight years, we should not be on the verge of a recession.
Don’t get caught up in the left media and right media debating about whether this is good politically. And don’t misinterpret any of this nonsense as a sign of an improving economy. It’s not.
But the markets are going to go up. The markets are betting on President-elect Trump’s intervention to make them go higher. The markets are not betting on Trump’s policies to actually improve the economy. Notice that distinction.
I agree the markets are going to go up for some period. Too many people were fearful of the markets prior to the election. Markets don’t crash when people are fearful. They crash when people are greedy.
Watch the markets go up. And when you see everyone you know thinking it’s time to be in the markets… people making money day-trading… people who have no idea about investing talking about how they’ve made a fortune… And you start doubting your convictions that the market is going to crash…
That is exactly when a crash is coming. Stay in your quality stocks. Especially the ones that pay dividends and that you plan to hold for 10 years or more. Be careful about buying new stocks. You can buy some new stocks if you do your homework and they’re stocks that you’ll be comfortable holding for 10 years, through a possible crash. But it’s also okay to hold cash and miss out on gains in “hot stocks.”
The last thing you want is to own non-quality “hot stocks” that you can’t get out of when the market drops 20% in one day. Don’t let the euphoria, rhetoric, and nonsense deter you. But don’t fight the trend by selling quality stocks. Ride their gains, because you’re not selling them during a crash anyway.
That’s it for this week. Next week we’ll talk about the Fed’s getting ready to raise interest rates.
To your health, wealth, and personal freedom,
Chad A. Walker, CPA, MBA