- According to the Commerce Department, Gross Domestic Product (GDP) in the first quarter of the year was actually higher than originally reported just a month ago. The figure was revised from an anemic growth rate of 0.6% to a slightly better number at 0.9%, primarily as a result of imports being lower than originally anticipated. While on the surface this is good news and makes it more difficult for us to officially enter into a recession, it is still very slow growth. It could also be argued that the lower import number is a direct result of consumers willing to spend less money. Nonetheless, this upwardly revised number gives us the opportunity to reflect on the fact that the economy is staggering, and at present, staggering in a positive direction.
- Over the years, many wealthy American citizens have given up their U.S. citizenship in an effort to protect themselves from U.S. income, estate, and gift taxes. There are several well-known people and hundreds you’ve never heard of who have done this. According to the Wall Street Journal, 470 American citizens gave up their citizenship and moved abroad in 2007. For years, Congress has threatened to find a way to stop people who created their wealth in the U.S. from escaping these taxes. They finally did it. Under the previous rules, anyone who renounced their citizenship had to continue to file U.S. income tax returns for 10 years and still owed income, estate, and gift taxes during that period of time. This rule has been abolished. Now, U.S. citizens will have to pay a tax on their U.S. assets as if everything was sold at the time they gave up their U.S. citizenship. Also, on inherited money the estate tax will be applied as if it were a “gift” to the heirs. In short, the rules make it less tax advantageous to move money offshore. These rules only apply to people who have a net worth greater than $2 million or who averaged $124,000 or more in income taxes for the past five years. There is a small tax break, however, in that the first $200,000 is not subject to the tax. These rules will certainly hurt some of the promoters of offshore trusts as well as those who are seriously thinking of giving up their citizenship.
- Now that the nominations for the upcoming fall elections are all but complete, advertisers are “licking their chops”. The next five months will be filled with radio and television ads with the parties telling us why and why not McCain/Obama would be best suited for the Presidential role. Although temporary in nature, this is much needed revenue as the weak economy has caused advertising dollars to decline significantly. What things can we expect? From Obama’s perspective, we will likely hear about how McCain is just a third term for President Bush and his policies. In fact, Obama and the Democrats are likely to make it appear that Bush is running, not McCain. On the flip side, Senator Hillary Clinton provided plenty of ammunition in attacking Obama during the long Democratic nomination process. Just imagine the ads where they actually use quotes to support McCain as she attacks Obama’s lack of experience in numerous areas. Once we get past all of the ad rhetoric, the campaign is shaping up to be one of the most interesting we’ve had in four decades. McCain, who is most comfortable in an informal setting as opposed to planned speeches, challenged Obama to a series of Town Hall debates. Obama, on the other hand, while not as good at reacting on his feet as McCain, is a powerful orator when giving a prepared speech. Regardless of the outcome of this election, the campaign should be one of the most stimulating and exciting since Kennedy and Nixon first debated on television.
- What is going on with gold as an inflation hedge? With oil having jumped 13% in just two days, gold hovered in the high $800s, down over 10% from its highs earlier this year. This traditional inflation hedge has not kept pace with other commodities for most of this year. Oil, a/k/a “black gold”, continued to jump by leaps and bounds, and some are even predicting $150 per barrel by July (really not hard to believe, is it?). We hearken back into history to find other commodities beyond oil that have moved at the same pace as these wild price increases. The one that comes to mind most easily is gold itself. In a short period of time during the late ‘70s it soared from $120 per ounce to well over $800 per ounce. It then crashed and remained below its record price of the late ‘70s and early ‘80s for over 25 years. Unlike gold, oil does have traditional “supply/demand” characteristics, but at the same time, we are concerned when any investment doubles in such a short period of time, i.e., the past 12 months. Much like the stock market of the late ‘90s or the real estate market of the mid 2000s, investors said that “prices would go to the moon and not come back”. The same is being said about oil and other commodities and we wonder if a year from now the theme of “oh this time it’s different” won’t be proven wrong once again.
- In a somewhat self-serving but nonetheless very interesting move, the Treasury Department released a couple of White Papers which talk about the benefits of the Bush tax cuts from 2001 and 2003. You might recall that many of these tax cuts will sunset over the next couple of years, and thus the Treasury Department is attempting to frame the debate. Here are a few of the “ditties”: The top 5% of taxpayers paid more than half (59.7%) of all individual taxes, while the top 1% paid 39.4% of the tax. In 2008, because of the elimination in the marriage penalty, income taxes were reduced by around $22.8 billion. The report goes on to state that if tax increases occur, then taxpayers will likely follow historical patterns when taxes have gone up. In 1993 they shifted portfolios towards tax-exempt investments. During the ‘70s, they used tax shelters as a way to “avoid” taxation. Of course, many of these tax shelters had little economic merit, so an investor was not paying taxes, but was actually losing money. Allowing the Bush tax cuts to expire will force all investors to reexamine their portfolios.
As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon.
RAY, KIM, ERIC, BRUCE, and LOU
©6/16/08 ProVise Management Group, LLC
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