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When Underperforming the S&P 500 Is a Good Thing

InvestMy Comments: I’ve spent time recently with clients talking about our mutual frustration with the performance of their investment portfolios over the past 18 months. They want their accounts to grow aggressively and I want them to grow aggressively, if for no other reason than it makes me look smart.

We can argue that the stock market is overdue for a crash, and that their respective portfolio managers are factoring that into the mix. The idea is to find ways to avoid the downturn since that alone makes it possible to make gains on the inevitable upturn.

Here is a perspective that will give you another way to look at this. I’m told patience is a virtue, but it’s still hard to come by.

Feb 1, 2015 | By Jeff Benjamin

As financial advisers roll through annual client reviews, many will face the task of having to explain how their portfolio strategies so badly lagged the 13.7% gain by the S&P 500 Index last year.

Fact is, a truly diversified investment portfolio should have returned less than 5% in 2014. It was that kind of year. Any adviser who generated returns close to the S&P was taking on way too much risk, and should probably be fired.

Blame the ever-expanding financial media or the increased awareness among investors, but there is no getting around the reality that clients have become programmed to dwell on the performance of a few high-profile benchmarks.

“Sure, the S&P 500 had a good 2014, and if you had all or most of your money invested in [that index], you did, too,” said Ed Butowsky, managing partner at Chapwood Capital Investment Management. “But what were you doing with most of your money in a single index?”

Most years, a globally diversified portfolio that spans multiple asset classes can hold its own relative to something like the S&P. But when a year like 2014 happens and the S&P essentially laps the field, financial advisers who have done their job might suddenly feel as if they have to make excuses for doing the right thing.

“Periods like 2014 are why people think they should just go buy the index,” said David Schneider, founder of Schneider Wealth Strategies. “Investors tend to fixate on the S&P because it’s the most famous index out there, and when it outperforms everything, it just makes the case for passive investing for all the wrong reasons,” he added. “People think they can just get rid of foreign stocks.”

While long-dated U.S. Treasuries emerged as a surprise outperformer last year with a 27.4% gain, most risk assets around the world didn’t even show up for the game.

Developed markets, as represented by the MSCI EAFE Index, fell 4.9% last year, and the MSCI Emerging Markets Index fell 2.2%.

SMALL CAP LAGGED

Midsize companies, as tracked by the Russell Midcap Index, generated a 13.2% gain last year and almost kept pace with the larger companies that make up the S&P 500. But the 4.9% gain by the Russell 2000 small-cap index shows that smaller companies were not really participating.

With everything packaged into a diversified portfolio, it would have been near impossible to generate anything eye-popping last year.

Applying allocations based on Morningstar Inc.’s five main target risk indexes, ranging from conservative to aggressive, the best performance last year would have been 5.23%, which includes a 1.51% decline during the second half of the year.

To get that full-year return would have required a 91% allocation to stocks, divided between 59% in U.S. stocks and 32% in foreign stocks.

That portfolio, Morningstar’s most aggressive, also included 4% in domestic bonds, 1% in foreign bonds and 4% in commodities, as an inflation hedge.

On the other end of the spectrum, the most conservative Morningstar portfolio had just an 18% allocation to stocks, including 13% domestic and 5% foreign. The 61% fixed-income weighting had 50.5% in domestic bonds and 10.5% in foreign bonds. The 10.5% inflation hedge included 2% in commodities and 8.5% in Treasury inflation-protected securities.

HISTORY LESSON

That portfolio gained just 3.38% last year but fell 0.73% during the second half of the year. “ History has taught us that at the beginnning of any 12-month period, stocks have as good a chance of gaining 44% as they do of losing 25%.” Mr. Butowsky said.

The onus is always on advisers to turn years like 2014 into teachable moments with clients, and a lot of advisers are doing exactly that.

Thomas Balcom, founder of 1650 Wealth Management, took a proactive approach in December by addressing the issue in his holiday greeting card message, which focused on “not putting all your eggs in one basket.”

“My clients were definitely surprised they weren’t up as much as the S&P, because everyone uses the S&P as their personal benchmark,” he said. “But we had things like commodity exposure and international stocks that were both down last year, and that doesn’t help when clients see the S&P reaching record highs.”

Veteran advisors recognize 2014 as a truly unique year for the global financial markets.

In 2013, for example, when the S&P gained 32.4%, developed international stocks gained 22.8%. But domestically, the S&P was outpaced by both mid- and small-cap indexes, meaning a diversified portfolio was riding on more than just the S&P’s positive numbers.

Prior to 2013, the S&P had outperformed international developed- and emerging-market stocks on only three other occasions since 2000. Domestically, the S&P has outperformed midcap and small-cap stocks only one other time since 2000, in 2011, with a 2.1% gain.

“It’s tough dealing with clients, because the S&P is the benchmark you can turn on the TV and hear about, and everyone wants to know why they aren’t experiencing the same returns as the S&P.” says Michael Baker, a partner at Vertex Capital Advisors.

“The S&P 500 really represents one asset class – large cap stocks,” he added. “And most investors only have about 15% allocated to large-cap stocks.”

Good Company, Bad Stock

retirement_roadMy Comments: This post is to remind you that stock market performance and the state of the economy do not follow the same track. From time to time there are close parallels, but they dance to a different drummer.

My arguments that the stock market is due for a crash are unrelated to the state of our economy. They are also unrelated to the name or party of the President in office at any given time. Obama cannot take credit for the current economic strength nor can G.W. Bush be blamed for the crash that happened in 2008. That I am also a Democrat is also irrelevant.

The stock market is going to crash again, and you need to be prepared if you have money exposed to what will be an unpleasant period. Period.

January 30, 2015 / Commentary by Scott Minerd

The U.S. economy is strong relative to other countries, but its equity valuations mean less upside potential for long-term investors than other areas of the world.

The U.S. economy is in the best shape out of any economy in the world, but it reminds me of a great business with a bad stock. Despite its underlying economic strength, I believe U.S. equity markets are likely to underperform those of less healthy economies in the long run. When I look around the world at economies that have many more problems than the United States, I see more upside potential for equity valuations and market performance in places like Europe, China and India.

Certainly, the United States is in a self-sustaining recovery—already the fifth-longest economic expansion since World War II. Despite noise this week around the 3.4% decline in durable goods orders, recent economic data releases continue to be positive: new home sales rose to a 6.5-year high and the Conference Board’s Consumer Confidence Index surged to 102.9 in January, the highest since August 2007. The U.S. economy remains the engine sustaining global growth, but when it comes to equity market valuations, a lot of the risk premia are out of the market.

One of my favorite macro-valuation tools is to compare total stock market capitalization to underlying gross domestic product (GDP). In the United States, this ratio is currently 134 percent, the highest level since the third quarter of 2003, the year this global comparison data became available. By the same measure, equity valuations in the euro zone, China and India are much lower. China’s equity market capitalization, for example, is 51 percent of its GDP, significantly below the previous high of 101 percent registered just prior to the global financial crisis.

As policymakers around the world introduce measures to reflate their economies and implement structural reforms to release growth potential, I wouldn’t be surprised to see Chinese, European, and Indian equities outperform U.S. stocks in the long run.

Switching to the bond market, I’ve been bullish since last fall that rates in the United States would decline to 2 percent or lower. In the near term, rates probably will fall further, but given that we’ve come more than 120 basis points since the beginning of January 2014 (as of yesterday’s close), it seems that the best part of the bull market in U.S. rates is over.

If it weren’t for quantitative easing in Europe and the deflationary shock coming out of oil, we would see U.S. rates meaningfully higher than they are today. With inflation likely to start picking up in the second half of the year, wage growth likely to start showing strength due to increases in minimum wage (20 states increased minimum wage effective Jan. 1), and the prospect that the Federal Reserve will probably increase rates at some point in the second half of the year, the vulnerability to rates rising will increase as the year plays out.

This will mean tough sledding for most of the bond market, but it’s not necessarily bad news for the U.S. economy. Even if rates rise modestly and a lot of the juice leaves the equity markets in 2015, the underlying economy is just fine and will continue to be just fine.

Foreign Markets May Offer More Growth Potential

U.S. stock market capitalization as a percent of GDP is at its highest level since the third quarter of 2003, the year this global comparison data became available. By the same measure, equity valuations in the euro zone, China and India appear much lower. As central banks in those countries implement policies to reflate their economies and structural reforms take hold, stock markets in those countries may present more attractive opportunities in the long run.

Group Health Insurance is Bad For America

healthcare reformMy Comments: Followers of this blog know my reasons for wanting to keep the PPACA in place, mindful of the need for a lot of modifications. What you may not know was about 40 years ago I cut my teeth in the insurance world selling individual health insurance policies.

My market was staff and faculty at the University of Florida where there was a one price, one plan fit all program. Those younger than average were paying the same as those in their sixties, thus subsidizing the old folks. I was able to provide equal or better coverage at far less money for those in my target market.

The health care industry, in all its forms, represents about almost 1/5th of our entire Gross National Product. Before the PPACA, the annual increase in health insurance premiums was about 7% per year, meaning before long, unless checked, it would choke us. You can argue that the PPACA should be abolished, but not before you come up with a meaningful alternative.

By Rick Lindquist February 3, 2015

(Editor’s note: This blog has been republished here with permission from Zane Benefits. This is part three of an ongoing series. You can check out the original, in its entirety, here.)

When you drive to work today, look around at the people, cars, and buildings you pass by. Between one-sixth and one-fifth of the people you pass on their way to work, representing 17.5 percent of our gross domestic product, work producing a product or service nobody really wants to buy—health care, or more accurately sickness care, since what most Americans call healthcare has very little to do with health.

Despite the fact that the United States spends two-and-a-half to three times per person what other developed nations spend on healthcare, the United States is the unhealthiest developed nation on earth. There are many reasons proposed for why this is so.

For example, 95 percent of the pharmaceutical prescriptions filled each year in the United States are for drugs you are expected to take for the rest of your life—because drug companies find it much more profitable to create customers for life by producing maintenance drugs that treat the symptoms of diseases versus drugs that cure diseases.

Medical providers from the individual doctor to the largest hospital are paid for their procedures and time spent versus their outcomes or health of their patients. However, the major reason that the U.S. health care industry costs so much is because the employers who pay for most U.S. health care do not have a financial stake in the long-term health of their employees.

Employees used to stay with one company for 25 years or more. Today, the average employee is projected to change jobs more than 10 times over his or her 45-year working life. Most of the major illnesses on which you can spend $1 today to save $100 tomorrow (like heart disease from obesity or cancer from poor nutrition) will not show up until an employee is long gone or retired, at which time the $100 cost is picked up by another employer or by taxpayers through Medicare.

As medical costs have escalated, employers have, in effect, told their medical providers to pay for only those expenses related to keeping or getting the insured back to work—and this does not include paying for the prevention of a disease that will not manifest itself during the expected tenure of the employee with the company.

Despite a new federal mandate in PPACA that employers must cover preventive care, the federal definition of preventive care includes tests like mammograms and prostate exams that merely screen for diseases rather than help prevent them.

Significant weight reduction, nutritional advice, vitamins, minerals, smoking cessation, and hundreds of other wellness-related treatments are excluded from most group and most individual health insurance plans. Although at least with individual health insurance plans you can choose to apply the savings to your wellness care.

In summary, rising health care costs, driven mostly by group health insurance, punish our nation on multiple fronts:
1. For you and your family, rising healthcare costs means less money in your pockets and forces hard choices about balancing your children’s education, food, rent, and needed care.
2. For your company, rising healthcare costs make it more expensive to add new employees and reduces budgets available for marketing, customer service, and product development.
3. For the government, rising healthcare costs lead to reduced funding on other priorities such as infrastructure, education, and security.

What’s the solution?
You should switch to individual health insurance because its good for America. With an individual plan, it empowers Americans to manage their own healthcare and it makes American businesses more competitive.

Tricks of the Mind Turned Oil Into Gold

oil productionMy Comments: Once again, I have a blog post about OIL. Clients are asking me how was it possible for the price of oil to rise as far as it did just a year ago and yet here we are, with the per barrell price 40% of what it used to be. If it’s economically realistic at $50 per barrell, how come the price was $140 or more just 18-24 months ago?

A basic premise found in Economics 101 is that the price of anything is a function of supply and demand. That rule is working now, but it still doesn’t explain where the money went when the price was $140 per barrell. These comments will help you better understand this phenomena.

Mikhail Fridman / January 28, 2015

In 2007 I made a bet with a fellow Russian businessman. The price of oil, he told me, would never drop below $80 again. This was the consensus among oilmen at the time. And that, I thought, was the surest sign that the oil price would soon start falling.

I told my acquaintance that the oil price could easily go down to $40. What determines it, I said, is not supply, demand or the cost of production. Rather, what matters is the mere perception of a potential shortage.

The price of oil stayed high only because people believed there was not enough of it to go around. But once people believe that, consumers start looking for an alternative while producers try to pump more of the stuff — and then prices fall.

I am not a professional oilman and my assumptions were based not on knowledge of geology or the rate of economic growth in China, but on the simple fact that humanity usually finds a way around any obstacle in its path.

While many of my colleagues in Russia and elsewhere are arguing about when the oil price may bounce back, I am convinced that we have entered a new period of low oil prices. It is like alchemy, but in reverse: black gold, a precious substance whose price was determined by its scarcity, has turned into a black, smelly liquid that makes wheels turn.

It is not the first time this has happened. The price of oil was relatively stable until the 1970s brought the psychological shock of an embargo imposed by Saudi Arabia on the export of oil to America.

In 1975, the US started its petroleum strategic reserve, contributing to the perception that oil was scarce. Oil producers saw their main objective was to guard their oligopoly. No one cared about such trifling matters as efficiency — the distribution of licences was far more important. A good lobbyist was worth more to an oil company than a good engineer.

To deal with this challenge, developed countries started to invest in energy saving and new technologies, and by the early 1980s this started to yield results. The ensuing fall in oil prices eventually sapped the Soviet Union of its economic lifeblood.

The price of oil stayed high only because people believed there was not enough of it to go around. But once people believe that, consumers start looking for an alternative while producers try to pump more of the stuff — and then prices fall.

Rapid economic growth in China and India in the early 2000s changed the perception about the balance between demand for oil and its scarcity. And once again developed countries with high levels of entrepreneurial freedom set themselves to work on solving the bottleneck.

There was no single solution, but everyone thought of something: biofuel, wind energy, oil sands, shale.

It was no accident that the countries that led the innovation were liberal market economies with strong property rights, while the countries that wished to thwart these efforts were resentful of competition and riddled with monopolists. They treated private property as a concession that could easily be taken away.

Political systems based on the distribution of rent demoralise people. Political regimes based on free competition motivate people. It is because of free initiative and competition that humanity can overcome bottlenecks.

The reason America has led the way in the production of shale oil and gas is not that it has a lot of shale — many other countries have a similar geology. It is that America has a lot of economic freedom.

This is a precious resource that many other countries lack. Its government does not sell licences for onshore drilling. It lets people buy land, and promises that nobody can take away from you what it is yours.

The dizzying oil prices of recent years were profoundly abnormal. The fall will turn oil production into a proper business where costs and efficiency matter more than lobbying power. This stands to make the world freer and safer, by reducing the power of illiberal regimes that thrive on oil rents.

Two years ago, I found myself in Manaus, a unique city in Brazil’s Amazonas, in the middle of the rainforest. In the late 19th century Manaus became one of the richest and most extravagant cities thanks to the rubber it had.

It built a splendid Belle Époque-style opera house out of Italian marble with vast domes and gilded balconies. But a few years later the seeds of the rubber tree were smuggled out of the Amazon and Brazil lost its monopoly.

Then the invention of artificial rubber finally buried the entire prosperity of this tropical Paris. Manaus fell into poverty, electricity generation became too expensive and the opera house went dark. It is a powerful lesson to the futility of suppressing competition.

The writer is an international businessman and chairman of LetterOne Group and Alfa Group Consortium

PUNS …

Peasant-Wedding-Bruegel-the-Elder

My Comments: For some reason this has been both a stressful and satisfying week. My observation is that progress is being made on several fronts, both personal and globally. It’s Friday, and my mind is ready for a little levity. So… please keep your groans to yourself. Thanks.

1. The fattest knight at King Arthur’s round table was Sir Cumfurance. He acquired his size from too much pi.

2. I thought I saw an eye-doctor on an Alaskan island but it turned out to be an optical Aleutian .

3. She was only a whiskey-maker, but he loved her still.

4. A rubber-band pistol was confiscated from an algebra class, because it was a weapon of math disruption.

5. No matter how much you push the envelope, it’ll still be stationery.

6. A dog gave birth to puppies near the road and was cited for littering.

7. A grenade thrown into a kitchen in France would result in Linoleum Blownapart.

8. Two silk worms had a race. They ended up in a tie.

9. A hole has been found in the nudist-camp wall. The police are looking into it.

10. Time flies like an arrow. Fruit flies like a banana.

11. Atheism is a non-prophet organization.

12. Two hats were hanging on a hat rack in the hallway. One hat said to the other: ‘You stay here; I’ll go on a head.’

13. I wondered why the baseball kept getting bigger. Then it hit me.

14. A sign on the lawn at a drug rehab center said: ‘Keep off the Grass.’

15. The midget fortune-teller who escaped from prison was a small medium at large.

16. The soldier who survived mustard gas and pepper spray is now a seasoned veteran.

17. A backward poet writes inverse.

18. In a democracy it’s your vote that counts. In feudalism it’s your count that votes.

19. When cannibals ate a missionary, they got a taste of religion.

20. If you jumped off the bridge in Paris , you’d be in Seine .

21. A vulture carrying two dead raccoons boards an airplane. The stewardess looks at him and says, ‘I’m sorry, sir, only one carrion allowed per passenger.’

22. Two fish swim into a concrete wall. One turns to the other and says, ‘Dam!’

23. Two hydrogen atoms meet. One says, ‘I’ve lost my electron.’ The other says, ‘Are you sure?’ The first replies, ‘Yes, I’m positive.’

24. Did you hear about the Buddhist who refused Novocain during a root-canal? His goal: transcend dental medication.

25. There was the person who sent ten puns to friends, with the hope that at least one of the puns would make them laugh. No pun in ten did.

Germany Is Delusional To The Point Of Insanity

global investingMy Comments: Assertive headlines such as what you see here are usually outside my comfort zone. For one it implies a pathology that I’m not trained to comment on and two, Europe and European values are different from mine, given that I’ve lived here in the US for the past 65 years. (Warning: this post is LONG.)

That being said, what goes on in Europe does influence what happens to our markets, and since investing money is an expertise I have, then knowing and trying to understand this sort of thing is important to me. And perhaps to you.

The Mercenary Trader / Jan. 21, 2015

“It is as if it’s accepted that the euro area’s modus operandi is to clear things with Germany, and for the ECB to constrain its actions to what is best for Germany.” ~ Athanasios Orphanides, former member of the ECB governing council

Most of the eurozone is experiencing deflation. Even the countries who aren’t – Germany etc. – are well below the ECB’s official 2% inflation target.

This is dangerous because deflationary conditions can tip into recession… and depression… and political extremism born of civil unrest. Deflation – or rather the extreme results of such, in the aftermath of harsh slowdown – brought us the Nazis in the 1930s. Post-Weimar economic implosion, not currency erosion, enabled the political conditions for Hitler’s rise to power.
Need we say more?

Apart from political unrest, deflation is like having no fuel in the emergency flight tank.

A lot of people will say “what’s wrong with deflation,” e.g. why is it so bad?

It’s important to clarify there is a big difference between falling inflation levels (disinflation) and inflation falling below zero. Think of a plane that stalls out.
When an economy goes negative, the risk is that the plane fails to overcome the stall… and crashes before it can pull up. Deflation (as opposed to disinflation) can lead to compounding “downward spiral” impacts, not unlike gravity’s increasing pull on a nosediving airplane.

The German attitude toward inflation, and debt, is pathological (indicative of mental disorder).

Germany is paranoid of inflation on a pathological level. Germany is also pathologically allergic to debt. Consider, for example, that Germany as a country has serious infrastructure needs… and there is real risk that Germany’s economy will slow in future. Right now, German interest rates hover above zero (or even dip below it). This is a historic opportunity for “good” financing… for logical spending on real needs, financed by incredibly low-cost debt.

Yet Germany is so debt averse, they aren’t willing to borrow for the future – not even for themselves – even with rates in the zero to one percent range. That’s almost the equivalent of turning down free money, even when it is badly needed for repairs… even when it has obvious strategic use. That is not frugality as a virtue, it’s more like a miser complex worthy of therapy.

Worse still, Germany is delusional about its own economy and dangers.

Think about this: What happens to the German economy when China really and truly slows? And what happens to the German economy when Japan goes “next level” in its competitive devaluation plan?

China is slow-motion imploding. No matter what happens, China has to switch from an infrastructure led economy to a consumer led one. This is very bad news for Germany, one of the world’s largest exporters. As is the increasingly competitive currency stance of Japan. Bottom line: Germany’s present economic strength could easily evaporate… for strong reasons that make logical sense. And how much cushion would they have in that event? None…

Bottom line: Germany would rather slit its own throat, economically speaking, than allow for a rational approach to inflation and debt.

That is a deliberately harsh phrase, it’s true. But the writing is on the wall. Germany’s commitment to austerity is not just pathological, it is economically suicidal.
The entire eurozone is at risk… and Germany’s own economy is too… and the lessons of history speak loudly. Yet Germany continues to live in a bizarro dream world where saving money has been elevated to a fetish regardless of surrounding circumstances.

We don’t choose to pick on Germany. We have friends who are German… family members and loved ones with German roots. It simply “is what it is.” The pathologies of a country, to the degree they go separate ways from rationality, are leading to economic disaster (and who knows what in the aftermath).

There are questions as to whether German provisions will “neuter” euro QE.

Draghi and the European Central Bank will announce some kind of quantitative easing on Thursday (sic). There is no question of it now. If they tried for another stall – more “wait and see” – European equity markets would simply go into freefall. Investors would start betting on accelerated odds of euro break-up.

But it remains possible that the “shock and awe” of euro QE will be neutered by German demands. Via the FT: To appease QE’s German opponents, which include the chancellor Angela Merkel herself, Mr. Draghi is expected to say that bonds bought will remain with national central banks, so losses will not be spread among eurozone members. But other eurozone countries, as well as the International Monetary Fund, fear the concession could reduce QE’s effectiveness…

OF COURSE giving Germany what it wants would reduce euro QE effectiveness!

• Germany wants to reduce fiscal exposure to weaker eurozone members.
• But establishing a united support front is the whole idea in the first place!
• The house is on fire and liquidity crisis measures (firehoses) are needed…
• But Germany wants to avoid charges for the water…
• And make sure any fires are segregated away from itself…
• Thus increasing the odds the whole thing burns down.

The German justification for not wanting to participate is ridiculous.

The stance of Germany is essentially, “Why should we pay for these bums? Why should we create more risk exposure for ourselves? We are savers, they are spenders… why should we waste money on them?”

The answer is that Germany should have asked those questions SEVENTEEN YEARS AGO. Saying “Nein!” to an insanely stupid monetary union would have been very logical, and the best thing for all… circa 1998 before the euro actually launched! But now it is too late to avoid responsibility for actions.

What’s more, it is no longer a “moral” question… but a question of WHAT THE RISKS ARE.

This is the other amazing / maddening thing about the German stance. Germany still acts as if there is room to say “no” on moral grounds… when the final question is what will happen, not what is right or wrong. When a course of action is highly likely to invite DISASTER, the question of right or wrong has to be put aside…

Because of Germany, we don’t know how euro QE will come across… but we are willing to short more FEZ against our euro position. Our EURUSD position has a sort of partial absolute hedge in short European equities. If Germany throws a spanner in the QE works, and “Super Mario” disappoints, EURUSD could spike in a big short squeeze. But European Equities (NYSEARCA:FEZ) would fall hard in that instance. Conversely, if Draghi and the ECB come through in a big way, the reverse could occur – EURUSD goes into freefall, FEZ rockets higher. So they act as de facto hedges of each other…

Another scary thing… even if Draghi gets his “big bazooka” QE… what good will it do?
The other frightening thing to consider: It may be too little, too late for Europe no matter what size of QE they get. There is little point in lowering eurozone bond yields (already pressing zero). And there is little real hope in stimulating bank lending. So the true point of euro QE would be… what? Making the euro a hell of a lot weaker to stimulate exports one supposes. What else is QE supposed to do?

One argument is that, once euro QE starts, it never stops… until it goes nuclear…
Some argue it doesn’t really matter how much QE the ECB starts with… because QE just gets bigger from that point no matter what. We can’t be sure this is true. Germany might try to stop a “failed” QE program. Then again, if things get really ugly – e.g. if Germany falls into recession too – then maybe it keeps going and going…
And the ECB finally winds up going “nuclear,” taking a page from Japan. Understand this: There are plausible scenarios where the euro goes to 85 cents before all is said and done. That outcome would not be too hot for risk assets. (Hello understatement!)

5 Republican Campaign Promises

My Comments: Campaign promises are usually pretty hollow expressions of what a candidate ‘would like’ to have you believe. If you win, then you can be held accountable. If you lose, then they are typically forgotten.

Last evening, President Obama gave us his 2015 State of the Union address. I did not watch it. My brain had been overly exercised earlier in the day and I simply didn’t have the stomach to participate in any more churning. From what I read this morning, I’m OK with who he is and where the country is at the moment.

As we start the new year, with an expectation that the news media will be rampant with gibberish from and about the various national candidates, here are five promises made by GOP hopefulls during the last cycle. They might wish them to be forgotten.

One can argue persuasively that ‘deficit reduction’ has not happened given the federal debt will increase by about $1T, but federal outlays vs federal receipts has improved significantly since 2010 ( $1,294B vs $483B in 2014 ). It is a significantly lower % of the Gross National Product than it was in 2008. That’s a very good thing.

Deficit Reduction

“We will curb Washington’s spending habits and promote job creation, bring down the deficit, and build long-term fiscal stability.”—2010 GOP Pledge to America.
When Republicans took control of the House in 2010, they repeatedly stressed that reducing the federal budget deficit was a matter of peak national importance. Which makes their repeated proposals to blow up the deficit by billions rather odd. But thankfully for the GOP, with President Obama and Democrats blocking budget-busting proposals like Paul Ryan’s tax plan, the deficit has steadily dropped throughout Obama’s presidency.

Economic Growth

“Well, if China can have 5 percent growth, and India can have 5 percent growth, and Brazil can have 5 percent growth, the United States of America can have 5 percent growth”—Tim Pawlenty, June 18, 2011
As Politico reported at the time, forgettable 2012 candidate Tim Pawlenty’s pledge to spur 5 percent GDP growth was “mocked by some economists and Republican critics as unachievable in a country this large.” But in the third quarter of 2014, the Obama economy hit Pawlenty’s benchmark (for their part, Republicans greeted the news with as much enthusiasm as they showed toward Pawlenty’s campaign).

Gas Prices

“I’ve developed a program for American energy so no future president will ever bow to a Saudi king again and so every American can look forward to $2.50-a-gallon gasoline.”—Newt Gingrich, February 22, 2012.
By Gingrich’s standards, President Obama has been stunningly successful: The national average gas price is now $2.32 per gallon, marking the lowest level since May 2009. Of course, gas prices have tumbled due to a wide range of factors, few of which involve Obama — but none of which involved bowing to a Saudi king.

Medicare

“Mitt Romney and I will protect and strengthen Medicare so that the promises that were made that people organize their retirements around, like my mom, will be promises that are kept.”—Paul Ryan, August 19, 2012
There’s some reason to doubt that Rep. Paul Ryan (R-WI) was sincere when he promised to protect Medicare, given that he has repeatedly proposed plans to end the program as we know it. But if the 2012 vice-presidential nominee does genuinely want to ensure that Medicare remains strong, then he’ll surely be glad to learn that President Obama’s Affordable Care Act has significantly improved the program’s financial outlook. Since Obamacare became law, Medicare’s Hospital Insurance trust fund’s solvency has been extended by 13 years.

Unemployment

“I can tell you that over a period of four years, by virtue of the policies that we’d put in place, we’d get the unemployment rate down to 6 percent, and perhaps a little lower.”—Mitt Romney, May 23, 2012.
Mitt Romney’s vow to reduce unemployment to 6 percent by the end of his first term in office was almost universally hailed as bold and ambitious. But under President Obama’s stewardship, the economy improved much quicker than Romney promised: The unemployment rate has dropped steadily since the 2012 election, and dipped to 5.9 percent in September. President Obama has also blown Rick Perry’s vague promise to create 1.25 million jobs out of the water.