Locally based CPA firm since 1956

The Markets – U.S. equities ended the month of June up a bit with a monthly gain in the S&P 500 of 0.33% bringing the year-to-date gains to 8.08%.

Washington – The GOP legislative agenda appears to be facing some serious head winds. Tax reform and health care priorities have suffered due to the constant damage control stemming from the public musings by President Donald Trump.

The Economy – GDP for the first quarter fist came in at a dismal 0.7% but has since been revised upward to 1.4%. The second quarter GDP is predicted to be 2.4% and the annualized GDP is predicted to come in at 2.1%. If Congress were to pass a tax reform or get some sort of infrastructure spending program passed, those GDP numbers should improve further. It seems however; all future spending is predicated on Congress understanding how much health care will cost.

Headlines- Last month I wrote about the WannaCry hack. Just this week the world discovered the Petya Ransomware. These are the most notable ransomware attacks in recent memory. WannaCry is thought to have originated from North Korea, in an effort to help fund a regime that is cash strapped. The Petya attack is “something we’ve never seen before” according to Kaspersky labs and it appears to have originated out of Ukraine.

If you want to learn more about cyber security, ransomware, and tips on how to protect yourself visit our recent blog https://wcmtexas.com/think-innovatively/. There you will find links to an article titled Digital Guardian that contains 101 things you can do to protect your data. You will also find a link to test the security of your password and a link to an app called “My Permissions”.

 

More on recent headlines:

The Federal Reserve just finished its annual round of large bank stress tests.  The banks all passed – meaning they had enough capital to withstand a massive financial shock and deep recession.

These stress tests are the political result of the government blaming banks, and not Fannie and Freddie for the 2008 Panic, and are designed to prevent another “market failure.”  The idea is that free markets have a tendency, all on their own, to lurch into panics, recessions or depressions.  We think though, if the federal government really wanted to develop stress tests to help maintain prosperity, the government itself should undergo a stress test, not the banks.

The biggest threat to prosperity has never been market failure; instead, the biggest threat is government failure. Markets didn’t fail in the Soviet Union, North Korea, Puerto Rico, Detroit, or Illinois.  Government failed.

There are three main types of government failure; One: government policies, even if well intentioned, often cause poor decisions that lead to depressions or simply lower the long-term growth potential of the economy. Two: the tendency of government to kick the can down the road for others to fix later.  Three: the government is so inefficient, ineffective, or deadlocked that it can’t stop certain government entities from collapsing.

For example, right now Illinois has no budget, has not run a balanced budget in more than 15 years, and is technically bankrupt.  Why has no one stopped this?  Where are the stress tests, regulations and “claw backs” to punish those responsible for this financial mess?  Government employees in Illinois seem to think they have more claim to the incomes and assets of the citizens of the state than the citizens themselves.  This is a disaster that could – and should – have been avoided.

How can the Federal Government run deficits year after year and project deficits for decades into the future, yet keep spending as if all was well?  The US is in the midst of one of its longest recoveries ever and government still couldn’t pass any kind of reasonable stress test.

Government failure has always been, and will always be, a bigger threat than market failure.  A free people have a natural incentive to fix incorrect consensus judgements in the market.  When a company’s stock or bonds are overvalued, or a bank is over-lending, then markets work to correct them.  The market punishes bad business decisions.  Even if you don’t think markets always fix themselves, at least you have to admit, others have an incentive to do so. Not so with mistakes made by the government.

We won’t hold our breath waiting for the government to stress test itself because we already know what an honest assessment would say.  The present course of government policy in many states – and the federal government as a whole – is unsustainable.

 

Book recommendation: Why Government Fails so Often: and How it Can do Better, by Peter H. Schuck.

Have a question? Let me know! Email me at kcompton@wcmtexas.com.