Why Picking the President Is A Lot Like Picking a Stock...
Thursday, August 28, 2008 | Dylan JovineRating:
CHOOSING A PRESIDENTIAL CANDIDATE IS A LOT LIKE BUYING A STOCK.Some candidates, like some stocks, have sexy stories but little else. I remember back during the early '90s when the biotech wave hit Wall Street. Before you knew it, companies with two guys in a lab testing mice had billion dollar market caps as investors pinned all of their hopes on them. As with the internet bubble, 99% of those companies flamed out.
By contrast, some candidates are like stocks that have very little style but a lot of substance. To me, those candidates are like the tried and true blue chip companies like Coca-Cola (KO) or American Express (AXP). There isn't much sizzle to that steak, but you know you can bank on it, which is why you buy those types of stocks for your retirement account.
Many folks I talk to believe the upcoming Presidential election is the most important election in a generation. On both sides of the aisle there seems to be a cry for change.
But how do you get past these absurd commercials and press opinions to make a honest and objective and qualified opinion on which candidate to vote for?
It is not my place, nor is it the place of The Tycoon Report, to tell you how to judge a candidate's social policies. That's for you to decide in the comfort of your living room with your family and your God.
What I can share with you today is how I judge a candidate's economic policies. Indeed, my method for picking a candidate is a lot like my method for picking a stock...
And picking the right stock is all about starting with the right "framework." Today I'd like to share some important foundations to my process so that hopefully you can develop a "candidate framework" as strong as your "investing framework."
Who doesn't want universal health care?
Universal health care. Job security. Social security. Who doesn't want that? Who in this country thinks that an American should have to worry about bankruptcy because of medical issues?
But every economic plan has a cost - whether intended or not. For example, many people who want universal health care cite several European countries as the model we should follow. But at what cost? Would we accept an unemployment rate of 12% and slow GDP growth to ensure that every American has universal health care?
Maybe. Maybe not...
My point isn't to take a position. That's for you to decide based on your own circumstances. But I do want to illustrate that there are real costs to any plan that any candidate proposes. Every action has an often unequal reaction and it is important to understand the nature of this relationship to determine what that reaction may look like.
Let's start today by looking at the relationship between U.S. Gross Domestic Product (GDP) and the U.S. Budget. Although it's important to look at data going back as far as possible, today I want to discuss 2007 so that we get a basic idea of the way this process works.
2007 GDP was $13.671 trillion. That means that our country as a whole (you included) produced goods and services worth $13.671 trillion dollars.
Likewise, in 2007 the U.S. revenues were $2.568 trillion dollars, or 18.8% of GDP. That means Uncle Sam taxed America at a rate of 18.8% of GDP, which is actually a bit higher than the 18.2% average since 1970.
But incredibly enough, the amount of taxes Uncle Sam took from us wasn't enough to finance its expenses. To accomplish that, the U.S. had to borrow roughly $162 billion in additional funds.
And that means that the U.S. Budget was a total of 20% of GDP in 2007, slightly lower than the average of 20.6% since 1970.
The relationship between GDP and the U.S. Budget
The reason it's critical to look at the Federal Budget as a percentage of GDP is because both individuals and businesses allocate capital more efficiently than the U.S. government.
In other words, it's like a see-saw relationship: the larger a percentage of GDP that Uncle Sam spends, the weaker our economy becomes. The smaller a percentage of GDP that Uncle Sam spends, the stronger our economy becomes.
To understand why economics works this way, you must first understand that all dollars are not created equal. If a government worker spends $1,000 to buy widgets, the odds are that he or she will likely get fewer widgets than a person in the private sector who spends the same $1,000.
Why? Because a person in the private sector (either business or individual) is governed by the profit motive. The more money he or she saves, the more money that will go directly into his or her pocket. Thus, a person in the private sector is more likely (not guaranteed, but simply more likely) to search, negotiate and fight for the best deal possible.
And believe it or not all of these little tiny individual decisions may not seem like a big deal in any given year. But over time, they add up in a very big way (like ATM fees).
(For an extreme example of government allocating far too great a percentage of a nation's wealth, one needs look no further than socialism: there the government made 100% of the capital allocation decisions versus 20% here in America!)
Another way to view it is that not every dollar in GDP is created equal. A dollar spent by the federal government may create .95 cents in GDP while a dollar spent by private business may create $1.05 in GDP. And that may mean the difference between an economy that grows and creates jobs or one that stagnates with high unemployment.
So the goal here is to make sure that the US Budget never becomes such a large percentage of GDP that it slows down economic growth.
And that means that to pay for many of the programs both candidates are proposing - without going into more debt and ruining our children's future - we are going to have to make some tough choices and prioritize what we want to do.
That doesn't mean that programs like universal health care are impossible. Indeed, I believe in our capacity as Americans to accomplish anything we want when we set our minds to it.
But what are we willing to give in return for that? No country has unlimited funds. That means that we have to make some tough choices and prioritize what's important to us as a country.
Make no mistake about it though: we're not just deciding what kind of country we want to live. The decisions we make today will also go a long way toward deciding what kind of country we want our children to live in.
And if that isn't a reason to think this election through intelligently, then I don't know what is.
This week I wanted to emphasize the relationship between the U.S. Budget and GDP so that everyone reading this knows that we can't just spend whatever we want to spend without serious consequences. Thus, in any of our future calculations, that means we have 20% of GDP to work with.
The good news is that 20% of the most powerful economy on earth gives us a lot of options. The bad news, again, is that we can't have it all. We have to make choices.
Next week I'll discuss exactly where Uncle Sam spends our tax dollars so we can begin to see what we're going to have to do away with to get some of the programs we want.
(Please let us know what you think about Dylan Jovine's article.)
Rate his article here »
Rate his article here »
Dylan Jovine
Chief Investment Officer
The Tycoon Report
