The New reality is that the US domination of Global economic activity is declining.  The US is facing what Great Britain faced at the end of World War I and II.  At that time with its worldwide colonies, Great Britain was the largest economic power in the world and from that time until now, the US ascended to that mantle.  Since the 1970s, when US manufacturing began to migrate to Asia, the US has witnessed a gradual decrease in its role as the world dominating economic power.  As long as the rest of the world's economy grew very fast, the decline was not as noticeable at home but in relative terms was very real.  However, since that period, during economic downturns the US has shed more jobs and has slowly replaced them, often with jobs that do not pay as much as the previous ones lost. 

On the other hand during the same period, China and other nations' economic activity have been increasing.  This new order is most telling when we compare the US recovery to the recovery of these rising powers.  Although the US recovery is anemic at best, the world economic activity is robustly rising as exhibited by their Gross Domestic Production (GDP), primarily in most of Asia, Australia, a good deal of Europe and South America.   This is one reason why we are witnessing other currencies strengthen as the US dollar weakens.  We will explain this in more detail below. 

As a result of growth across the globe, the US dollar is declining against many world currencies.  This decline is a benefit for the US stock market since many, if not most, companies have significant international exposure (Coca Cola, GE, Microsoft, Apple, Kraft and Boeing to name a few).  As the dollar drops, foreign sales earn greater profits reported in dollars without a change in unit sales. Also US goods become cheaper to purchase including US Treasuries, equities, companies and real estate. Furthermore, the commodities sector is rising which explains why oil is over $70 per barrel despite huge inventories of crude oil. The same situation is true with copper, iron and potash. It is possible that a third to a half of the rise in the market indices is related to the new reality that the world economy can grow with anemic growth in the US economy.  

Other countries experiencing real growth worth noting are Asia (China in particular), South America (Brazil), Australia (where the government raised interest rates to slow down their economy) and Canada.

In North America, Canada's economic activity is greater than the US and Mexico is faring worse; however, the US economy continues to dominate the continent. The US weakness hurts both Canada and Mexico.  Canada, due to its stronger financial system and more diverse natural resource exports, is doing much better than Mexico.  Mexico, dependent upon cheap Mexican labor with its US trade, is hurting.  Exports to the US of manufactured goods have been weak. Mexico has strong oil exports to the US; except, its production of oil has been dropping for years due to corruption related to nationalization of its oil industry. 

Europe continues to struggle but its banking system and manufacturing base is proving more resilient than the same industries in the US.  For all of these reasons, we continue to suggest a greater exposure of your equity assets in foreign securities. 

On another note, we cannot downplay the importance of the Federal Government's actions in influencing the equity markets.  Washington is making significant changes. We see seven actions by the Obama Administration and Congressional Democratic leaders that will affect you.  First, although we have a huge and growing deficit, Congressional leaders and the Obama administration state that they are committed to an increase in Social Security benefits for 2010 recipients.  It is expected that 25% of seniors will not see their monthly Medicare part B premiums increase from $96.40 to $104.20. This situation arises from a rule in Social Security which bars increases when that increase results in a decrease in net payments to Social Security recipients.

Second, Congressional leaders and the Obama administration announced plans that will benefit 75% of Social Security recipients from the effects of rising Medicare premiums.  Congressional leaders have stated that they will apply the rule to all Social Security beneficiaries. Furthermore, the same Congressional leaders have indicated they desire to give an additional benefit of $150 to $250 per Social Security beneficiary. Congressional leaders have also signaled their desire to extend unemployment benefits for an extra 13 weeks; employers will pay for the extension by extending the .02% payroll tax surcharge for another year. This payroll tax tends to hurt employment which means that unemployment will definitely rise above 10% with its enactment. 

Third, Congressional leaders and the Obama administration note that certain taxpayers over the age of 70 ½ will pay more in 2010. Due to the rise in the stock market, Congress will not extend the moratorium on the required minimum distributions (RMD) for 2010. 

Fourth, the same Congressional leaders, as well as, our President are also focused on Estate taxes. With the intent of taxing estates for people who die in 2010, Congress is expected to extend the $3.5 million exemption amount for 2009 to 2010, as well as, extend the maximum rate of 45% on estates.  The claims for this zero tax in 2010 change are to prevent 1) children from murdering their parents or 2) elders from committing suicide.  More likely is the federal government needs money and it is expected that this change will generate approximately $56 billion in additional tax revenues per a 2006 report from the US joint economic committee.  Today, the US desires every revenue source to help shrink the $1.4 trillion dollar annual deficit.

Fifth, Congressional leaders and the Obama administration have signaled that the AMT exemption amount will be raised for 2010 so they will not revert to pre 2001 levels. The AMT is viewed as a middle class tax so for taxable incomes under $100,000 this change is helpful.  It has little to no effect for higher earning taxpayers. 

Sixth, our friends at the IRS are stepping up plans to audit payroll taxes of small businesses.  The service expects to audit 6,000 businesses over the next three years. Please be aware and take note of this as a small business owner.  The IRS will focus upon people labeling employees as independent contractors to avoid paying Social Security and Medicare taxes. The government wants to shore up the near bankrupt programs and small businesses have always been easy pickings.

Last, but certainly not least, Congress has worked out the only non universal-universal health care bill!  As of passing of the bill by the Senate Finance Committee, the $829 billion being spent over the next ten years to bring universal health care to America, will reduce the uninsured from about 47 million to 34 million.  Since that represents 11% of the total US population and more than 72% of the current uninsured, the savings from reduced use of emergency rooms, free hospital visits etc. will not be nearly as great as promised.  So per capita we are spending approximately $28,000 per person US citizen to insure about 38% of the uninsured or about $64,000 per covered uninsured and we are not insuring everyone.  The difference in cost will probably be in health insurance premium costs for the rest of us and if the $28,000 is accurate then the cost to us over ten years is probably over $900 billion which comes out to an increase in health care premiums of over $6,700 we have to pay.  To me this is a back door tax and should be handled up front and openly through universal coverage!   Let's see what happens in the Conference Committee but we will keep you posted!