Imagine you have a business relationship with a partner. You work and run the business, and take home 65 percent of the profits for your efforts and your partner received 35%. Last December your partner recognized your hard work and rewarded you with an additional 14 percent of the business, reducing their take to 21 percent. Suddenly you are receiving a much larger portion of the profits.
At the same time your business partner has made an effort to reduce friction in the business and keep borrowing costs low. These are ideal conditions for your business to grow, and they are exactly what the U.S. Government has done.
In short, the tax cuts passed by Congress late last year are a big deal. Corporations are getting around 20 percent more tax relief and reflecting that relief in well-publicized bonuses to workers, increases in earnings, and growing dividend payments to the shareholders. All of that is not just good – but incredibly good for the American economy and citizens.
The economy has been limping along at an anemic positive growth rate of 1-2 percent for the past decade thanks to increased taxes on consumers and businesses, increased regulations, foolish government spending and expanding entitlement programs, all of which act as sand in the gears of our economy. Innovations and entrepreneurship have been the reason we have had any real growth. The corporate tax cut likely will be responsible for our GDP – the total run rate of our economy – to move from 2 percent to 3 or 4 percent in the coming years.
Reducing regulation also stimulates our economy. Removing unnecessary regulations make running, expanding, and owning a business easier and more affordable. These burdensome distractions deter innovation and growth, and slow the speed of progress. Some regulation is good and needed, but rolling back damaging regulations is a very positive step for the economy and investors.
But it hasn’t been all positive with our business partner. Unfortunately he has a harsh spending habit and has been combative with our business partners.
You see our partner has actually increased discretionary spending 10%, doubling what was expected. This is a long term problem in the making. Increasing our credit card debt, then refinancing it into the mortgage (the national debt) is not the right thing to do. But cutting your spending doesn’t lower your mortgage payment, increasing your payment does. America needs to grow its way out of debt, which was the intention behind the tax cuts.
Our business partner seems to enjoy picking fights with our customers and suppliers by threatening to raise prices with new tariffs. Tariffs are a selective tax on specific goods and services designed to influence consumer behavior. The problem is that the artificially increased costs are often passed on to the customers. Creating tariffs, or even worse starting a trade war, has a net effect of raising costs for everyone. But if someone in another country can offer goods and services at a lower cost, I should have the freedom to buy them from them at the lowest price. Amazon has taught us this lesson.
No business partner is perfect, but anytime someone is willing to offer me 20 percent more of the profits, reduce friction in the business and keep our borrowing costs low, I’m happy. But the excessive spending and the trade threats aren’t helping. Hopefully our partner is doing this with some level of intention, perhaps to force renegotiation (he likes to negotiate). Tax cuts, regulation reduction, and an accommodative Federal Reserve all point to an economy and market ripe for growth. If our partner can correct the two problem areas, we could see even more opportunity.
Steve started his investment career in 1978 with the NYSE investment firm EF Hutton, working in the environment of a large investment company. Desiring to provide clients with objective investment advice, he founded Prosperion Financial Advisors. Learn more about Steve here.
Securities & Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this article may not develop as predicted.
https://prosperion.us/wp-content/uploads/2018/05/zjaglnglxik.jpg7201280Steve Boorenhttps://prosperion.us/wp-content/uploads/2017/02/whitelogosized.pngSteve Booren2018-05-18 12:34:312018-05-18 12:34:31Renegotiating with our Business Partner, Donald Trump
Presenting the LPL Research Midyear Outlook 2018: The Plot Thickens, packed with investment insights and market analysis to guide you through all the action we may see in the year ahead. When we as investors began 2018, we were tuned in to the recent fiscal policy changes that were expected to propel economic activity and […]