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December 17, 2012

Will big government cause the stock market to fall?


'Recall that a few months ago Obama said the private sector is doing 'just fine.'  How can the private sector be doing fine with more than 22 million people looking for full-time work and the lowest labor-participation rate since 1981?  The president thinks help for them lies in the government hiring millions of new workers.  This does not bode well for cuts in government spending.

Are the deficits sustainable?  At some point, interest rates will rise as lenders become more concerned about our deficits and national debt.  At that point, stocks will face more competition from fixed-income securities.  Stock prices will have to fall.

From a big-picture standpoint, it's undeniable that our country is becoming a welfare state.  There are over 48 million people on food stamps, and structural unemployment is rising as U.S. education fails to keep pace with the rest of the world.

The fact that Obama could win a second term, having presided over the worst economic recovery on record, is evidence that voters are more interested in which leaders will extend entitlements the longest, rather than which ones can accelerate economic growth.  There are plenty of examples of welfare states in Southern Europe, and their stock markets are not exactly flourishing.

As a portfolio manager, I would value the stock market of our welfare state like those of Southern Europe, at no more than 10 times earnings.  Multiplying that times S&P earnings 20% lower than 2012 takes the S&P to 800, down 44% from where it is today.''

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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