We can all sleep more soundly tonight. Congress is back in session today. Any connection between the opening of the new session of Congress and the fact that every single stock in my portfolio is down for the day, I’m sure, is purely coincidental.
They have a lot of work to do this year. Tax reform, social security reform, lawsuit reform, and telecom reform. That’s a lot of reforming to expect from the only whorehouse in America that loses money. But we can always hope.
Even better than hoping, we need to keep an eye on them. There will be a huge amount of money at stake in the laws Congress will write this year. That means a lot of snouts in the trough. But the reforms are very important to get right.
I attended the White House Economic Summit just before Christmas to put my two cents in, and am heading to Washington tomorrow to do more of the same. Here are a few of the things I think are especially important.
Tax reform will happen, but it won’t be the big-think project being discussed in the newspapers. I think the President will get the top marginal tax rate cuts made permanent as his first order of business. That’s very important because more than 80% of tax revenues collected at the top rate are paid by small business owners. Now that banks are lending to companies again, small businesses are primed to grow; they will be the main source of both IT capital spending and productivity growth this year. We must prevent the deficit-hysteria in Congress from derailing that growth. Flat tax and sales tax ideas are just that; good ideas that will never happen. We could, however, get another nudge down in the dividend tax rate. That would be great news for growth.
Social security reform is going to happen in the form of private savings accounts. I expect that to take place in the next 4 months. That would be great news for both the bond and stock markets, and would begin the process of introducing reality into the social security game. Ignore the articles you will be seeing about how the resulting government debt will bury America; they are wrong. The interesting question will be how to educate everyone in America in choosing investments. I will write more about that later this week.
Telecom reform is the most important reform of all. Under the existing telecom law the US has fallen from first place to 13th place in world telecom networks. Telecom speed is important because it is literally the central nervous system of the whole economy–the principal driver behind productivity growth. Congress is going to write a new telecom law this year. It is hugely important that they get it right. What does that mean? Anything that increases capital spending on new communications technology. Japan and China have announced recent advances in telecom speed that allow their companies to to business at speeds 50 times what we call broadband. We can’t afford to lose this game.
This is the perfect year to attack these issues. The economy will grow 4% this year; inflation will be around 2%. That means interest rates will remain near current levels and the productivity-driven profit increases will push stock prices higher. Stock values are already $3 trillion higher than they were two years ago before the dividend tax cut. There are $450 billion in tax revenues baked into those gains that nobody is counting, and a lot more to come if we get the reforms right.
JR
www.rutledgecapital.com
