What would a Romney Presidency mean for your investment portfolio? Part I

A key part of the 247bull investment strategy involves capitalising on the powerful long-term trends that exist within the global economy. It is for this reason that that for the past six years our primary investment thesis has been to be long gold (and silver) and we will remain bullish on gold all the time the factors driving the gold bull market remain in place.

So far this has proven to be a very successful strategy, however as long-term investors looking to play macro themes such as currency debasement and financial repression, we are constantly looking for things that could alter or invalidate our investment thesis. This article examines the upcoming US presidential election and tries to answer the question, what would a Romney Presidency mean for your investment portfolio?

Investment thesis

The 247Bull portfolio is heavily weighted towards precious metals and their related equities. That’s because gold, silver and the companies that produce it are in a major bull market. Precious metals prices are being driven up by powerful structural forces such as:

Currency debasement: With central banks across much of the world turning to policies such as quantitative easing (money printing) in order to “solve” the global financial/ debt crisis, the value of paper currencies such as the US Dollar, Euro and British Pound, is being eroded.

Financial repression: Another part of the solution to the global debt crisis is the policy of financial repression. Financial repression involves keeping money captive and then subjecting it to negative real interest rates, i.e. rates of return that are well below the true rate of inflation. This allows governments to erode the value of their debt and issue new debt at very low interest rates. Unfortunately it also erodes the real wealth of savers.

Investors and those looking to protect their wealth traditionally turn to gold during times of increased financial and economic uncertainty and there are plenty of reasons to be fearful today. Quite apart from currency debasement and financial repression, there are an increasing number of systemic risks: everything from the threat of sovereign debt default to concerns over the solvency of the banking system.

All the time these macro conditions exist, investors will continue to prioritise wealth preservation and will therefore continue to be attracted to gold. The question is, would a Romney presidency change any or all of these factors? And, if so, how should investors respond?

Tax cuts

As we have pointed out before, it is not raising taxes that increases government revenue, it is lowering them, and Mitt Romney certainly seems to appreciate this. His plan is to fix America’s tax code such that it focuses on jobs and growth.

From mittromney.com: “To repair the nation’s tax code, marginal rates must be brought down to stimulate entrepreneurship, job creation, and investment, while still raising the revenue needed to fund a smaller, smarter, simpler government.

America’s individual tax code applies relatively high marginal tax rates on a narrow tax base. Those high rates discourage work and entrepreneurship, as well as savings and investment. With 54 percent of private sector workers employed outside of corporations, individual rates also define the incentives for job-creating businesses. Lower marginal tax rates secure for all Americans the economic gains from tax reform.”

In a nut shell, Romney promises to do the following:

  • Make all of the 2001-2008 tax cuts permanent.
  • Allow some of the 2009-2010 tax cuts to expire as scheduled in January.
  • Cut tax rates on ordinary income by 20% across the board.
  • Repeal the estate tax and the Alternative Minimum Tax (AMT).
  • Repeal the 2010 Affordable Care Act (Obamacare) tax increases.
  • Repeal the 2010 health law’s 3.9% tax on investment income for high-income households.
  • Make capital gains, dividends, and interest tax free for households making $200,000 or less, and tax capital gains and dividends at the current 15% rate for those making more than $200,000.
  • Allow the 2010 payroll tax cut to expire in January.
  • Repeal the additional 0.9% Medicare tax on high-income workers (a product of the 2010 Affordable Care Act) that is due to take effect next year.
  • Cut the corporate tax rate from 35% to 25% and extend the research and experimentation credit and full expensing of capital investment.

Romney promises to finance his tax cuts and his repeal of estate taxes and the AMT by limiting tax preferences, such as deductions, credits, and exclusions. However, it is worth noting that he has not said how he would do this.

Also the Tax Policy Center, which is a non-partisan organization, couldn’t make Romney’s numbers work, concluding that his plan is “mathematically impossible” unless he raises taxes on the middle class.

Balancing the US budget

At the close of business on 20 January 2009 (the day before President Obama took office) the US federal debt stood at $10,626,877,048,913. Today the figure is $16,221,220,460,731, an increase of 52%, or more than $64,000 per US taxpayer.

America’s national debt has increased more during the Obama administration than it did from the time George Washington became America’s first president in 1789, to the beginning of Bill Clinton’s second term in 1997, a period of 208 years.

The US budget deficit has risen from $160.7 billion in 2007 to $1.3 trillion in 2011, and according to the Congressional Budget Office (CBO) US government spending this year will be 22.9% of gross domestic product whilst revenue will be 15.7%.

Romney has said that it is his mission to restore America to health by “reducing the size of the federal government and getting its fiscal house in order”. To that end he has also pledged to balance the budget within 8 to 10 years and get government spending down to 20% of GDP by 2016.

There are three ways in which Romney plans to tackle spending and debt. The first is to “eliminate every government program that is not absolutely essential”. He gives the following examples of the kind of cuts he would make:

  • “Repeal Obamacare, which would save $95 billion in 2016.
  • Eliminate subsidies for the unprofitable Amtrak, saving $1.6 billion a year.
  • Enact deep reductions in the subsidies for the National Endowment for the Arts, the National Endowment for the Humanities, the Corporation for Public Broadcasting and the Legal Services Corporation.
  • Eliminate Title X family planning programs benefitting abortion groups like Planned Parenthood.
  • End foreign aid to countries that oppose America’s interests.”

The second is to “return federal programs to the states where innovation, cost management and reduction of fraud and abuse can far exceed what Washington achieves. I will block grant Medicaid and workforce training, saving well over $100 billion in 2016.”

The third part of Romney’s plan involves significantly improving “the productivity and efficiency of the federal government itself”. He gives the following examples of how this could be achieved:

  • “Reduce the federal workforce through attrition and align compensation with the private sector, saving over $40 billion by 2016.
  • Repeal the Davis-Bacon Act, a union giveaway that artificially raises costs for government projects, and save taxpayers more than $10 billion a year in the process.
  • Attack rampant fraud in government programs by enacting far stiffer penalties for those who steal from taxpayers. Cutting improper payments in half could save more than $60 billion a year.
  • Consolidate, eliminate and streamline federal departments, agencies and offices following a stem-to-stern review.”

In addition to these three approaches Romney intends to ensure that “both Medicare and Social Security are made sustainable for future generations.” The plan here is to slowly increase the retirement age for younger workers to keep up with increases in longevity, and to ensure that “Social Security benefits for higher income recipients should grow at a slower rate than for those with lower incomes.”

Romney has pledged that these reforms “should not affect current seniors or those near retirement, and tax hikes should be off the table.”

It is possible to cut taxes, grow government revenues and balance the budget. For example, President Reagan implemented the largest tax cut in American history in his first term, and government revenues more than doubled by the end of his second term. It remains to be seen however, whether Romney and Ryan could pull off a similar feat.

Part II of this article will examine the other key changes that Romney promises to make, before trying to assess what a Romney presidency would mean for investors and what they should do if indeed he is elected.

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