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Roberts, Obamacare & Our "Stall-Speed" Economy

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
July 3, 2012

IN THIS ISSUE:

1.  Justice Roberts’ Apologists on the Right

2.  Should Have Overturned on the Basis of “Fraud”

3.  Supreme Court Disapproval Surges After Decision

4.  Our “Stall-Speed” Economy

5. Upcoming Money Manager Webinar on July 12

Overview

I decided late last week that I would not make any more comments about the Supreme Court’s ruling on Obamacare in my weekly writings. But then something happened over the weekend that changed my decision to keep my mouth shut.

So today I will put forth my latest thinking on the Supreme Court’s controversial decision on Obamacare, and you can take from that what you wish. At a minimum, it will give us a whole new light in which to consider Chief Justice John Roberts.

Following that discussion, we’ll look at the latest economic reports. I’ll warn you in advance, these reports don’t suggest much encouragement for our struggling economy. Even so, we need to keep on top of the economic reports, even if they don’t suggest big changes.

Justice Roberts’ Apologists on the Right

I voiced some of my concerns over the Supreme Court’s Obamacare decision in my BLOG on Friday. Specifically, I said that I was frustrated and angeredby the Court’s decision. As the day wore on, I pondered whether or not I would have more to say about the “Roberts decision” in today’s E-Letter which goes out to a vastly larger audience.

By the time I went to bed on Friday night I had decided NOT to write about the Roberts decision on Tuesday (today). I thought to myself: It’s over, Obama won, can’t change it, let it go, don’t come off as a whiner. To my surprise, I woke up Saturday morning feeling the same way. I was actually kind of relieved.

But that was before I read nationally syndicated columnist George Will’s article in RealClearPolitics later in the day on Saturday (he actually wrote the column on Friday, but I didn’t see it until Saturday). The column was entitled “A Substantial Conservative Win.” George Will is generally considered to be a leading conservative, but if you have read him for years, as I have, you know that he is not always a conservative.

Along that line, Will felt obliged (I suppose) to find some silver lining for conservatives in the Supreme Court’s decision to uphold Obamacare almost in its entirety. Will went on to claim that the Court’s surprising ruling was a “substantial victory” for conservatives. I didn’t agree before I read the piece, and certainly did not agree after I read it.

Will’s thinking went as follows: Justice Roberts’s opinion declared that the Constitution’s “Commerce Clause” does not authorize Congress to require that we buy health insurance. If it did, that would give the federal government a blank check to regulate any and all private conduct. The Court also decided that Congress unconstitutionally coerced the states by threatening to cut off Medicaid funds if they opted out of Obamacare and refused to create health insurance exchanges.

Let’s take the Commerce Clause argument first. It is true that a number of analysts, like George Will, read the decision to mean that the Commerce Clause is effectively dead as a vehicle by which the government can pass legislation and expect the Supreme Court to declare it constitutional by way of the Commerce Clause.

This may be true on the face of it, that Congress may not be able to directly force us to buy electric cars, solar panels or broccoli. But whether Justice Roberts realizes it or not, his opinion on Obamacare provides a constitutional road map for the architects of the next great expansion of the welfare state. All the government has to do in the individual mandates of the future is include a financial penalty, and then – thanks to Justice Roberts’ opinion on Obamacare – the new mandate is transformed into a constitutional exercise of Congress’s power to tax.

The Court’s decision that the government can’t withhold Medicaid funding from the states also doesn’t hold much water. The limits on congressional coercion in the case of Medicaid may apply only because the amount of federal funds at risk in that program’s expansion  was so huge (basically all or nothing). But what if Congress threatens to cut off only 5% or 10% of Medicaid funding to force states to obey future federal mandates? Will the High Court strike that down too? Maybe, maybe not.

The point is, the two big things some conservative writers say we should be happy about – the Commerce Clause and Medicaid funding – can very likely be circumvented. Now you might argue that the government and the Supreme  Court would not do either of those things, especially given how unpopular the Obamacare decision is.

But let me remind you that it is quite possible that 2-3 current justices on the High Court will retire in the next few years due to their ages. If the current Court can reach a decision like they announced last Thursday – thanks to Chief Justice Roberts – just imagine what it might allow the government to do if President Obama gets to appoint one or two or three new justices in the next four years!

Should Have Overturned on the Basis of “Fraud”

Apparently it never crossed the minds of Chief Justice Roberts, and the four liberal justices that he defected to, that by declaring Obamacare to be a “tax” and not a mandate, this amounted to fraud. Throughout the brutal (and unethical) battle to get Obamacare passed, we were continually promised that the program was not a tax.

President Obama and Democrat leaders of Congress repeatedly insisted that Obamacare was in no way a tax increase. I’m sure you’ve seen replays of the video with George Stephanopoulos (ABC News) interviewing President Obama. Stephanopoulos repeatedly tried to get Obama to agree that it was a tax increase. Obama refused.

A desperate Stephanopoulos repeated: “You reject that it’s a tax increase?” A defiant President Obama: “I absolutely reject that notion.” Yet “that notion” is the only one that would fly at the Supreme Court!

This Stephanopoulos interview was only one of many where the president denied that Obamacare was in any way a tax increase. Harry Reid and Nancy Pelosi made similar promises. Lots of Democrats did. Why? They knew full-well that if the American people perceived Obamacare to be a tax hike, it would have been political suicide to vote for it. Now that it is officially a tax, we’ll see how many heads roll in November!

Healthcare Mandate Tax

The point is, Obamacare was sold (and promised) as one thing – the mandate that Americans had to purchase health insurance or pay a penalty – when in reality it was just a tax increase. In my business, and most others, that is called FRAUD. But apparently, that argument never occurred to any of the Supreme Court justices.

The worst part is that Chief Justice Roberts initially voted with the four conservative justices to overturn Obamacare, but later changed his mind. On Sunday, CBS News posted a report confirming as much. The report notes the following after Roberts changed his vote:

“Roberts then withstood a month-long, desperate campaign to bring him back to his original position, the sources said. Ironically, Justice Anthony Kennedy - believed by many conservatives to be the justice most likely to defect and vote for the law - led the effort to try to bring Roberts back to the fold.

‘He was relentless,’ one source said of Kennedy's efforts. ‘He was very engaged in this.’ But this time, Roberts held firm. And so the conservatives handed him their own message which, as one justice put it, essentially translated into, ‘You're on your own.’

The conservatives refused to join any aspect of his [Roberts’] opinion, including sections with which they agreed, such as his analysis imposing limits on Congress' power under the Commerce Clause, the sources said.

Instead, the four joined forces and crafted a highly unusual, unsigned joint dissent. They deliberately ignored Roberts' decision, the sources said, as if they were no longer even willing to engage with him in debate.”

A link to this CBS story is included in SPECIAL ARTICLES below.

Along this same line, I’m sure you noticed how the mainstream media fawned over Chief Justice Roberts immediately after everyone figured out that Obamacare was upheld by the Court. He instantly went from villain to hero!

Next, there is the question of repealing Obamacare. I’m not optimistic. Even if Romney manages to win the White House, he doesn’t have the power to repeal it unilaterally. It is clear that he would need a majority vote in the House and 60 votes in the Senate. No one I know is expecting the GOP to have 60 votes in the Senate next year. There is a procedural way to only require 51 votes in the Senate but it’s very complicated (see link below), and who knows if the Republicans will win back the Senate. It doesn’t look good today.

The House of Representatives is scheduled to hold a symbolic vote to repeal Obamacare on July 11, but it will not be binding.

Barring something unexpected, Obamacare is here to stay. Then the question is, does it help or hurt Obama’s re-election chances? I argued in my BLOG on Friday that it hurts him. Click on the blog link and take a look at why I feel that way.

Finally, now that it is clear that Obamacare is a tax increase, it will be the largest tax increase on the middle class in US history. There is a very good article from Forbes in SPECIAL ARTICLES below that lists all the many tax hikes associated with Obamacare. Be sure to read it.

Remember that Obama promised repeatedly in the 2008 campaign that he would never raise taxes on the middle class. While the new taxes don’t kick in until 2013, people are going to figure that Obama just broke that promise! Remember what happened to the last president who promised not to raise taxes (“Read my lips…”)? Wouldn’t that be nice!

Supreme Court Disapproval Surges After Decision

Boy, this will come as a big surprise – laugh, laugh! Public opinion of the Supreme Court has grown more negative since the highly publicized ruling on the president’s healthcare law was released last Thursday. A growing number now believe that the High Court is too liberal and that justices pursue their own agenda rather than acting impartially.

A week ago, 36% said the court was doing a good or an excellent job. That was already down to 33% as of Sunday. However, the big change is a rise in negative perceptions. Today, 28% say the Supreme Court is doing a poor job. That’s up 11 points over the past week.

The new Rasmussen Reports national telephone survey, conducted on Friday and Saturday following the Court ruling, found that 56% believe justices pursue their own political agenda rather than generally remaining impartial. That’s up five points from a week ago. Just half as many – 27% – believe the justices remain impartial.

37% now believe the Supreme Court is too liberal, while only 22% think it's too conservative. A week ago, public opinion was much more evenly divided: 32% said it was too liberal and 25% said too conservative. My how things can change in just a week!

Our “Stall-Speed” Economy

I haven’t mentioned it in a very long time, but I was a private pilot for a number of years back in the 1980s. I owned my own airplane, a Piper Arrow, and used it frequently to travel and present hedging seminars all across the Southwest.

“Stall-speed” is an aviation term. A stall occurs when the “angle of attack” is so great that the wind flowing above and below the wings ceases to produce lift. It can be caused by climbing too rapidly or flying too slow. When a stall happens, the airplane suddenly loses altitude.

Continuing this aviation analogy, the US economy stalled in the second half of 2008 and early 2009 and lost a great deal of altitude (ie – recession). In the second half of 2008, GDP plunged by -3.7% and -8.9% in the 3Q and 4Q, followed by a drop of -6.7% and -0.7% in the first two quarters of 2009. This was the so-called “Great Recession.”

The economy recovered from the stall in the second half of 2009, with GDP growth of +1.7% and +3.8% in the 3Q and 4Q. The recovery continued in the first half of 2010 with growth of +3.9% and +3.8% in the 1Q and 2Q. But the recovery began losing steam in the second half of 2010, with GDP growth of only +2.5% and +2.3% in the 3Q and 4Q.

In 2011, growth slowed even more with GDP up only +0.4% and +1.3% in the 1Q and 2Q. In the second half of 2011, the economy looked like it was gaining at least some momentum with GDP growth of +1.8% in the 3Q and a respectable +3.0% in the 4Q. The rebound in the 4Q was largely attributed to “inventory rebuilding.”

Last week, the Commerce Department released its final estimate of 1Q GDP for this year. The 1Q number was unchanged from its previous estimate at +1.9% (annual rate), but down from its initial estimate of 2.2%. The government said the increase in the 1Q was mainly due to increased consumer spending, exports and residential and non-residential fixed investment. Slowdowns in federal, state and local spending were the culprits.

The decline from 3.0% in the 4Q of last year to 1.9% in the 1Q has everyone wondering if the economy is about to stall again. About half of Americans fear that we’re already in a new recession, although we’re not officially there at this point.

The Commerce Department also reported that corporate profits unexpectedly plunged in the 1Q by $6.4 billion. That is the first quarterly drop in four years. By comparison, corporate profits increased $16.8 billion in the 4Q of last year.

All eyes will now be focused  on the advance estimate of 2Q GDP which won’t be released until July 27. Most forecasters expect the 2Q GDP estimate to fall in a range of +1.5% to +2.0%. I will bring you the consensus forecast for 2Q GDP as we get closer to the report date. In the meantime, let’s look at some of the more recent economic reports. 

A good place to start is consumer confidence. The Consumer Confidence Index fell for the fourth consecutive month in June to a reading of 62.0. The following chart from Advisor Perspectives gives us some history of this key index.

Consumer Confidence Index

As you can see, the index now at 62.0 is way below the high set in early 2000, but at least it is still above the record low of 25.3 in February 2009. The bottom line is that confidence is not nearly high enough to generate a strong economy, and it is falling.

Retail sales fell modestly (-0.2%) for the second month in a row in May. If we subtract auto sales, retail sales fell 0.4% in May.

More troubling is the ISM manufacturing index which unexpectedly shrank in June for the first time in almost three years. The index fell from 53.5 in May to 49.7 in June. A reading below 50% suggests a recession. On the plus side, durable goods orders increased 1.1% in May.

The unemployment rate rose to 8.2% in May, from 8.1%. The economy added only 69,000 new jobs, the lowest number in a year, versus the consensus estimate of 150,000 jobs. The Labor Department also revised down its jobs number for April by a third to only 77,000. The unemployment report for June will be out on Friday morning and is expected to remain at 8.2%.

Weekly claims for state unemployment benefits have moved higher once again in recent weeks. The Thursday reports have come in at or above 380,000 applicants for the last four consecutive weeks.

On the housing front, the news was mixed. New home sales rose modestly in May, whereas sales of existing homes declined slightly.  Housing starts were down modestly in May, while building permits increased.

As for inflation, prices have been moving lower recently. The Consumer Price Index fell 0.3 in May. The Producer Price Index fell 1.0% in May. No doubt the Fed is watching this trend closely; it does not want to see prices falling. The 2Q GDP report on July 27 may influence the Fed’s decision on QE3.

All in all, it looks like the economy will continue to struggle for the rest of the year. Forecasts for 2013 don’t look much better.

Our upcoming WEBINAR on July 12

Halbert Wealth Management will host our next money manager webinar on Thursday, July 12 at 4:00 p.m. Eastern time. The webinar will feature the latest money manager to make it onto our recommended list – System Research, LLC.

This is a long/short Treasury bond strategy with very impressive performance numbers. This is definitely a strategy that you will want to consider, especially if you believe interest rates will go back up at some point.

To register for the webinar and to view a short video with more details, including the actual performance, CLICK HERE. (As always, past performance is not necessarily indicative of future results.)

Happy 4th of July everyone,

Gary D. Halbert

SPECIAL ARTICLES

Roberts switched his vote on Obamacare
http://www.cbsnews.com/2102-3460_162-57464549.html

Obama: The Biggest Middle Class Tax Hiker
http://www.forbes.com/sites/jimpowell/2012/06/29/supreme-court-outs-obama-as-the-biggest-middle-class-tax-hiker/

The Republican recipe for repeal
http://www.politico.com/news/stories/0612/78002.html

 


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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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