by Gary Alexander
March 26, 2024
Dad was a rocket scientist. That was painfully obvious when he moved our family from peaceful Seattle to politically charged Huntsville, Alabama, in the summer of 1963, just after I graduated from high school. Dad supervised a team of professionals, just one tier below rocket-ace Wernher von Braun at the Marshall Space Flight Center, making the Saturn-V launching rocket, in order to fulfill President Kennedy’s 1961 promise of “landing a man on the Moon and returning him safely to the Earth before this decade is out.”
What I didn’t know, until the early 1960s, that dad was also a rocket scientist during the 1950s. I didn’t know that because his work was classified, and he dutifully kept his mouth shut. In the summer of 1945, when I was born, two weapons were born – the atom bomb, as dramatized in the 7-Oscar-winning film, “Oppenheimer,” and the Bell Labs/U.S. Army Project Nike, a surface-to-air missile (SAM) designed to intercept attacking aircraft or missiles: Nike is the Greek goddess of winged victory, not the sneaker firm.
Nike was fully developed in the early 1950s at over 250 hidden sites, including half a dozen around our home city of Seattle, one on Vashon Island, right across from our home, where dad’s team worked on the SAMs. After the Nike Project was declassified, dad loved to diagram the four-dimensional forces of space and time required to compute the intersection of a rocket with a plane, to cause an aerial explosion. That’s rocket science. If your math is precise, you are guaranteed to hit your target, be it a bomber, or the moon.
Later in life, dad was confused about investing because the math didn’t add up. Trends in place did not continue. P/E ratios rose and fell. Companies (or economists or politicians) lied or “bent the numbers.” I had the honor of telling dad that economics and (by extension, investing) is not a “hard” science, like the physics he knew so well. Economics is a hybrid science, part math and part psychology, relying on human reactions and trillions of individual choices. The problem with academic economics is that the math geeks have hijacked the craft, using econometric models to project current trends into a mostly fictional future.
Econometricians have ignored the psycho-social side of human practices (praxeology), relegating them to the boutique school of Austrian economists, led by Ludwig von Mises in his mid-century masterpiece, “Human Action” (1949). Von Mises said that real people have different goals, making personal decisions to fulfill those goals. Not all economic decisions involve money. Some goals involve soul satisfaction.
If this sounds too theoretical, consider two monetary angles on personal economics: Debt and taxes. As the face of the $100 bill might say: “There’s nothing more certain than debt and taxes.” — Ben Franklin.
Question #1: “If the economy is so good, why are so many families so unsatisfied?”
Inflation is coming down, the jobless rate is at, or near, 50-year lows, we’ve dodged a recession, and our GDP growth rates are the envy of the world. The major stock market indexes are at, or near, all-time highs. National wealth is also at record highs. Yet poll after poll shows only 15% to 25% of voters think they are better off under President Biden. Are they all misinformed by a negative media, or reacting rationally?
A paper published by the National Bureau of Economic Research (NBER) in February 2024 asks that very question, calling it, “The Consumer Sentiment Anomaly.” (“The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly” by Marijn A. Bolhuis, Judd N.L. Cramer, Karl Oskar Schulz and Lawrence Summers). They pointed out that the cost of debt service is not included in the Consumer Price Index. For nearly 15 years – including all eight years under Obama – we had near-0% short-term interest rates, so this was no big problem, but with the monetary over-reaction to COVID by the over-printing of fiat money, we saw the most rapid rise in interest rates in history (over 5% in 15 months), resulting in huge debt increases and rising rates at all levels. This study calculated that this rise in rates pushed mortgage rates over 140% higher, and car loans about 80% higher, while credit card rates rose from an average 15% a year, to 23%. This pushed the “real” Consumer Price Index to a peak of 18% (annual rate) in April 2022 and a recent real reading of 7% (rather than 3%) as of the end of 2023.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That’s important, because the poor are hurt most by inflation and debt service, while the rich seldom take out loans, paying by cash in full. The middle class is also hurt badly, and that’s where most of the votes are. It’s a basic human desire to want more things in life than we can afford, so we tend to buy big items (like homes and cars) on time, paying for them through debt service, but then we want even more, so we charge small things, too. Kudos to those who remain debt free, especially college kids, but so few do.
Also, inflation is cumulative, while wages lag. Food and gasoline prices are each up 20% in the last three years and wages aren’t, so “real wages” have declined. Shoppers look at prices, not the latest decline in monthly inflation data. When their wages don’t match rising costs, they register this angst in public polls. Add to this a tax increase (taxes are not part of the CPI), and watch the sentiment polls drop further.
Question #2: “If deficits are rising (and they are), why not just raise taxes on the rich?”
If a government raises tax rates, they will collect more taxes, right? That seems to be the reasoning behind President Biden’s budget plan for Fiscal Year 2025. Raise taxes on businesses and the rich and we can close the budget gap, but raising taxes on the rich invariably causes lower tax collection on the rich, and vice versa, an example of changed behavior by carrot and stick motivation. This is proven under Coolidge (1920s), Kennedy/Johnson (1960s), Reagan (1980s), Bush (2000s) and now in the 2017 Trump tax cuts.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Art Laffer shows, in his 2022 book, “Taxes Have Consequences,” if you raise tax rates on the rich and businesses, you raise incentives for tax avoidance, or kill economic growth, which reduces tax receipts.
Three examples from Biden’s 2025 budget demonstrate the economic consequences of raising tax rates:
#1: Raise business taxes from 21% to 28%: If you add-in the average 6% state tax on businesses, this would make U.S. corporate tax rates the second highest among the 38 countries of the Organization for Economic Cooperation and Development (OECD) consortium, behind only Colombia. This tax increase would cause many big companies to move overseas, and small companies to stop hiring or close up shop.
#2: Tax unrealized capital gains: Imagine a business owner with nearly all of his $200 million in net assets tied up in his growing company, which doubled in the last year. If he is required to pay 25% of the $100 million capital gain, that would require selling one-eighth of his stock, thereby depressing the price, and he would have to do this each year. The same applies to a wealth tax, requiring a “fire sale” of stocks.
#3: Ending Trump’s middle-class tax cuts. The Trump tax cuts will automatically end after 2025, unless they are renewed. This will increase tax rates for most Americans. Self-employed workers are motivated to work if their total tax rate is under 30%, but not if it creeps over 40% (counting FICA). When the government demands two pounds of flesh instead of one, lots of folks might stop working for Uncle Sam.
Where does that leave the investor? My rocket scientist dad put together a retirement portfolio that wasn’t working for him – mostly gold and bonds – in the 1990s, and that’s when I told him the basic story about “this isn’t rocket science dad, it’s harder than that. It’s about human beings, emotions, sentiment and contrarian thinking.” He knew I worked with some of the best minds in the business, including Louis Navellier, so he said, “Would you manage this mess for me?” I agreed, and we got lucky. He let me make his portfolio decisions right at the dawn of the high-tech revolution, at the start of a huge market move.
Sometimes, being lucky is better than being smart, so we both profited from the market’s rocket ride.
Navellier & Associates does not own Boeing Company (BA), in managed accounts. Gary Alexander does not own Boeing Company (BA), personally.
All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Role of Nvidia and Super-Data in this “Brave New World”
Income Mail by Bryan Perry
It’s Time to Lock in High Yields
Growth Mail by Gary Alexander
Economics Isn’t Rocket Science (It’s Harder than That)
Global Mail by Ivan Martchev
If the Fed Plans to Cut Rates, Then Why is the Dollar Firm?
Sector Spotlight by Jason Bodner
Is This Bull Market Boring You to Death?
View Full Archive
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About The Author
Gary Alexander
SENIOR EDITOR
Gary Alexander has been Senior Writer at Navellier since 2009. He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks. For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.
Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s. He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division. Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander
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