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The Great Disconnect of 2010

Written By Brian Hicks

Posted July 2, 2010

Helicopter Ben and Nancy Pelosi don’t seem to be aware of what’s happening on Main Street.

And you can profit from that… which we’ll discuss in a moment.

But first, this “we’re recovering… but it won’t feel like a recovery” garbage is getting old. 

Recovery? What Recovery?

Pelosi’s “unemployment checks will create more jobs” video is laughable. How does it create more jobs? By raising money spent on unemployment insurance premiums? How many jobs are not filled because capital is spent on insurance? Yes, I agree that unemployment checks are needed. Jobs are hard to come by. But to say it’ll create jobs just isn’t true.

I guess what Nancy Pelosi is saying that an unemployment insurance check puts money in people’s pockets, and this money will be spent, for products, and that increased demand for products will provide jobs in order to produce those products, etc., etc, etc.

I’d love to get your thoughts on this…

In no way am I trying to be political. I’m simply pointing out a disconnect between what Bernanke and Pelosi think… and what’s happening to the good, hard working people of this country.

I don’t know. Maybe I’ve been banging my head against the wall too long.

I’m just trying to nix the idea that we’re recovering or are beginning to recover.

Consumer confidence plummeted sharply this month on job worries. Income is weak. And household debt is still high, which doesn’t leave many people much money to fuel 70% of the economy.

The only reason these people were able to fuel the last market run was because they borrowed through credit cards or against their home. They can’t do that anymore.

Consumers also know that much-needed economic stimulus is dying off. No wonder they’re scared…

Retail sales fell hard in May as consumers cut back on buying clothes and cars. Total spending fell 1.2%. And with consumer accounting for some 70% of our growth, things aren’t looking so hot…

There’s little chance, with unemployment numbers, that these people run out and spend.

Then, another 40.2 million Americans are on food stamps since March. That’s up 21% year over year. Close to 46% of those currently unemployed have been out of work for more than six months… and Biden doesn’t think we’ll see all jobs recovered.

We’re finally seeing what unemployment numbers really are post-Census workers…. look at today’s unemployment number.

The best way to handle this situation… while profiting is to prepare for downside. Buy gold. Buy the foreclosure processing companies. Buy puts on the major indexes. Do something to prepare yourself.

First, a glimpse of what’s coming in 2010.

According to this page, the “fun” begins on January 1.

This is only some of what we’ll see… You can get the entire report here.

First Wave: Expiration of 2001 and 2003 Tax Relief

In 2001 and 2003, the GOP Congress enacted several tax cuts for investors, small business owners, and families.  These will all expire on January 1, 2011:

Personal income tax rates will rise.  The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed).  The lowest rate will rise from 10 to 15 percent.  All the rates in between will also rise.  Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates.  The full list of marginal rate hikes is below:

– The 10% bracket rises to an expanded 15%
– The 25% bracket rises to 28%
– The 28% bracket rises to 31%
– The 33% bracket rises to 36%
– The 35% bracket rises to 39.6%

Higher taxes on marriage and family.  The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of income.  The child tax credit will be cut in half from $1000 to $500 per child.  The standard deduction will no longer be doubled for married couples relative to the single level.  The dependent care and adoption tax credits will be cut.

The return of the Death Tax.  This year, there is no death tax.  For those dying on or after January 1 2011, there is a 55 percent top death tax rate on estates over $1 million.  A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.

Higher tax rates on savers and investors.  The capital gains tax will rise from 15 percent this year to 20 percent in 2011.  The dividends tax will rise from 15 percent this year to 39.6 percent in 2011.  These rates will rise another 3.8 percent in 2013.

Second Wave: Obamacare

There are over twenty new or higher taxes in Obamacare.  Several will first go into effect on January 1, 2011.  They include:

The “Medicine Cabinet Tax”  Thanks to Obamacare, Americans will no longer be able to use health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin).

The “Special Needs Kids Tax”  This provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2500 (Currently, there is no federal government limit).  There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children.  There are thousands of families with special needs children in the United States, and many of them use FSAs to pay for special needs education.  Tuition rates at one leading school that teaches special needs children in Washington, D.C. (National Child Research Center) can easily exceed $14,000 per year.  Under tax rules, FSA dollars can be used to pay for this type of special needs education.  

The HSA Withdrawal Tax Hike.  This provision of Obamacare increases the additional tax on non-medical early withdrawals from an HSA from 10 to 20 percent, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10 percent.

Third Wave: The Alternative Minimum Tax and Employer Tax Hikes

When Americans prepare to file their tax returns in January of 2011, they’ll be in for a nasty surprise—the AMT won’t be held harmless, and many tax relief provisions will have expired.  The major items include:

The AMT will ensnare over 28 million families, up from 4 million last year.  According to the left-leaning Tax Policy Center, Congress’ failure to index the AMT will lead to an explosion of AMT taxpaying families—rising from 4 million last year to 28.5 million.  These families will have to calculate their tax burdens twice, and pay taxes at the higher level.  The AMT was created in 1969 to ensnare a handful of taxpayers.

Small business expensing will be slashed and 50% expensing will disappear.  Small businesses can normally expense (rather than slowly-deduct, or “depreciate”) equipment purchases up to $250,000.  This will be cut all the way down to $25,000.  Larger businesses can expense half of their purchases of equipment.  In January of 2011, all of it will have to be “depreciated.”

Taxes will be raised on all types of businesses.  There are literally scores of tax hikes on business that will take place.  The biggest is the loss of the “research and experimentation tax credit,” but there are many, many others.  Combining high marginal tax rates with the loss of this tax relief will cost jobs.

Tax Benefits for Education and Teaching Reduced.  The deduction for tuition and fees will not be available.  Tax credits for education will be limited.  Teachers will no longer be able to deduct classroom expenses.  Coverdell Education Savings Accounts will be cut.  Employer-provided educational assistance is curtailed.  The student loan interest deduction will be disallowed for hundreds of thousands of families.

Charitable Contributions from IRAs no longer allowed.  Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA.  This contribution also counts toward an annual “required minimum distribution.”  This ability will no longer be there.

Two ways to profit from the meltdown

I don’t believe we’ll see economic growth progress again — not until housing, unemployment, and confidence is less of a disaster.  Oh, and the sting of expiring taxes hurt a bit less. 

But here’s how you can profit from a likely collapse.

First, buy gold…. lots and lots of gold

France’s Societe Generale thinks gold stands to rocket to $1,430 an ounce on fears of double dip recession alone. Not on the reality, mind you — but on fear. 

There’s fear that we’ll heading into the second leg of financial chaos with the Eurozone in trouble.

There’s also a concern that governments will print their way out of trouble, spiking inflationary risks.

These conditions are both great for gold.

Add in geopolitical risks with Iran and Israel, and tensions alone will drive gold higher.

Buy foreclosure processing companies

Only asses think the housing market’s bottomed…

Fact is, three long years and millions of foreclosed homes later, there’s still a wave of foreclosures headed our way — just as we’ve been warning readers about since the early days of 2007.

We’re nowhere near the end of a crisis that could cost us $1.5 trillion.

Yet, there are two very simple ways to profit from the very companies that help process the foreclosures.

We believe they’ll be quite busy, and profitable, over the next few months.

Go where the smart money is going.

The banks are never prepared to deal with the skyrocketing mess that we’re about to face. When these loans were made, everyone foolishly thought that real estate prices would keep skyrocketing.

Nowadays, lenders are outsourcing to select companies that specialize in foreclosure processing — for a hefty fee, I might add. These companies are streamlined to specifically handle the millions of foreclosures we’re about to face.

You can read more about profit opportunity with these companies here.

I leave you with this: Be confident in preparing for downside.  And don’t fall for this “it may not feel like a recovery… but it really is” garbage.  It just isn’t true.

And if you celebrate it… have a great 4th of July.  Relax.  Take time off.  The world isn’t coming to an end.