The Sentinel

Are higher taxes in your future?  A recent issue of our newsletter outlined the financial condition of the United States and painted a grave picture that even the government admits is in our future as early as the year 2020.  The year 2020 will see all government revenue go to paying for entitlements and interest on the national debt.  That assessment was made before the health care bill and under the supposition of moderate interest rates on government debt.  If we just raise taxes, we can fix the problem right?

A fundamental problem with government is what they do with tax revenue.  When government gets a dollar they spend more than what they receive.  A tax increase is an opportunity not to reduce debt or balance a budget, but to fund a new program to expand government.  The health care bill is an excellent example.

Several new taxes go into effect on January 1, 2011 to support the health care legislation.  For example:

Americans will no longer be able to use health savings accounts (HSA), flexible spending accounts (FSA), or health reimbursement accounts (HRA), funded with pre-tax dollars for the purchase of non-prescription, over-the-counter medicines, except insulin.

There will be a cap on flexible spending accounts of $2500.

There will be an increase in 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.

This next one is not a tax, yet!  Starting in 2011 employers will be required to report the value of health benefits provided.  The progression from here is a potential tax on employer-provided benefits since that may be considered income in the future. 

There are other taxes beyond these.  Marginal tax rates will increase, the marriage penalty will return, the child credit will be cut in half and the death tax returns.  Rest assured that the increase in taxes will not result in a reduction of our deficit or debt condition.  At the moment where government should think about reducing its size, it is doing just the opposite.  Nobody likes taxes but when they go to expand the size of government in a time when it should contract, it makes tax increases much harder to swallow. 

Government is in the ultimate conundrum.  They are up to their eyeballs in debt.  They have no way of materially reducing that debt.  They raise taxes to satisfy part of their constituency but then dampen economic growth that could help them in some small way to reduce their debt. 

Source: Americans for Tax Reform

And just to prove that government is in no mood to downsize despite their overwhelming debt problem we have the following graphic courtesy of the WSJ and the Department of Labor.  The chart shows changes in job openings and hires in the last year.

Why The Sentinel?

Individual investors, business leaders, government officials and investment advisers were blindsided by the collapse of the stock and real estate market and the accompanying credit conditions.  Institutions and advisers in whom trust had been placed, failed in their moment of greatest need. Were these economic conditions truly unforseen as many are now stating?  The last year produced a powerful rally in the stock market leading to optimism for an economic recovery.  Is the foundation for an economic recovery present?

The Austrian School of Economics illustrates how human behavior is a vital component of understanding financial and economic trends. The stock market, the real estate market, the bond market and other investment categories are greatly affected by the collective mass of behavior.  The anticipation of this behavior reveals market trends.  As an individual investor, your mission is to make sure you are not caught by surprise when the trend changes. 

The sentinel depicted here guards the Knights' Castle in Rhodes.  A Sentinel is a soldier stationed to guard against a surprise attack.  Thus was born the idea of a publication to help investors against suprise attacks on their portfolios. As you protect your investments in a world fraught with misinformation, this publication will be your Sentinel.

The Sentinel's purpose is to educate readers on investment topics and economic trends. Oceans of information are available but how much do readers truly understand? Investment failure is often the result of misunderstood information and an inability to identify changes in trend.  People invest based on what others are doing.  This type of crowd-following can be deadly during trend changes.

Rather than simply telling you what to do, The Sentinel explains the reason for taking specific action. The explanation is given with historical context and contemporary examples. Such an approach applies reasoning to investment action rather than the herding instinct typical to most investors.

 Oliver Wendell Holmes is credited with saying,

"The mind, once expanded to the dimensions of larger ideas, never returns to its original size."

The ideas presented will be large and you will never think about investments in the same manner.

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