Economics is difficult

I wish I understood economics. I find economic reports confusing. Here are some examples:

• “Our economy is bad because we are in a period of slow growth.” If we are still growing how bad can it be? I read in the International Herald Times last month that only three major countries are still in a growth period; Canada, the U.S. and Germany. Other than Germany, Europe is having a hard time. Growth has pretty much stopped in China and India. In the rest of the world, countries like Mexico seem tied up by corruption or bad leaders. We should be glad to live in the U.S. where we still have economic growth. It seems unrealistic to expect strong growth all the time.

• “The 8 percent unemployment rate is killing our economy.” Well, it would be nice if everyone that wants a job could have one. But my recollection is that during my adult life we have always had an unemployment rate not far from 8 percent. I recall 6 percent for a while, and 10 percent for a while. I don’t recall any extended period below 6 percent. So yes, our leaders should work on helping people get jobs, but I don’t see it as anywhere nearly the economic crisis that the politicians claim it to be. Right now in France, where I am writing this, unemployment is fluctuating between 10 and 12 percent.

• “Taxes are too high, and they are preventing growth.” In fact our tax rates are much lower than in most developed countries. And as we all know from recent disclosures of our candidates, the rich are paying a ridiculously low tax rate. I’ve never seen any hard evidence that reducing taxes would benefit the economy, and personally I think the things my taxes pay for are a bargain — things like roads, police, fire protection, clean water and sewage. All of these come out of various taxes I pay, but I would hate to have to pay for them myself.

• “We can’t afford to pay for healthcare for all.” This seems the most silly of these claims. All over Europe there is healthcare for all, and it works well enough. If the rich want better healthcare or special services they can buy them. But for the average guy, access to basic healthcare services is a really nice thing in life, and preventing people from walking down the street spreading disease because they were not treated is not an attractive alternative. And if necessary, I would gladly pay a few hundred dollars more on my taxes if that’s what it takes, and I suspect most people would also. Certainly universal healthcare has not hurt the economies of Germany and Norway. If they can afford it, why can’t we?

• “The Greek crisis and Euro zone in general are going to cause the U.S. stock market to drop way down.” Not according to all the economic data I read from the professionals. Nor has that happened in spite of the fact that we all know Greece is a disaster, other European countries are in trouble, and the whole area is in recession — except for Germany. And yet my wife is convinced that the European community, the Euro zone, is not viable and when this becomes apparent the U.S. equities market will fall 20 percent.

So what do I make of all this? One thing that strikes me is that our culture has changed so that we expect more and more. One way to look at all this is that we are getting greedy. And when we don’t get what we expect we turn negative. While there are many people numerically in the U.S. that need help to lead a reasonable existence, the vast majority are eating well — too well in many cases — and have adequate transportation and housing. Not what they long for, but not bad. Generally we don’t have huge slums like in Brazil where thousands of people live in cardboard shacks without running water.

What does this mean for investments? It seems that for the rest of 2012, and perhaps into 2013, the overall equity market in the U.S. probably won’t move up or move down much. But there will be some swings as bad news comes and goes. Yet profits remain pretty strong for the top U.S. companies, and even banks and financial institutions might start to improve a bit. I don’t think it will matter too much (economically) who is elected president. The actions taken by the current administration don’t generally take effect for years after they come into office. We are just now reeling from the over-expenditures and generous tax cuts of the Bush administration.

So what to do? Hang in there. Good companies will do OK. With some research you might find the next Apple. We are looking now for companies in the water business because we think water will be more scarce in the next generation. And we have invested in 3D printing companies since that seems like a really good idea.

But we’re not investing much in those kinds of stocks. We invest primarily in well-managed companies that pay good dividends. Then we write options against them for additional premium income. We try to generate between 8 and 12 percent a year on our invested capital, between dividends, option premiums, and — occasionally — a capital gain, depending on the year and the amount of attention I give to it. And if a stock underperforms over an extended period, we sell it at a loss “for tax purposes” as Woody Allen would say, and reinvest in something that looks better. The value of the capital base goes up and down from year to year, but I don’t pay too much attention to that, on a macro basis. I try to watch the individual stocks and maintain the income stream.

Most of all, I pay little attention to all the negative press.

For information about Merv Hecht and more details on the strategies and stocks he writes about in this column, visit his website at DoubleYourYield.com.