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Yoshikami: Fiscal Responsibility as Consensus?

Something's happening to the American public that Washington DC needs to listen to very carefully.

After decades of overspending, Americans seem to be finally understanding that trillion dollar deficits have long-term consequences and must be addressed.

A recent CNBC pollindicated that most Americans believe taxes must rise and government services must be cut to address runaway deficits. This is a shocking pivot for the American public long satisfied with a heavy personal and public debt load. Its encouraging.

Of course, the difficult challenge will be tax policy. It's easy for everyone to agree that spending must be cut but it's a much harder battle to determine if taxes should be raised and who should pay more. We all know Warren Buffett's perspective that he and the affluent should be taxed more. But this perspective runs headlong into a view that less taxation is necessary to allow free enterprise the greatest latitude in building real economic growth.

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As the debate continues, it's important for investors to assess which sectors might benefit or be negatively impacted if deficit cutting talk actually becomes action. Here's a potential losing and winning sector.

Some have proposed a national sales tax as a way to cut the deficit. But one wonders what this might do to consumption and how it might impact companies like Wal-Mart or Coach if a 6 1/2% national tax is imposed on purchases (as was suggested by recent bipartisan panel). The retail industry is surely worried that they will bear an inordinate amount of the deficit cutting burden. Given the traumatized condition of American consumers, an additional tax on purchases would be highly unfavorable to this industry.

One sector that will likely do well if real deficit action is taken is the financial sector. Lower deficits will translate into a more stable economy; good for financial companies. And as balance sheets continue to strengthen (note J.P. Morgan's announcement that they plan to buy back $1 billion in shares), profitability will surely follow. Perhaps banks aren't doing God's work as Goldman Sachs' Lloyd Blankfein intimated at the height of the financial crisis, but it is important work to be sure. Banks and the economy tend to do well simultaneously. And cutting deficits will do the economy a world of good.

The bottom line is difficult choices will need to be made. Count on 40% of the public and business leaders to scream that the solution chosen is the wrong one. Of course, self interest has a strong impact on perspective and we should keep that in mind as objections are raised. It's a difficult task to please everybody and frankly impossible. We should recognize that fact as the debate continues.

Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.