FreedomFest Continuing Coverage

Wharton Professor Siegel Favors Dividend-Paying Equities for the Long Term

Investors worried about the turmoil in the stock market should keep in mind that dividend-paying stocks significantly outperform other equities and bonds in the long term, said Jeremy Siegel, an acclaimed Wharton Business School finance professor who delivered a keynote address at FreedomFest Friday morning.

A falling stock market has fueled selling momentum but Siegel told attendees that his historical research of the market shows that stocks are becoming attractively valued after a pullback during recent months. He also advocated focusing on valuation as investment criteria rather than growth and he used his own research findings to back up his views.

A $1 investment in stocks during January 1802, held until Dec. 31, 2007, would have grown to $766,854, Siegel said. An identical $1 invested in bonds at the start of 1802 climbed to $1,320 by the end of 2007, while $1 invested in gold would have risen to just $2.45 during the same time pan, Siegel said. Meanwhile, the dollar itself only would buy six cents of what it purchased in 1802, he added.

The average annual rate of return on U.S. stocks during the same period hit 6.8%, Siegel said. U.S. government bond returns averaged an annual real return of 3.5% and actually resulted in losses for certain periods of time during the second half of the 1900s, he added.

Stocks are riskier than other investments for a one-year period but the risk evens out with bonds for a 20-year period, Siegel said.

The earnings yield ratio is an excellent long-term predictor of real returns from stocks, Siegel said. Using that indicator, the real returns on equities should grow a minimum of 5.5% during the next year, Siegel added.

For the same 12-month period, bonds should generate a real yield of 1.47%, after accounting for a 2.5% annual inflation rate, Siegel said. In comparison, the equity premium is 4.2% to 7.1%. That projected premium for equity investments is significantly higher than the long-term equity premium of 3%, Siegel explained.

Those forecasted numbers make a “strong case” for equities and a “very strong case” for international equities, Siegel said.

Beware of assuming that professional fund managers will outperform market averages, Siegel said. Indeed, three out of four mutual fund and active equity managers cannot match the performance of the S&P 500, he explained.

Anyone who remains wary about stocks in light of the latest drop in prices may be reassured that the dynamic, updated, S&P 500 Index that serves as a benchmark for the stock market averaged returns of 10.83% per year from March 1, 1957, to Dec. 31, 2006, Siegel said. However, he cautioned attendees that financial and technology stocks produced mediocre returns during that same period and he pointed out that new additions to the S&P 500 generally have underperformed during that time frame.

Growth is overrated in evaluating stocks, Siegel said. Roughly 83% of the gains in equities come from valuation, compared to just 17% that is driven by whether a given stock is on a growth trajectory, he added.

Stocks sold at reasonable prices that pay a dividend typically perform well for investors during the long term, Siegel said.

A factor for investors to consider is that the population in developed countries is aging. It will cause a heightened percentage of the world’s Gross Domestic Product (GDP) to come from developing nations instead of developed countries, Siegel said.

The developed world currently produces the majority of the world’s GDP, Siegel said. By 2050, developing countries will generate the lion’s share of the world’s GDP, he said. If international markets remain open, Siegel said he is optimistic about future stock prices. 

The rising price of oil is a growing concern due to due the dependence of the U.S. economy on foreign oil producers, Siegel said. The United States currently imports 12 million of the roughly 20 million barrels of oil that it consumes each day. As a result, increases in the price of oil will have a significant impact on the U.S. economy, he added.

Dr. Mark Skousen, the organizer of FreedomFest and the editor of the monthly investment newsletter Forecasts & Strategies, told attendees that Jeremy Siegel ranks among the world’s “geniuses” in understanding the market.

Obama Presidency Could Be a Coming Tsunami, Political Pundit Says

LAS VEGAS—The tax increases that Sen. Barack Obama (D-Ill.)  plans to enact if elected the next U.S. president would hurt the U.S. economy and investors alike, said Stephen Moore, editorial page editor at The Wall Street Journal, during his FreedomFest presentation here Friday.

The “largest tax increase in American history” will occur if Sen. Obama is elected president, Moore said. Increased capital gains taxes and the expiration of the temporary tax cuts enacted under the Bush administration only would exacerbate current economic troubles, Moore explained during his talk, “The Coming Tsunami: What an Obama Presidency Will Mean.”

“I think Barack Obama is a very dangerous man to have as our next president and I am not sure that John McCann would be that much better,” Moore said.

If the U.S. capital gains tax rate is allowed to climb it will cause the value of stocks to fall “overnight,” Moore predicted. Virtually every country in the world is cutting its tax rates to become more competitive but the United States is at risk of heading in the wrong direction and doing the reverse, he added.

The Dow Jones Industrial Average lost 20% starting in 1968 until the Reagan administration had a chance to tax cuts and enact other policies that drove the stock market upward, Moore said. President Reagan told his White House staffers when he took office that he hated taxes, inflation and the Soviets. The president then tasked his advisors to address those problems and they did, Moore said.

Complaints that the distribution of wealth in the United States has gone off kilter and require hiking taxes on the wealthiest Americans are ill-founded, Moore said.

From 1982-2007, inflation was under control and brought the United States the “greatest period of wealth creation” in modern civilization, Moore said. More wealth was produced in the United States during the 25 years leading up to 2007 than in the previous 200 years, he added.

Since 1980, a halving of the marginal tax rates actually caused the wealthiest Americans to pay an increasing share of income taxes each year, Moore said. The per capita income of middle-income Americans also has risen significantly since 1980, he added.

During the past six years, the budget for non-defense spending has increased under the Bush administration and a Congress led by Democrats. The infamous “bridge to nowhere,” funded by Congress to serve an island in Alaska inhabited by just 50 people at an astronomical cost, is an example of the wasteful spending that has taken place during that time period, Moore said. Every agency in the federal government has increased spending, he added.

Another vexing problem for the economy is inflation, Moore said. The United States had negative real interest rates between January 2002 and January 2008, Moore added.

Ill-advised interest rate cuts by the Fed are a key reason for the excessive borrowing that resulted in recent years, Moore said. Rates now should be lifted to boost the flagging value of the U.S. dollar and to curb inflation, he added.

The increasing value of gold is a signal that the dollar is weakening and the threat of inflation is growing, Moore said.

“The reason that oil is so expensive today is that the dollar” is so weak, Moore said. Without the steep depreciation of the dollar, the price of oil would be $80 a barrel rather than in the neighborhood of $140 a barrel, he explained.

There is a chance that the Democrats could hold 60 seats in the Senate once the new Congress arrives in Washington next January, Moore said. An Obama presidency and a Congress controlled by Democrats would be particularly bad news, he opined.

For the past 50 years, the best combination is when one party occupied the White House and the other major party controlled the Congress, Moore said. The worst combination during that time has occurred when Democrats occupied the White House and a majority in the Congress, he added.

With a Democratic Congress, the first two years of the Clinton presidency were a “disaster,” Moore recalled. The Republicans then took control of Congress away from the Democrats, with Newt Gingrich leading the way, and the federal government began to make strides, he added.

Moore said it was unlikely that Sen. Obama will choose Sen. Hillary Clinton as his running mate. The looming shadow of former President Bill Clinton may be too much for a President Obama to tolerate, he added.

“The White House is not big enough for three people who want to be president at the same time,” Moore said.

The “cult of Obama” is a phenomenon that has involved the media elevating Sen. Obama to “rock star” status, said Gene Healy, another FreedomFest presenter who also is a senior editor at the Cato Institute. The public’s image of the presidency seems to be a combination of wanting someone who will be “American’s shrink,” social worker, buddy, life coach and supreme war lord, he added.

People now expect more from a president than they did generations ago, Healy said.

“We can’t blame the growth of the presidency on a succession of bad presidents,” Healy said. If people want to restore the constitutional role of the presidency, it will take much more than one election, he added.

The problems involving the excessive influence of the president will not go away for two reasons, Healy said. First, Democrats traditionally have supported the expansion of presidential powers. Second, there will be enormous pressures for the incoming president to revert to the Bush theory of democratic power, particularly if a Democratic president is elected with the expectation that he will “rescue America,” Healy said.

Wharton Professor Siegel Favors Dividend-Paying Equities for the Long Term

LAS VEGAS – Investors worried about the turmoil in the stock market should keep in mind that dividend-paying stocks significantly outperform other equities and bonds in the long term, said Jeremy Siegel, an acclaimed Wharton Business School finance professor who delivered a keynote address at FreedomFest Friday morning.

A falling stock market has fueled selling momentum but Siegel told attendees that his historical research of the market shows that stocks are becoming attractively valued after a pullback during recent months. He also advocated focusing on valuation as investment criteria rather than growth and he used his own research findings to back up his views.

A $1 investment in stocks during January 1802, held until Dec. 31, 2007, would have grown to $766,854, Siegel said. An identical $1 invested in bonds at the start of 1802 climbed to $1,320 by the end of 2007, while $1 invested in gold would have risen to just $2.45 during the same time pan, Siegel said. Meanwhile, the dollar itself only would buy six cents of what it purchased in 1802, he added.

The average annual rate of return on U.S. stocks during the same period hit 6.8%, Siegel said. U.S. government bond returns averaged an annual real return of 3.5% and actually resulted in losses for certain periods of time during the second half of the 1900s, he added.

Stocks are riskier than other investments for a one-year period but the risk evens out with bonds for a 20-year period, Siegel said.

The earnings yield ratio is an excellent long-term predictor of real returns from stocks, Siegel said. Using that indicator, the real returns on equities should grow a minimum of 5.5% during the next year, Siegel added.

For the same 12-month period, bonds should generate a real yield of 1.47%, after accounting for a 2.5% annual inflation rate, Siegel said. In comparison, the equity premium is 4.2% to 7.1%. That projected premium for equity investments is significantly higher than the long-term equity premium of 3%, Siegel explained.

Those forecasted numbers make a “strong case” for equities and a “very strong case” for international equities, Siegel said.

Beware of assuming that professional fund managers will outperform market averages, Siegel said. Indeed, three out of four mutual fund and active equity managers cannot match the performance of the S&P 500, he explained.

Anyone who remains wary about stocks in light of the latest drop in prices may be reassured that the dynamic, updated, S&P 500 Index that serves as a benchmark for the stock market averaged returns of 10.83% per year from March 1, 1957, to Dec. 31, 2006, Siegel said. However, he cautioned attendees that financial and technology stocks produced mediocre returns during that same period and he pointed out that new additions to the S&P 500 generally have underperformed during that time frame.

Growth is overrated in evaluating stocks, Siegel said. Roughly 83% of the gains in equities come from valuation, compared to just 17% that is driven by whether a given stock is on a growth trajectory, he added.

Stocks sold at reasonable prices that pay a dividend typically perform well for investors during the long term, Siegel said.

A factor for investors to consider is that the population in developed countries is aging. It will cause a heightened percentage of the world’s Gross Domestic Product (GDP) to come from developing nations instead of developed countries, Siegel said.

The developed world currently produces the majority of the world’s GDP, Siegel said. By 2050, developing countries will generate the lion’s share of the world’s GDP, he said. If international markets remain open, Siegel said he is optimistic about future stock prices.

The rising price of oil is a growing concern due to due the dependence of the U.S. economy on foreign oil producers, Siegel said. The United States currently imports 12 million of the roughly 20 million barrels of oil that it consumes each day. As a result, increases in the price of oil will have a significant impact on the U.S. economy, he added.

Dr. Mark Skousen, the organizer of FreedomFest and the editor of the monthly investment newsletter Forecasts & Strategies, told attendees that Jeremy Siegel ranks among the world’s “geniuses” in understanding the market.

Flat Tax Debate Accelerates

LAS VEGAS — Bulgaria’s adoption of flat corporate and personal income taxes won praise from panelists at FreedomFest here Thursday who gathered to debate whether the United States should adopt a flat tax or a so-called fair tax.

Bulgaria was a communist country until 1989 but it subsequently implemented a flat tax under a socialist government, after a period of economic distress and hyper-inflation, said Svetla Kostadinova, executive director of the Sofia, Bulgaria-based Institute for Market Economics. Her observation that Bulgaria’s economic growth and employment have improved since the adoption of the flat tax contrasts with rising unemployment and weakening economic growth in the United States.

The Bulgarian government adopted a 10% tax rate for corporate income in 2007 and the same tax rate in 2008 for individuals, Kostadinova said. The country now has a 6% unemployment rate, compared to 12% three years ago, she added.

“Overall, the flat tax idea works,” Kostadinova said. “Bulgaria is a clear example and the Balkans is another clear example.”

Twenty-five nations around the world already have adopted a flat tax, said Chip Wood, who moderated the panel discussion on taxes.

The greatest protection against what is expected to be aggressive tax policies of an Obama presidency would be a flat tax, its proponents said during the panel discussion.

Under Sen. Barack Obama’s plan, the highest tax rate in the United States would be 53%, said Steve Moore, an editorial page writer with The Wall Street Journal. Either the flat tax or the fair tax should be adopted to stave off potentially worse economic problems than those that exist now, he added.

If a flat tax of 17% is adopted, it would spur economic growth, Moore said. A flat tax also would be “rocket fuel” for the economy, he added.

Right now, the United States is headed on a “freight train toward economic disaster,” Moore said. Neither presumptive general election presidential candidates Sen. McCann nor Sen. Obama has a clear idea about the current economic straits that are facing the country, he added.

An Obama presidency that includes income tax increases could cause enough additional economic strife to spur U.S. lawmakers to adopt a flat tax of less than 20% within five years, Moore predicted.

The problem with the flat tax is that it still is an income tax, said Richard Rahn, an advocate of adopting a fair tax who also is a senior fellow at the Cato Institute.

A fair tax essentially is a national retail sales tax that is imposed on businesses that must collect it from their customers, according to Dr. Mark Skousen, an economist who organized FreedomFest and writes the monthly Forecasts & Strategies investment newsletter.

Such a sales tax could be under 10% and potentially eliminate the need for the Internal Revenue Service (IRS), Rahn said. A disadvantage of enacting a flat tax rather than a fair tax is that the IRS would need to be retained, he added.

Flat tax advocate Dan Mitchell, a senior fellow of the Cato Institute, is worried that a national sales tax favored by fair tax supporters might be added on top of an income tax. He doubts two-thirds of the Senate would vote to eliminate the current income tax, so Mitchell said that he favors a flat tax to avoid such a risk.

As a result, the flat tax version of the income tax would be easier to enforce than the fair tax, Mitchell said. He warned that the Bush tax cuts seem likely to expire and an Obama presidency appears destined to pursue tax hikes and to try to create a French-style or German-style welfare state, he added.

An Obama presidency most likely would lead to an increase in social security taxes, as well as the creation of a new, higher tax rate for the highest-income earners, said David Tuerck, executive director of the Beacon Hill Institute. The election of Sen. McCann as the next U.S. president would be “good news,” Tuerck added.

A fair tax advocate, Tuerck said that there is no flat tax that will protect against left-leaning elected officials. No flat tax will “fix that problem,” Tuerck said.

The correct approach is to support a proposal that taxes everyone by setting a single rate under a fair tax, Tuerck said.

A ray of hope was offered by Rahn, who recalled during his presentation that economic growth slowed in the mid-1970s before former U.S. President Ronald Reagan and ex-British Prime Minister Margaret Thatcher took office and enacted policies to restore economic growth, he said.

The Republicans tend to do well as an opposition party, Rahn said. He advised not to be “too disheartened” if Sen. Obama is elected the next U.S. president and tries to raise taxes.

“There will be a big battle in Washington, Rahn said.

Tightened Security Is Hurting U.S. Economic Freedom, Professor Says

LAS VEGAS — The United States is slipping in its economic freedom ranking in large part due to increased security to thwart terrorists, said Robert Lawson, a professor of economics at Auburn University, said Thursday at the FreedomFest conference here.

The erosion of economic freedom in the United States is occurring as a number of other countries are achieving big gains, Lawson explained. For that reason, even comparatively small dips in U.S. economic freedom are causing the country to slip faster in its ranking compared to a number of other nations in the world that are increasing their economic freedom.

In 2000, the United States ranked second in the world in economic freedom before falling to eighth and ending up on the verge of dropping out of the top ten altogether, Lawson said in follow-up comments after his presentation.

The United States has an economic freedom rating that has been falling slightly each year since 2000. Property rights issues are a major reason for the slippage, along with the cost of clearing customs, Lawson said. Both changes could be attributed to the government’s increased measures to protect against terrorism, he added.

“George Bush has been a disaster for economic freedom, if you want to blame it on him,” Lawson told attendees. However, Lawson explained after his formal presentation that anti-terrorism policies enacted during the Bush administration to boost security most likely contributed to the decline in U.S. economic freedom.

Countries that have been fueling a general global trend toward economic freedom include Ireland, a nation that has significantly scaled back government spending since 1980 to become an economic powerhouse in Europe, Lawson said. The Great Britain and New Zealand also have shown dramatic improvement in growth through increased economic freedom, he added.

In Latin America, Chile has gone from comparatively restricted economic freedom in 1975 to well above average, Lawson said. Economic growth in Chile has followed.

In Asia, China is expanding economic freedom substantially in certain regions, while limiting it in others, Lawson said. Overall, China has been notching increased growth as economic freedom rises.

India is another example of a country that has gained on the economic freedom scale and has enjoyed rapid growth. India has achieved greater economic freedom than China and, as a result, is the market that Lawson said he would target for investment rather than China.

Venezuela, under the regime of Hugo Chavez, has incurred sagging growth as its economic freedom has diminished, Lawson said.

The most countries that are the most free also have the longest life spans, Lawson said. In addition, data show that economically free countries have the best distribution of wealth, he added.

Overall, economic freedom worldwide has been rising slightly during the past two decades, said James Gwartney, a Florida State University economics professor who holds the Gus A. Stavros Eminent Scholar Chair. His analysis found that economic freedom is the key to growth and is spurred by gains from trade, entrepreneurship and investment.

Entrepreneurship is a driving force behind economic growth and a big reason why the standard of living has risen dramatically in the last 50 to 100 years, Gwartney said. Not only do free economies have higher rates of investment but they also attain greater productivity from investment, he added.

Among the regions of the world, Africa has the highest trade restraints, Gwartney said. Sub-Saharan Africa is made up of more than 40 countries, so any movement toward economic freedom in that region could make a meaningful impact.

Both direct and indirect benefits are derived from economic freedom, Gwartney said. The direct effect of economic freedom is to aid growth through gains in overall productivity. The indirect effect of economic freedom includes spurring growth from rising levels of investment, he added.

Free-Market Economic Solutions Could Fix Current Problems

LAS VEGAS — Free-market economists have solutions to all of the financial problems that are arising right now, said Dr. Mark Skousen, the editor of the monthly investment newsletter Forecasts & Strategies. Skousen offered his views during the first day of the FreedomFest conference that he organized for July 10-12 in Las Vegas

The conference, including a world economic summit, is taking place at a time when stock prices are dropping, the economy is weakening and the U.S. dollar is falling. Politicians and monetary policymakers seem unable to provide the answers and individual investors must take heightened responsibility for navigating their own portfolios through troubled economic waters, Skousen and other speakers said during a panel discussion Thursday.

The ongoing real estate crisis preceded the current fuel crisis and other crises may follow, Skousen said. The previous president made so many mistakes it will be very difficult for the best of the Republican elected officials to win in the upcoming election, said Skousen, who predicted that Democratic Sen. Barack Obama would become the next U.S. president.

Key issues that will need to be addressed in the United States are the reform of Social Security and the lack of individual savings, Skousen said. A program in Chicago automatically enrolls workers in 401(k) savings at five companies that participated in a pilot project. As a result, the savings rates of their employees tripled, Skousen explained.

Corporations now can adopt such automatic savings programs for their employees, if their managements choose to do so, Skousen said. As a result, there is a potential solution to the problem of a relative dearth of individual savings, he added.

As the U.S. dollar sinks, economic opportunities will arise in other parts of the world, said another panelist, Peter Schiff, president and chief global strategist at Euro Pacific Capital.

While FannieMae and Freddie Mac plunge in value, there are a lot of good quality companies that pay high dividend yields elsewhere in the world, Schiff said. For example, Asia will develop from a region that predominantly consists of savers to one that will increasingly become consumers of goods, Schiff said.

The Federal Reserve Board punishes savings and rewards “reckless borrowing,” Schiff said. He also said the United States has a “dollar crisis,” not really a fuel crisis. The weakening dollar is causing the price of fuel to soar, he explained.

For investors, the biggest investment risk that they face is their personal response to current economic and financial conditions, said Rick Rule, another panelist who is the president of Global Resources Investments LLC.

The subprime lending problem stemmed from giving people money to buy goods or property that they could not afford, Rule said. Subprime lending, including consumer purchases, are not wholly the blame of politicians and Wall Street, but also caused by the “subprime thinking” of investors themselves. Rule said.

Increased U.S. security regulation has “anesthetized” investors from safeguarding their own portfolios, Rule said. Pay attention and use common sense, he advised.

“Your congressman is not going to help you; he is going to steal from you,” Rule said. As a result, investors should not expect to be sheltered through the current economic conditions by the government, he added.

During the next four years, the United States will “sprint” in the wrong direction, Rule said in response to a question.

A bright spot is that the natural resources business is in a super-cycle, Rule said. It is a very good business and receiving investment funding, he added.

“I try to look for stuff that is cheap or that has a real trajectory on my side,” Rule said.

Investors also need to beware that taxes likely will rise, no matter who is elected the next U.S. president, said tax attorney Jeffrey Verdon, another panelist who addressed the current investment climate.

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