These are just a few of the tough questions facing investors. And there may be no one better to offer answers, insight, and advice than Money Morning Contributing Editor Shah Gilani.
A retired hedge-fund manger, Gilani has routinely been there to shepherd investors through blinding market uncertainty. He's used his contacts on Wall Street to give Money Morning readers the inside scoop on the collapse of American International Group Inc. (NYSE: AIG), the May 6 "Flash Crash," and most recently the "Mortgagegate" scandal that currently threatens to undermine the fragile U.S. recovery.
Indeed, Gilani has been a tireless advocate for investors and a prescient market maven. That's why Money Morning's editors recently sat down with Gilani to talk about today's most pressing issues and discover what he expects for financial markets in the months and years ahead.
In the partial transcript of that interview below, Gilani discusses why it's a good time to invest in stocks, what steps should be taken to fix the U.S. economy, and whether or not gold prices have peaked.
In short, the U.S. government has failed the public as a matter of course, but there is still a way out of our current economic malaise and ample opportunity for investors to profit.
Shah Gilani: It's not a good time to invest in stocks - it's a great time. While economic numbers in the United States are uninspiring in terms of growth, they have inspired the U.S. Federal Reserve to pursue an expansive monetary policy.
If the Fed is successful in keeping rates down while the economy slogs toward recovery and jobs growth, two things will happen:
1) Fixed-income investors will exit their low-yielding bond holdings and chase appreciation and total return prospects in the equities markets.
2) If we have growth here in the United States - since we're behind the global curve - the rest of the world will already be humming along. That means price pressures and inflation. That's better for stocks and bad for bonds. That's going to propel equities to extraordinary heights.
(Q): Does gold have more room to run from here?
Gilani: Yes, there's more room for gold prices to head higher. Countries around the globe continue to devalue their currencies in a race to be export driven machines. Additionally, the growing threat of inflation is another reason gold will continue to be a momentum trade.
(Q): Is U.S. President Barack Obama getting the job done?
Gilani: No. The president has blown a historic opportunity to lead the country. Ramming healthcare down America's throat left everyone on both sides of the argument with a terrible taste in their mouths. It was the nail in the coffin of bipartisanship. The President should have moved immediately on financial reform, making the economy and a safe investing environment the basis of recovery. He had the wind in his sails, but he chose to sail onto the rocks of healthcare instead of pursuing financial reform. He's lost a lot of supporters and a lot of credibility.
(Q): What should be done to fix the economy?
Gilani: The government should change the tax system to favor small business development. It should cut taxes on dividends to a flat 10% to encourage corporate profits to be paid out to capital investors. That will increase equity investing and savings, both of which will supply cheap capital for business growth and employment. However, the government should only allow the flat rate tax for the portion of dividends that are non-leveraged; in other words, don't let corporations borrow to pay dividends. If they make profits and pay dividends from those profits, they will be strong companies, safe investments, and the basis for a sound, productive economy.
(Q): How concerned are you about the budget deficit?
Gilani: I'm very concerned about the budget deficit. If there is no real, transparent address of runaway government spending, the U.S. economy will become third rate - perhaps within five to seven years.
(Q): What are the chances that the U.S. economy will lapse into a double-dip recession?
Gilani: Unfortunately, the dice are in the hands of government and not the private sector. Until politicians decide that they are the problem and that big government is crowding out entrepreneurship and free enterprise, there's a chance the U.S. economy will backslide into a double-dip recession. Throwing money at banks and artificially keeping interest rates low, but not incentivizing capital formation and small business development, could keep us out of a double-dip, but it doesn't guarantee we won't end up like Japan and suffer for the next two decades.
(Q): What one thing needs to be done to fix the jobs picture?
Gilani: Reduce the tax burden on businesses and employers when they demonstrate they are bringing on and keeping new hires.
(Q): Does the U.S. economy need more stimulus?
Gilani: No. It's like the government wants the Fed to re-kindle a fire that has just been doused with flame retardant chemicals. It's not going to work because there's not enough kindling and too much retardant. Stimulus should take the form of reduced tax burdens, less wasteful spending, fewer pet projects. Wasteful government stimulus projects misallocate scarce capital resources. They only serve to line the pockets of special interest groups who lobby for them and the "consultant" middlemen who broker the deals.
(Q): Should Pres. Bush's tax cuts be extended to all?
Gilani: No. Draw a line in the sand that separates the superrich from the rest of us. $250,000 is not rich. Make it $5,000,000. Don't cut taxes for the superrich - raise them. If you're making $5,000,000 a year you owe this country something back. And, at the same time, completely eliminate the "death tax." Why take anything from anyone after they are dead? They've already paid their taxes.
(Q): China: friend or foe?
Gilani: China is the best friend we have. Because the saying goes, keep your friends close and your enemies closer.
[Editor's Note: Shah Gilani, a retired hedge-fund manager and renowned financial-crisis expert, walks the walk. In a recent Money Morning exposé, Gilani warned that high-frequency traders (HFT) were artificially pumping up market-volume numbers, meaning stocks were extremely susceptible to a downdraft.
When that downdraft came, Gilani was ready - and so were subscribers to his new advisory service: The Capital Wave Forecast. The next morning, because of that market move, investors were up 186% on a short-term euro play, and more than 300% on a call-option play on the VIX volatility index.
Gilani shows investors the monster "capital waves" now forming, and carefully demonstrates how to profit from every one.
But he doesn't stop there. He's also the consummate risk manager. As the article above demonstrates, Gilani also makes sure to highlight the market pitfalls that can ruin years of careful investing and saving.
Take a moment to check out Gilani's capital-wave-investing strategy - and the profit opportunities that he's watching as a result. And take a look at some of his most-recent essays, which are available free of charge. You can access those essays by clicking here.]
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