The United States

Bank of America announced Thursday that it will charge $5 monthly for its debit card. This fee may be quickly implemented at other banks. The new fees may drive bank customers away from debit cards and back to credit cards, which, interestingly, would benefit the banks implementing the fee. This action may be a good lesson for government on how to properly encourage behavior, as opposed to granting tax breaks and spending taxpayer money.

The economy, as measured by GDP, was not as weak as thought during the second quarter. The revision revealed that growth was slightly more than 1%. It is reasonable to expect sluggish growth as consumers pay down debt and rebuild credit. Consumers are doing the right things.

At the end of July 2011, 45.3 million people in 21.5 million households (approximately 18% of US households) were receiving food stamps. The number of persons receiving food stamps has increased 8.3% in 12 months and is up 56.7% over three years. The average monthly benefit per household in July 2011 was $284. I am not sure that government's focus on refinancing mortgages through lower interest rates addresses this problem.

AAA reported a 9 cent drop in average gasoline prices last week in the US.

Washington

The New York Post reports that among elected members of Congress, 80% have no business acumen. About one-third studied government and law, 20% studied humanities, and 12% have an educational background in science and technology. Business, accounting and economics were studied by only 20%. Few have the education or real-world experience to understand the issues on which they make decisions. The over-representation of the legal field may explain why we get 2,400-page laws.

Starting the Week

The market starts this week concerned again about the Greek debt situation and its impact on European banks.

Mickey Cargile CFP® is the Founder and Managing Partner of Cargile Investment Management. With 30 years of experience, Mickey is a nationally recognized authority in financial planning, investment management, insurance and estate planning. Mickey routinely provides commentary and analysis on investment, economic and financial issues for major national and international news publications including Bloomberg, Businessweek, Consumer Reports, Fortune, Forbes, Money, and U.S. News & World Report. For more information visit www.cargileinvestments.com.

The Fed will continue to repurchase Treasury securities as its Treasury holdings mature. But in a twist to go with the twist, it will now reinvest maturing agency bonds and mortgage assets in agency-backed mortgage debt. Up until now, these proceeds were being invested in Treasuries.

As to the effectiveness of the twist, we are less dismissive than most analysts. The dollar is stronger, neutralizing the Achilles' heel of QE―the sharp commodity price increases following from dollar weakness which choked off consumer spending after the initial rush of growth. The Fed's meaning when it says "longer-term securities" is finally aligned with the market's understanding. The twist is heavily weighted toward the longest dated Treasuries, a sector barely touched by QE. The Fed's new mortgage purchases are significant. The Fed will be buying all new production and then some for the next nine months. It would be a mistake to dismiss the Fed action as unlikely to have much economic impact.

Washington, DC

The President's budget speech on September 19 was originally billed as an explanation of how to pay for the stimulus announced to a joint session of Congress two weeks ago, but it turned out to be more. Rather than starting a negotiation from a reasonable middle ground, the President proposed an ideological mix of taxes and spending cuts with room to move toward the center if Republicans want to negotiate in earnest. And, if they don't, it presents an alternative ideology for voters to contrast against Republican proposals in the upcoming election.

So, how does the budget speech stack up? The press consensus is that the plan is serious about the deficit. However, the media made four primary objections to the plan:

• As Bloomberg News explains, the so-called "Buffett tax" is easier to propose in simple language, as in the President's speech, than to write in an effective way. The reason Warren Buffett pays so little in taxes―far less than most of the super rich, according to the Wall Street Journal―is that so much of his income comes from sources that are protected from taxes for a reason (like municipal bonds). Start erasing those tax advantages and it could have significant unintended economic consequences.

• As Washington Post editors point out, Obama could have (they say should have) gone big in attacking the deficit. His plan falls short of addressing the long-term structural problems in entitlements; therefore, it falls short of the deficit high ground.

• As the AP explains, the President made a point of emphasizing how millionaires will "pay their fair share" under his plan, but the tax and fee increases he proposed (most of the new fees are characterized as "savings" rather than taxes) will cost the middle class billions. There are several new fees that will affect the cost of an airplane ticket, something already larded with federal taxes.

• Many of the spending cuts are "bogus," according to the Washington Post. The biggest savings stem from the drawdown of troops in Afghanistan and Iraq. If you eliminate the savings already in the agreement over the debt ceiling and the military savings, the new proposals consist of $3 in tax hikes for every $1 in spending cuts, according to the Washington Times.

The government classifies the cost of housing above 30% of a household's wages as unaffordable.

Approximately one-third of households rent housing. The median rent in the U.S. is $855. Fifty-three percent of renters pay more than 30% of their salary for rent, and 27% pay more than half their salary.

Among homeowners with mortgages, 38% pay more than 30% of household income and 15% pay more than half. Approximately one-third of households own houses with mortgages.

Approximately one-third of households own houses outright without mortgages.

Even though nationwide home prices have declined 30% since their peak in 2006, and the home affordability index is its most affordable ever recorded, housing is still too expensive for 30% of all households (about 30 million households).

The Stock Market

Warren Buffett's company announced that it will buy back its own stock with some of the money Buffett feels guilty about not paying in taxes. Although I see no evidence that stock buybacks improve shareholder value, the program is evidence that Berkshire Hathaway is feeling the pain of low interest rates and the associated high cost of holding liquidity. It also shows that the underlying holdings of Berkshire Hathaway continue to generate strong cash flows even in what is represented as a bad economy.

The note above is general market commentary and is not an endorsement to buy or sell Berkshire Hathaway.

About Mickey Cargile

Mickey Cargile CFP® is the Founder and Managing Partner of Cargile Investment Management. With 30 years of experience, Mickey is a nationally recognized authority in financial planning, investment management, insurance and estate planning. Mickey routinely provides commentary and analysis on investment, economic and financial issues for major national and international news publications including Bloomberg, Businessweek, Consumer Reports, Fortune, Forbes, Money, and U.S. News & World Report. For more information visit www.cargileinvestments.com.