Obamacare Will Tip Economy Into Recession

The law will aggravate the stagflationary environment

   

Setting aside all political considerations, investors need to be aware that Obamacare — in conjunction with stagflation — is going to send the U.S. economy into another recession. Much of this has to do with the law’s effect on employment and how it dovetails with other macro issues that are unfolding in the economy. Let me explain — and tell you what to do about it.

Immediately following Obama’s re-election, several notable companies announced lay-offs. The ostensible reason was that Obamacare requires companies with more than 50 employees to provide health insurance or face a large fine. Thus, small businesses that have just over 50 employees cut some loose, while others with just under 50 simply don’t hire anyone else.

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Japan Is the Next Shoe to Drop

Other companies are cutting back hours for workers from 40 to 30, which exempts them from health insurance requirements since only full-time employees are entitled to insurance. This is — and will — take place at many major corporations.

There are other costs, as well, related to additional tax liabilities placed on corporations. Medical device makers like Medtronic (NYSE:MDT) and Stryker (NYSE:SYK) have laid off people because Obamacare imposes a tax on medical device makers. They don’t want to pass on the costs to their customers because the space is too competitive to raise prices.

That’s the same issue plaguing Papa John’s (NYSE:PZZA), which has been unfairly criticized by its decision to lay off workers instead of raising prices in the competitive market environment.

Some people think that these companies should simply absorb those additional costs, but they fail to understand that they have a sacred fiduciary duty to their shareholders to maximize profits. The same naïve people think that obligation should be subordinated to some moral obligation and that the company shouldn’t change a single thing because of healthcare issues. This implies a juvenile view of how capitalism works.

The result of this tough capitalistic reality is that unemployment and underemployment are going to increase dramatically. That means Subsequently  those workers will have less money to spend into the economy. At a company like Boston Scientific (NYSE:BSX), money that used to pay employees now gets paid to the government as a tax. The government will not deploy that tax money as efficiently as Boston Scientific would into the economy.

Why? Because government never deploys money as efficiently as private enterprise or as you or I would when we decide how to spend our money.

Meanwhile, wages remain stagnant and inflation is higher than anyone is willing to admit. So the wages that workers are getting buys less and less. Then there’s the matter of consumer debt. The myth is that consumers are deleveraging, when in fact they are actually defaulting in bulk, primarily on mortgage debt. That eats up their access to credit, which would help fund purchases.

As prime borrowers start to dry up, credit card companies have taken to extending that credit to sub-prime borrowers. Almost 30% of credit cards were issued to sub-prime customers in Q3. That’s a band-aid for consumer spending which is going to fall off sooner rather than later — and bad debt is already on the rise.

Wealthy folks have already sensed that things are not so great for the economy, and have been pulling back on their high end purchases. Most major sentiment indicators remain, or have turned, bearish. The Business Roundtable, which tracks CEO sentiment, is at its worst level in three years, and companies plan to scale back capex in 2013.

In short, we are in a stagflationary environment — and that usually leads to recession. Normally, the Fed would lower interest rates to stave that off, but they are already as low as they can go.

So what’s an investor to do? First, have a long-term diversified portfolio that you don’t expect to draw on for 20 to 30 years. For the near term, however, you should position your portfolio away from bonds (which yield nothing) and reduce exposure to consumer discretionary stocks and luxury stocks.

Also, take some profits if you own auto companies and buy the deep discounters like dollar stores such as Dollar Tree (NASDAQ:DLTR). Buy energy, like ExxonMobil (NYSE:XOM) because people will always need energy and use energy and jump into real estate, such as REITs, which act as an inflation hedge and pay nice dividends. I suggest apartment and storage REITs, such as Public Storage (NYSE:PSA). As people become unemployed, they’ll turn back to pawn shops as they did in the financial crisis, so have a look at EZCORP (NASDAQ:EZPW).

Most of all, set aside some cash for when stocks get too cheap to ignore.

As of this writing, Lawrence Meyers was long EZCORP. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.


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