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TheStreet Open House

Poor Mitt! Road Ahead Tests His Portfolio

By Richard Schmitt

NEW YORK ( TheStreet) -- If you checked out Mitt Romney's tax return information in the news lately, "Poor" probably would not be a word that would leap to mind. With reported wealth of over $200 million, Gov. Romney seems to be doing quite well, thank you. Yet many economic and demographic factors point to Mitt finding himself poorer over the next few years.

Ignoring any Swiss bank accounts, Romney presumably holds U.S. stocks that he or his blind trust expects to appreciate in value. History suggests the degree to which his stocks appreciate depends on the health of the U.S. economy. However, many factors, such as flagging GDP growth, record debt and high unemployment suggest the U.S. economy, and possibly the stock market, may not be so robust at this point.

So far, unprecedented government intervention in the form of monetary easing and deficit spending has managed to somewhat prop up a languishing U.S. economy, sporting GDP growth of only1.3% for the second quarter of 2012. Recognizing the continuation of this type of government stimulus would make U.S. investments less attractive to Americans as well as foreigners, credit rating agencies downgraded U.S. debt earlier this year.

To deal with the problem, the U.S. has imposed a fiscal cliff that would call for automatic reductions in government spending and tax increases next year.

Government policy changes could affect the economy and Romney's portfolio in the following ways:

  • First, absent stemming the tide of easy money, Romney's portfolio would suffer from the potentially inflationary and currency-devaluing effects of monetary easing that may make American investments not as attractive to foreigners. Nevertheless, QE3 makes a monetary policy change appear unlikely in the near term under current Federal Reserve Bank policy.
  • Second, the prospect of curbing a government spending habit hooked on trillion dollar deficits may further chill his stock holdings. Since fiscal year 2008, increased federal government spending has accounted for over 60% of the growth in US GDP. As a result, an end to that extra government spending would cut already weak GDP growth by more than half.
  • Third, a U.S. economy hooked on consumer spending seems to be sputtering due to high unemployment and tight credit, as well as a smaller generation of big spenders. While Baby Boomers reaching age 65 at the rate of 10,000 per day are well past their peak spending years, their Generation X successors in their peak spending years of their 40s and 50s are much less in numbers.
    This lag in personal consumption that historically comprises 70% of GDP may continue until the even larger Generation Y picks up the slack in the economy as they reach their peak spending years in the 2020's.
  • Then there are the market technicians who point out we are in the midst of a sideways market cycle similar to the 18-year period experienced between 1964 and 1982. If that is the case, the passage of time alone will bring the U.S. closer to the end of this sideways market cycle that began in 2000 as well as to the increased spending by a Generation Y coming of age.

    In any event, the stock market is bound to experience some bumps along the way as the economy adjusts to changing events. Although these factors point to some uncertain times ahead for Romney's investment portfolio, this market volatility may not put him in the poor house if he rebalances his portfolio regularly.

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