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Irrational Exuberance - July 2011
All of the markets have a very strong "risk on" bias to them.
Stocks, commodities and bonds are all showing the same trade. As is
always the case there are a bunch of factors involved. The Euro story is
one of them. The spin is that the fix is in and we should worry about
something else. (I don’t believe word one of that spin)
Another factor is the story being planted left and right that that there
is big progress being made on the debt ceiling. The talk today from the
NYT, WaPo and WSJ is that Obama has put real cuts on the table for Social Security. That there is a plan to means test Medicare as a way to cut costs. (As of now there are no details on any of this)
One aspect of the “compromise” talk is a story about how changing
inflation calculations could generate significant new revenue for the
IRS. The technical description is a change from CPI-W to the Chained CPI
for the purposes of indexing various aspects of the tax code.
The Joint Committee on Taxation did a review of this. I was surprised
with the results. The consequences are measured in the following chart
that looks at things out in 2021. Look at what income groups have a tax
increase as a result of this. Those making Less Than $100k would get hit by the highest percentage. Those that make $500k-1mm do pay 0.1% more, but the really fat cats making over a Mil don’t feel it at all.
This analysis is restricted to just the changes in inflation
adjustments. There are more changes that will be added to the final
package (if any is achieved), including broadly higher tax rates. This
one proposal is not an earth shaker. But it is representative of what we
will see. My thoughts:
The proposal that was analyzed by JCT is a No Sale in my opinion. What Democrat is going to vote for this? None in their right mind, is the answer. This drives a stake in their base.
The same is true for any other of the “new” ideas that got floated today. Means testing Medicare will be an impossible sale. Reducing COLA adjustments for Social Security may look like a possible alternative on paper. But it’s a political third rail.
Market enthusiasm for what is being made to look like a
break in the log jams on the debt limit talks is very premature. These
ideas being bandied about will prove to be very unpopular. There is not
one segment of the population that will like what is coming. If there is
to be a credible plan to balance the government’s checkbook, there is
one thing for certain: We will all hate the results.
The ‘solution(s) will all be rejected by some interest group(s) over the next few days. I would put a high probability on the process hitting the wall (again) at some point soon.
The markets are all pricing in a resolution. I think it will go down to the last hours.
There will be a ‘risk off’ market as a result of the sobering conclusions. This will come before the end of the month.
When some Pol from the left or the right tries to tell you who is going to be paying more taxes, just ignore them. They are all lying. As the JCT report shows, everyone will be paying more.
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g'day bruce i bookmarked your predictions for 2011 article and was reading it today. i'd say i'd give you 7/10 which is pretty impressive. i'm just waiting to see those big swings in gold... so i could grab more.
The legislative "solution" really isn't terribly relevant, because all the discussion is premised on adhering to a set of absurd fantasies.
"Let's see, if we maintain 3.4% GDP growth over the next 20 years, we can afford to maintain our huge spending with some adjustments."
The problem isn't with the spending adjustments part of that claim--it's with the hypothetical. The growth period is over. We'll be lucky to avoid annual contraction in real terms. Nominally we might be able to achieve increases in dollar amounts shuffled around, but if that's the goal, why don't we just add another zero to every dollar figure and create HUGE economic growth to coast on?
"Chained" CPI - what an ironic term; no doubt humorous to the slave-masters of Wall Street and Washington.
I think it will fly, along with means tested medicare that somewhow excludes any limits on Congress, their families, second-cousins, and pets.
We are dealing with equivocating parasites.
Imagine a swarm of talking leeches that tell you they aren't really sucking your blood, they are giving you a free blood-thinning treatment.
There will be a break in the logjam acceptable to Democrats and Republicans. They will announce great satisfaction and proceed to screw the Middle Class and lavish trillions on the illuminati.
Yeah but the Ignorati will remember just who screwed them come election time...Bwahahahaha, I crack myself up! :>D
depends on how the market values the Obama presidency. If Obama loses much more credibility, market confidence will take a hit. And Wall Street doesn't really care if taxes on the rich go up, as long as asset values are being supported, and consumers (read SSN recipients can still spend) You have to think this is bad deal for everyone, unless QE3 is your end game. The last two one term presidencies were followed by recessions. I think Wall St is betting on Obama, and that means they know something the rest of us don't because he appears to be fading pretty fast.
good points. You made me just stop and wonder how independent the pollsters are; at least the ones we hear about...
It's risk on via bid supported markets...y'know CB's and whatnot. But, how long can they keep them bid?
We are all turning to China now re: major bust.
yep, gotta fat cat here
http://www.youtube.com/watch?v=6eLIMc4khe0&feature=player_detailpage
his name is "Arnold." Treasuries are not a risk asset of course but of course equities, commodities and foreign investments are. As are hedge funds, long/short funds, and pretty much anything actively managed. In case your wondering "Arnold" is a bond investor.
Go easy on the fat cats, they've lost the ability to endure suffering.
The middle class and poor are far more adept at it ...
-- The Book of Lloyd, Chapter 8, Verse 7
Make no mistake, SS is on the table in order to alienate the Republicans. Come election season, Pelosi, Reid, et al will be screaming, the Republicans forced us to cut SS to get debt raised. This is pure politics. And what did they expect? The debt ceiling statute is a polictical law and it is being used as intended. Theater.
It took me a while to realize that pretty much anything that happens in DC is political theater. I think I've gone through most of the 5 stages of grief and have almost come to accept it.
Well, on second thought, I think I bounce around in betwen anger and acceptance most days.....
First, this is a stupid event to try to progress anything, the Debt Ceiling??
Secondly, nothing agreed to will have much shelf life past any election.
Thirdly, the market is more concerned with resource appreciation. On one hand it is inflation and on the other deprivation. And it has discovered Twitter. Like Yahoo in the good old days.
I have been a market watcher, participant since 1958. This beats all. I understand the sell side, but know that bears are more prevalent than any time in this time frame, getting in their own way. What is maladjusting the scenario is that resources are running out, not going down to buy consumption but up to price out. This gives a signal to the stock crowd of strength, but it is really an arrow they don't appreciate.
Asia is selling to the West. The West needs to import what is going up. West runs out money, Asia loses market. All in a sea of contracting derivatives.
What Democrat is going to vote for this? None in their right mind, is the answer.
I think 'which Dem has a mind' is more on point.
Bankers want the debt ceiling raised.
Bankers own the politicians.
Politicians make the vote.
PASS!
Almost everyone, on ZH and in the "Real world" is reachinh peak stress. I think we need stress tests for all.
Panacea at last. If is good for Wall St. it has to be good for us too. (sarc)
Didn't the market drop about 7% back in July of 2007 after the first Bear Stearns announcement (insert sovereign debt crisis), and then rally to new highs, and then crash crash crash through March of 2009? I think I've seen this movie before...
More more more...how do you like it...
www.youtube.com/watch?v=RlJGrIyt-X8