Federal Tax

The Federal government is supporting its dependents and its crony-capitalist Elites with borrowed money: $1.5 trillion every year, fully 40% of the Federal budget. It is in effect filling the gap between exploding costs and declining income, just like the middle class did until they ran out of collateral to leverage. The dwindling middle class, now at best perhaps 25% of the workforce, has been reduced to tax donkeys supporting those above and below who are dependent on Federal largesse. Fisher found that this cycle ends in transformational political upheaval. No wonder; even as the class paying most of the taxes shrinks and is pressured by higher costs, the class of dependents expands as the economy deteriorates and the super-wealthy Power Elites continue to control the levers of Central State power.

Better stock up on the Depends now. 

Courtesy of the class division SWAT team, we already know all too well that Buffett had a lower tax rate than this secretary. We however have a question: according to just released data, the Obama's paid $789,674 in taxes in 2011...

• OBAMAS PAID 20.5% IN TAXES ON $789,674 IN 2011

So... inquiring minds want to know if the Fairness Expert in Chief paid less than his secretary in 2011?

• Beijing on edge amid coup rumours (FT) - as predicted two days ago, do not expect any official media update on this critical matter, until after the outcome, whatever it is
• Goldman scours emails for use of word "muppets" (Reuters)
• Germany to Balance Budget Early (WSJ)
• Osborne Gives and Takes From Rich in U.K. Budget Balancing Act (Bloomberg)
• Big Spending at Fannie, Freddie Should End, Watchdog Says (Bloomberg)
• Volcker Says U.S. Needs Reforms in Finance, Government (Bloomberg)
• Chinese Firms, Regulators in Talks on Yuan-Fund Program (FT)
• Ireland Said to Ready Bank-Debt Proposal for ECB Review (Bloomberg)

Every once in a while an event crystallizes the stark reality behind the lacy curtain of propaganda and artifice. Here is one such event. Correspondent R.T. is a retired accountant who has resided in Arizona since 2001. Prior to 2001, he resided in California. On March 14, he received a letter from the California Franchise Tax Board (the agency that collects income taxes) claiming that he owed $1,343 for the tax year 2006. This was the first notification he'd ever received of this claim. This was an interesting claim given that R.T.:

• Did not reside in California in 2006
• Did not file a State income tax return in California in 2006
• Did not have any outstanding tax issues with California in 2006
• Did no business in California in 2006
• Owned no property in California in 2006

The persistent negative investment flows at U.S. listed mutual funds specializing in domestic stocks is one of the most important long-term trends catalyzed by the Financial Crisis.  AUM has dropped by $473 billion since January 2007 despite the S&P 500 Index’s essentially flat performance over this period.  The news is no better since the beginning of 2012 – despite the ongoing rally in domestic equities – with $6.8 billion of further outflows year to date.  In today’s note Nic Colas, of ConvergEx analyzes what will reverse this trend along two vectors: the desire and ability of individuals to invest. The rally in risk assets, along with declining actual volatility, is the best hope for a reversal in money flow trends. Offsetting that factor are continued stresses on household budgets and consumer psychology combined with problematic demographic trends. Bottom line: domestic money flows have likely become more economically sensitive than in previous cycles. 

Stepping softly onto a slippery slope...

To confirm a reversal in Treasuries we need a bona fide breakout. 

We have examined the nuance of the euphoric jobs data this morning from every angle and by now there should be plenty of 'information' for investors to make their own minds up on its credibility. However, the avuncular CEO of TrimTabs, who despite channeling Lewis Black lately, likely knows this data a little better than the average Jim on the street having collected tax witholdings data for the past 14 years, is modestly apoplectic at the adjustments. In one of his more colorful episodes, and rightfully so, Charles Biderman notes that "Either there is something massively changed in the income tax collection world, or there is something very, very suspicious about today’s BLS hugely positive number," adding, "Actual jobs, not seasonally adjusted, are down 2.9 million over the past two months. It is only after seasonal adjustments – made at the sole discretion of the Bureau of Labor Statistics economists – that 2.9 million fewer jobs gets translated into 446,000 new seasonally adjusted jobs." A 3.3 million "adjustment" solely at the discretion of the BLS? And this from the agency that just admitted it was underestimating the so very critical labor participation rate over the past year? Finally, Biderman wonders whether the BLS is being pressured during an election year to paint an overly optimistic picture by President Obama’s administration in light of these 'real unadjusted job change' facts. Frankly, in light of recent discoveries about the other "impartial" organization, the CBO, we don't think there is any need to wonder at all.

• Angela Merkel casts doubt on saving Greece from financial meltdown (Guardian)
• Germany Rejects ‘Indecent’ Call to ECB on Greece, Meister Says (Bloomberg)
• Obama Calls for Higher Taxes on Wealthy (Bloomberg)
• Fed set to push back timing of eventual rate hike (Reuters)
• Recession Looms As UK Economy Shrinks By 0.2%, more than expected (SKY)
• King Says BOE Can Increase Bond Purchases If Needed to Meet Inflation Goal (Bloomberg)
• When One Quadrillion Yen is not enough: Japan's first trade deficit since 1980 raises debt doubts (Reuters)
• Sarkozy to quit if he loses poll (FT)
• U.S. Shifts Policy on Nuclear Pacts (WSJ)
• ECB under pressure over Greek bond hit (FT)

That after last year's abysmal performance on Wall Street, best summarized by the following quarterly JPMorgan Investment Banking revenue and earnings chart, bonuses season would be painful should not surprise anyone. But hardly anyone expected it to be quite this bad. The WSJ reports that Morgan Stanley, likely first of many, will cap cash bonuses at $125,000 and "will defer the portion of any bonus past $125,000 until December 2012 and December 2013" with bigger 'sacrifices' to be suffered by the executive committee which, being held accountable for the collapse in its stock price, will defer their entire bonuses for 2011. Morgan Stanley is likely just the beginning: "As banks report fourth-quarter results this month and make bonus decisions for 2011, total compensation is likely to be the lowest since 2008." This means that once Goldmanites get their numbers later this week, we will likely see a mass exodus for hedge funds which remain the only oasis of cash payouts on Wall Street. Alas, unlike the Bank Holding Companies, a series of bad decisions will result in hedge fund closure, as the TBTF culture will never penetrate the stratified air of Greenwich, CT. And with bonuses capped at about $80K after taxes, or barely enough to cover the running tab at the local Genlteman's venue, the biggest loser will be the state and city of New York, both of which are about to see their tax revenues plummet. And since banker pay is responsible for a substantial portion of Federal tax revenue, look for Federal tax withholding data in the first few months of 2012 to get very ugly, making America even more responsible on debt issuance, and likely implying the yet to be re-expanded by $1.2 trillion debt ceiling will be breached just before the Obama election making it into the biggest talking point of the election cycle.

All you need to know.

Once upon a time,...

If there is one stance that can gather non-partisan support, it's "tax the rich." If we look at tax revenues and income in a practical way, we find "tax the rich" will not close the widening $1.5 trillion gap between Federal revenues and spending. Clearly, $1.5 trillion annual Federal deficits to fund the Status Quo--fully 10% of the nation's GDP--is unsustainable. Eventually, the ad hoc "solutions" currently being pushed by the Federal Reserve--zero interest rates to keep borrowing costs artificially low and money-printing operations that buy Treasury debt--will encounter political and/or market pressures which will limit the marginal effectiveness of these interventions, and the real cost of these historically unprecedented deficits will trigger a host of unintended consequences--all negative.  How about those soaring corporate profits? If we taxed 100% of the $1.5 trillion corporate profits, then we could close the $1.5 trillion budget deficit. But then Wall Street would have nothing to support those sky-high stock valuations.

Buffett's deep pockets allow him to play White Knight when fast cash is needed. I think that makes he's a predator.