The European Commission formally endorsed the financial transaction tax agreed to by eleven of the 27 members. The tax will be set at 0.1% for stocks and bonds and 0.01% for derivatives. The tax will go into effect at the start of 2014, by which time the participating countries will give it formal approval.
There seems to be two purposes of the tax. The first is to raise revenue. The EC projects the tax will raise 30-35 bln euros annually where ever and whenever an instrument from eleven is traded. This would seem to block the ability to avoid the tax by moving transactions out of the eleven countries. It reinforces the "residence principle". This essentially means that if some one is a resident of the eleven countries, or acting on behalf of a resident, the transaction will be taxed anywhere it takes place. The other purpose is to deter the high frequency trading, which some officials see as largely unnecessary and potentially destabilizing.
Everyone knows that for the better part of the past year Apple was the world's biggest company by market cap. Most also know that AAPL aggressively uses all legal tax loopholes to pay as little State and Federal tax as possible, despite being one of the world's most profitable companies. Many know, courtesy of our exclusive from September, that Apple also is the holding company for Braeburn Capital: a firm which with a few exceptions, also happens to be among the world's largest hedge funds, whose function is to manage Apple's massive cash hoard with virtually zero reporting requirements, and whose obligation is to make sure that AAPL's cash gets laundered legally and efficiently in a way that complies with prerogative #1: avoid paying taxes. What few if any know, is that as part of its cash management obligations, Braeburn, and AAPL by extension, has conducted a mindboggling $600 billion worth of gross notional trades in just the past four years, consisting of buying and selling assorted unknown securities, or some $250 billion in 2012 alone: a grand total which represents some $1 billion per working day on average, and which puts the net turnover of some 99% of all hedge funds to shame! Finally, what nobody knows, except for the recipients of course, is just how much in trade commissions AAPL has paid on these hundreds of billions in trades to the brokering banks, many (or maybe all) of which may have found this commission revenue facilitating AAPL having a "Buy" recommendation: a rating shared by 52, or 83% of the raters, despite the company's wiping out of one year in capital gains in a few short months.
This trend has been in place since the financial crisis, but the fact that it is accelerating is extremely disconcerting. First off, this is not the kind of behavior that should be witnessed in an “economic recovery.” Second, we need to remember the huge percentage of Americans on food stamps and/or disability. As we have discussed previously, many of them also have jobs. So essentially, a wage and a check from the government is still not enough to survive. They still need to tap into a loan from their 401k plans.
What a long and wild ride it has been since then and the forks in the road have been marked with turmoil, disdain and an ever increasing amount of debt for this small nation. The solution for each and every problem has been more money appended by more taxes and more austerity measures and the Greeks keep lining up and will keep lining up until the cash dries up and then other conclusions will be found. You may think it is a never ending story and that the current act will go on forever but that would not be my bet nor do I think it is a likely conclusion. Whether it is the German Parliament or the IMF or some other nation in Europe under the guise of nationalism and prudence who has had enough and rightly says, “That is enough;” there is an ultimate endpoint to this game.
Thirty years ago, the USSR was better known as the "Evil Empire." Fast forward to today, when its successor Russia, is apparently the "Tax Free Empire", and less socialist than France, at least to infamous millionaire expatriate Gerard Depardieu, who as reported previously has paid €145 million in taxes over 45 years, and who demonstratively decided to give up his French passport in the wake of France's socialist 75% millionaire tax (subsequently ruled unconstitutional), and as of today, has just been granted Russian citizenship.
-If you’re employed, you’re a loser.
Time is running out. The cliff negotiations have devolved into two unpalatable options: (1) extend just the middle income tax cuts and extended unemployment benefits and allow about two-thirds of the cliff to happen, or (2) go over the cliff in the entirety. In BofAML's view, given the short time frame and legislative hurdles, the latter appears much more likely. Stock market vigilantes have replaced bond vigilantes as the potential good, bad, and ugly scenarios are devoured flashing red headline by flashing red headline. They, like us, believe that going over the cliff is not a benign “slope” as some suggest. Rather, it accelerates the already-building damage to the economy and markets. The latest evidence is the plunge in consumer confidence. Indeed, this could mark the beginning of the rotation in the uncertainty shock from businesses to consumers. Going over the cliff has many secondary, largely ignored, negative impacts, including tax changes that could damage the housing recovery, as well as negatively impact education and alternative energy, among many others.
To understand this endgame, we need to start with the financial and political basics of wealth and power in the U.S. Put these nine structural dynamics together and the endgame becomes clearly visible: Politically, a Tyranny of the Majority comprised of those who draw direct transfers/benefits from the Federal government, is ruled by the top half-of-1% financial aristocracy who own the majority of income-generating assets. The minority, who pay most of the taxes (the 24.5% between the majority and aristocracy), will see their taxes rise as the aristocracy buys loopholes and exclusions while the bottom 50% pay no income tax. Financially, the Federal government’s spending has outrun the tax revenues being collected. Structurally, Federal expenditures for entitlements (Medicare, Medicaid, Social Security, Veterans Administration, etc.) will rise as Baby Boomers retire en masse over the next 15 years, while tax revenues will stagnate along with earned income. There is no way to square these circles. What few dare admit, much less state publicly, is that the Constitutional limits on the financial Aristocracy and the Tyranny of the Majority have failed.
The use of economic pain to expand governmental control of a nation is not a new concept. It has been a tool successfully used many times in history. The reality that "taxing the wealthy" does not increase revenue or promote economic growth is lost on the 80% of Americans that are economically uninformed and are just struggling to maintain their current standard of living. The path over the "fiscal cliff" is bad for the economy, the average American family and the stock market. However, for the White House, going over the "cliff" is the next move in this elaborate game of chess which will clear the path towards completing Obama's long term objectives of complete socialization of the American economy.
Amidst all the "fiscal cliff" talk of raising tax rates, few dare to ask: have tax revenues topped out? How could tax revenues decline as rates go up? Easy: people modify their behavior in response to whatever incentives and disincentives are present. Make mortgage interest deductible and people will rack up huge mortgages. Reduce the yield on savings to near-zero (thank you, Federal Reserve) and people will save less. Raise tax rates and people will lower their income or move to low-tax locales. As the saying has it, "Money goes where it is treated well." Supporters of higher rates tout studies that find upper-income taxpayers shrug off higher rates, staying put in high-tax states: Do High Taxes Chase Out The Rich? and Superrich stay put in high-tax states like California. On the other side of the ledger is this study from Britain: Two-thirds of millionaires left Britain to avoid 50% tax rate. Which view is correct? Both, as a result of different dynamics. There are at least four separate dynamics in play.
Watching Barack Obama and Mitt Romney duel in the presidential campaign should have convinced the spectators that we live in an age of illusionists. Few of the assertions and conjectures thrown around have been subjected to what the political chattering classes deem to be the indignity of factual verification. This brings us to the sharp pencil people in the Obama administration, specifically the OMB. They claim to know what the relative size of the federal government will be in 2016, at the end of President Obama’s term. According to the OMB’s plans, the federal government, as a percent of GDP should be 22.5%. That’s a 1.8 percentage point drop from the current level. Given that President Obama’s first term recorded a record growth in the relative size of the federal government, and that the President campaigned on a platform of more big government, it is doubtful that he will come close to meeting his own OMB forecasts, in his second term. Yes, the illusionists, not the President’s sharp pencil people, will probably carry the day. What will make the President’s task even more onerous is money – as in the money supply. Thanks to Basel III, the U.S. money supply isn’t the only one creating growth headwinds. Europe faces significant money supply deficiencies. Will Asia continue to be the world’s locomotive? We will have to wait and see. At present, though, one thing is certain – an age of illusionists has arrived.
An initial lower open in major European cash bourses has been pared despite concern over Greek and a lack of any progress in agreement between Eurozone officials and the IMF. Source comments early on in European trade helped provide renewed optimism that a plan for Greece is edging closer after it was reported that the German Chancellor Merkel told lawmakers Greece's financing hole through 2016 can be filled with combination of lower rates and increased EFSF. The FTSE is under-performing its European peers at the mid-point of trade today as several large cap stocks go ex-dividend, although strength has been seen following the latest Bank of England minutes which showed a less dovish than expected 8-1 vote split to hold fire on QE between the MPC meetings. Following the release of the minutes, a now reduced expectation for asset buys at the December meeting saw upside in GBP/USD in a move away from the 1.5900 handle, and Gilt under pressure, although short-sterling shrugged off the comment that the central bank is unlikely to cut bank rate in foreseeable future.
- Rough start for fiscal cliff talks (Politico)
- Europe Fails to Seal Greek Debt-Cut Deal in IMF Clash (Bloomberg)
- Japan’s Exports Reach Three-Year Low as Recession Looms (BBG)
- Beggars can be angry: Greek leaders round on aid delay (FT)
- More financial blogs launching soon: Financial Times Deutschland closing (Spiegel)
- China's backroom powerbrokers block reform candidates (Reuters)
- BOE Voted 8-1 to Halt Bond Purchases as QE Impact Questioned (Bloomberg). In the US the vote is 1-11
- UK heads for EU budget showdown (FT)
- Eurodollars - another epic scam: How gaming Libor became business as usual (Reuters)
- Clinton Shuttles in Mideast in Bid for Gaza Cease-Fire (Bloomberg)
- Fed Still Trying to Push Down Rates (Hilsenrath)
We all stand 'fingers-over-eyes and thumbs-in-ears' awestruck at the immense wreckage that the fiscal cliff titan will wreak upon the country. However, deep inside our socially responsible minds, all we can really think about is - what about my needs? The Pew Center On The States has just released a very broad and detailed look at just how the increased taxation and reduced spending will impact each and every state. Here, in two simple charts, is the answer.
Whenever the case is made for a stronger U.S. dollar (USD), the feedback can be sorted into three basic reasons why the dollar will continue declining in value:
- The USD may gain relative to other currencies, but since all fiat currencies are declining against gold, it doesn’t mean that the USD is actually gaining value; in fact, all paper money is losing value.
- When the global financial system finally crashes, won’t that include the dollar?
- The Federal Reserve is “printing” (creating) money, and that will continue eroding the purchasing power of the USD. Lowering interest rates to zero has dropped the yield paid on Treasury bonds, which also weakens the dollar.
All of these objections are well-grounded. However, the price of gold is not consistently correlated to the monetary base, the trade-weighted dollar, or interest rates. We have seen interest rates leap to 16% and fall to near-zero; gold collapse, stagnate, and then quadruple; and the dollar gain and lose 30% of its trade-weighted value in a few years. None of these huge swings had any correlation to broad measures of domestic activity such as GDP. Clearly, interest rates occasionally (but not always) affect the value of the trade-weighted dollar, and the monetary base occasionally (but not always) affects the price of gold, but these appear to have little correlation to productivity, earnings, etc., or to each other. Gold appears to march to an independent drummer.