State Tax Revenues
There has been quite a bit of discussion lately over the rapid reduction in the government's budget deficit as it relates to economic growth going forward. There are 3 issues that will likely impede further progress on the deficit reduction in the months ahead; 1) lower rates of tax revenue, 2) weaker economic growth and 3) greater levels of spending. The good news for stock market bulls is that deepening budget deficits increase the amount of bonds that the Treasury will need to issue to cover the shortfall in spending. This will give the Federal Reserve more room to continue their current monetary interventions which have inflated asset prices sharply over the last year. Creating financial instability to gain economic stability has been an elusive dream of the Federal Reserve since the turn of the century; yet someday it is hoped that they may just be able to "catch their own tail."
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.
Almost precisely a year ago we posted "268 NY Credit Suisse Employees Learn They Are About To Be Laid Off Via Department Of Labor Website." Now, a year later, irony has struck again, as this time 138 employees from an already substantially trimmed Credit Suisse office in Manhattan, find out courtesy of the DOL's WARN website, but certainly not their HR team who wants everyone as motivated as possible until the "Hammer Hits" day, they have just been made redundant in the critical Christmas bonus season between October and December 29, 2012. Instead now everyone will be undermotivated until they get to learn who gets sacked. All that is left now are the actual identities of the pink slippees. The only other open question is whether the loss to US Federal and NY State tax revenues and US GDP will be offset by the more broken windows that are increasingly being discounted as a result of the ever rising unemployment and greater social unrest (not to mention part time NYPD jobs especially if sharpshooting is actually involved in their training this time).
While markets await details on the next round of quantitative easing (QE) -- whether refreshed bond buying from the Fed or sovereign debt buying from the European Central Bank (ECB) -- it's important to ask, What can we expect from further heroic attempts to reflate the OECD economies? The 2009 and 2010 QE programs from the Fed, and the 2011 operations from the ECB, were intended as shock treatment to hopefully set economies on a more typical, post-recession, recovery pathway. Here in 2012, QE was supposed to be well behind us. Instead, parts of Southern Europe are in outright depression, the United Kingdom is in double-dip recession, and the US is sweltering through its weakest “recovery” since the Great Depression. QE is a poor transmission mechanism for creating jobs. It wasn’t supposed to be this way.
For all the drama surrounding Wall Street bonuses in a year in which Wall Street profitability was cut in half to just $13.5 billion, the worst since the collapse and bailout of 2008 and 2009 (and compared to $27.6 billion in 2010 and $61.4 billion in 2009), one would think that the average banker would see zero bonus in 2011, or in some cases, especially if they worked at a Greek bank, be told to pay for the privilege of working. The truth is that according to official data from the NY City Comptroller, the average bonus dipped by just 13% in 2011, declining modestly from $138,940 to $121.150. In fact, while a number of large firms announced reductions in cash bonuses for 2011 (with several firms reporting reductions in the range of 20 to 30 percent), personal income tax collections indicate a smaller decline in the overall cash bonus pool. A big reason for this is deferred bonuses from prior years hitting this year's payroll and thus smoothing the impact. Still, bankers being forward looking people, are looking forward and probably not liking what they see. Yet while 2011 data for comprehensive pay is still not available, in 2010 the average salary rose by 16% to $361,180 as more firms shifted to a base-heavy comp structure. Indicatively, the average Wall Street salary is 5.5 times higher than the rest of the private sector at $66,100. And no matter how one feels about them, one thing is true: the New York economy would founder without taxes paid by bankers: "the securities industry in New York City accounted for 23.5 percent of all wages paid in the private sector despite accounting for only 5.3 percent of all private sector jobs" and more importantly, "each job created (or lost) in the securities industry leads to the creation (or loss) of almost two additional jobs in other industries in the City. OSC also estimates that each new Wall Street job creates one additional job elsewhere in New York State, mostly in the City’s suburbs." Hence - Wall Street's bonuses have become "Too Big Too Fall", as the entire economy of NY City and the state is now held captive by Wall Street's exorbitant bonuses.
Are we really in an economic recovery or is it a figment of the Fed's quantitative easing? This will be the biggest factor in the 2012 elections.
If anyone is tired of the daily European soap opera with surrealistic tragicomic overtones, they can simply shift their gaze to the 8th largest economy in the world: the insolvent state of California, whose controller just told legislators has just over a month worth of cash left. From the Sacramento Bee: "California will run out of cash by early March if the state does not take swift action to find $3.3 billion through payment delays and borrowing, according to a letter state Controller John Chiang sent to state lawmakers today. The announcement is surprising since lawmakers previously believed the state had enough cash to last through the fiscal year that ends in June." ....uh, oops? But sure, fix the problem of excess debt by more "borrowing" why not. As for the math: "But Chiang said additional cash management solutions are needed because state tax revenues are $2.6 billion less than what Gov. Jerry Brown and state lawmakers assumed in their optimistic budget last year. Meanwhile, Chiang said, the state is spending $2.6 billion more than state leaders planned on." Quick, someone come up with a plan that involves subsidies and tariffs on China, or something else that deflects from what the source of the problem really is. Because the last thing that anyone in America would want to bring up is this thing called "responsibility" for their actions, or, as in now becoming the default case, the lack thereof. And why do that, when time spent so much more productively scapegoating this, and blaming that for one's own massive errors of judgment.
The ridiculous war between Obama and S&P, which escalated last night following disclosure by the NYT that S&P was being investigated for its muni ratings, has just taken another turn for ths surreal after S&P announced that it would most likely downgrade munis as soon as the final US budget is finalized. Granted that could very well mean never. To quote S&P: "In our opinion, the longer-term deficit reduction framework adopted as part of the Budget Control Act of 2011 (BCA) could undermine the already fragile economic recovery and complicate aspects of state and local government fiscal management. Either of these outcomes could potentially weaken our view of certain individual credit profiles of obligors across the sector." The sector being the US munis. And from Bloomberg: "The company, which said earlier this month that states and local governments could remain AAA even after the U.S. cut, said in a report today downgrades could come after reductions in federal funding or changed policy. Ratings changes would come based on “differing levels of reliance on federal funding, and varying management capabilities,” and, after the Budget Control Act of 2011, will be felt “unevenly across the sector,” S&P said. "Experience tells me I would expect there to be some downgrades,” said S&P credit analyst Gabriel Petek in a telephone interview. “These cuts are coming in addition to the losses of revenue that already came during the recession."" Bottom line: the longer this downgrade over up to 7000 issues is deferred, and it is very much overdue right now, the bigger it will be when it finally arrives, and the greater the gloating by Meredith Whitney will be when it finally arrives.
There are those who thought that following the material pushback by every chatterbox on CNBC that the muni situation is actually nice to quite nice, contrary to what Meredith Whitney had prophesied, that the scourge of Citi would slink back into whatever hole it is she crawled out of. And then there is Meredith Whitney, whose occasional appearances on TV have resulted in 25 weeks of consecutive, and material outflow from municipal funds. Undaunted by her critics, she has now doubled down, and shifting away from munis, is now focusing one level higher: on the state financial crisis. Her conclusion, sure to set off a firestorm of angry responses tomorrow when the Op-Ed hits the print version of the WSJ: "Defaults in a variety of forms by states and municipalities are already happening and more are inevitable. Taxpayers have borne the initial brunt of these defaults by paying higher taxes in exchange for lower social services. And state and local government employees are having to renegotiate labor contracts that they once believed were sacrosanct." And sure enough, she refuses to abandon her muni thesis: "Municipal bond holders will experience their own form of contract renegotiation in the form of debt restructurings at the local level. These are just the facts. The sooner we accept them, the sooner we can get state finances back on track, and a real U.S. economic recovery underway." Yes, well, one can argue that the sooner Ms. Whitney accepts that the modus operandi in the developed world is to preserve the status quo no matter the cost, and kick the can down the road indefinitely, the sooner we can all get back to a state of vegetative existence in which nobody questions anything and the world is one swell place until everything blows up.
Your one stop summary of the week's key bullish and bearish developments.
Take a look at these ugly figures...
In my article "Something Is Happening" I noted a glimmer of positive economic data. I was cautious to not call it a "recovery" yet because there isn't a clear trend. I still feel that way. The Fed and the federal government may yet blow up a recovery. But ... I can't ignore positive signs. I read the same data as other free market oriented blogs out there, I am just about the only one seeing this. "Believe what your eyes see, not what you want to believe."
QEII has suddenly made this paper appear a bargain. Treasury bond investors are not being compensated for their risk at current yields, but muni bond investors are. If the Bush tax cuts are not extended, the effective taxable yield pops up to 4.27% for top earners. That’s a lot in this zero yield world we live in. And let’s face it, taxes are going up a lot, no matter who won the election, making these bonds even more valuable in the future. The risk of an outright default on this paper has been vastly overblown by the media. (NCP), (NVX).
Advocates claim that passage of Proposition 19 would solve the state’s budget crisis, as it would bring in tens of billions of dollars of tax revenue while cutting the cost of our prison budget by billions more. Be careful what you wish for. Today, the industry for alcoholic spirits is dominated by a handful of globally integrated marketing giants running volume driven businesses on razor thin margins, like Anheuser Bush (BUD) and Diageo (DEO). State tax revenues from this will be miniscule.