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Enlightened Self Interest
Over the past few months my thinking on what global leaders should be doing in the face of the rapidly growing problems has morphed in an entirely different direction. For some time now I’ve been banging on the table that interference with market forces in an attempt to kick a can down the road are the worst kind of policies. My concern has been that the costs of this interference will ultimately be greater than the cost of letting chips fall where they may.
My revised thinking is driven by one factor. "What’s in my best interest?", is what it's come to. Enlightened self-interest is all that matters to me. To hell with everyone else.
To that end, I want to make a strong recommendation that a financial market tax be implemented in the US and Europe.
What I want to see is a plan along the following lines:
Fee for stocks and options = ½%. (This would be applied to both the buy and sell side so that the cost of a “print” would be 1%)
Fee for all other transactions = .005% (FX, bonds, CDS, Swaps, Futures and all other derivative transactions.
Dean Baker, from CEPR, is strongly behind this type of thinking. It doesn’t matter that Dean has never been close to a financial market in his life. He actually thinks that transaction taxes could raise $100b++ a year (for ever). Dean does admit that there may be some consequence to this. He is aware that a proposal along these lines would destroy liquidity across all markets. He thinks this is not important at all. His thinking:
The small fees the EU is considering charging would only raise transactions costs and liquidity back to levels seen in the early to mid nineties.
Well, that’s what I’m looking for. Let’s dial back the markets so that the level of liquidity is back to the “early” nineties. That would be perfect for me. I don’t care that people who actually know what they’re talking about have to say about this. For example, Ken Rogoff, former chief economist at the IMF, (a guy who’s opinion I normally respect). His thinking on a transaction tax:
The tax would significantly reduce market liquidity with "no obvious decline in volatility" and "increase the cost of capital, ultimately lowering investment."
Let me explain my thinking. Upfront, I want to address the criticism I’m going to get. I’m a 10 percenter. I wanna be a 5 percenter. I don’t give a damn about anyone else in the system other than myself. I have financial resources. I have investment skills and experience that the vast majority of small investors don’t have. My goal is to make a pile of money off of those folks that don’t have what I have. Fairness and economic consequence is of no concern to me. I just want to get richer.
If we do get a Fin Tax that has some teeth, it will destroy liquidity. The vast amount of intra-day trading of equities is not able to generate a net 1% cost of transacting. The typical profit targets are far less than 1%. A transaction tax would wipe out the HFT crowd. That group accounts for as much as 70% daily turnover. Take out the rest of the day traders and jobbers and we would get turnover down to about 20% of what it is today. That would put guys like me in the catbird seat.
Should we get a transaction tax, I would anticipate a enormous ramp up in daily volatility. Intra day swings of 5% on the big indexes would be a common event. Individual stock names would be subject to even more violent swings. Small cap stocks would be the worst hit. There I’m anticipating daily swings in the 10% range. On days where there is company specific news that intra day swing could widen to 20%. Cha Ching for me!
On an annual basis I would expect very big swings. 30-40% changes in the S%P index would be a normal event. Over all, the ramp up in volatility would be very bad for equity valuations. Today there is a great debate as to whether the S%P should trade at 13Xs earnings or should it be 15Xs? In my view a year after the implementation of a transaction tax the market would be wondering if the “proper” multiple is not 5 -10Xs earnings.
That outcome would suit me just fine. I want to buy assets very cheap. That the suckers who believed in the “Buy and Hold” were puking after a 50% correction wouldn’t bother me at all. I want to own Dean Baker’s stocks at 50 cents on the dollar.
I want the IPO market to dry up. I want any company to pay through the nose for new equity money. I also want secondary stock issuance for big companies to fall apart. Today, the cost of a secondary is a temporary reduction in a stock’s price of 3-5%. I want that to widen to at least 10%. I’ll make a fortune that way.
Bonds have always been a specialty for me. I’m certain that spreads would widen by big amounts. I would just sit back and make a bundle. Some poor sap wants to sell $100k of an obscure Muni bond? Screw them. My bid will be 5% down from the last trade. I think that bond trading for off the run issues will just be a cash machine for me.
I’m pretty good at distressed investing. Given that just about everything would be distressed I would have a field day.
The financial sector of the US (and the globe) would see their earnings go out the window. This, coupled with the fact that the same sector represents about 30% of current GDP, there would have to be a depression. A big one.
Once again, this would suit me just fine. I would buy real-estate at 25 cents on the dollar. Cash, and only cash, would talk in these conditions. There would be no mortgage market left.
The Fed would be printing money like mad in these conditions. Hyper inflation would follow. I’m as certain as I can be that I would be a big winner (versus everyone else) should that be the result.
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I’m half serious and half joking this morning. I’m looking at the TV and all of the OWS stuff that is happening around the world. This is gathering speed very quickly now. Anyone who thinks this is going to go away in a few days is just nuts.
One global response from the “Deciders” to the current protests could be a transaction tax. That would be “popular”. It might just be something that is done as a way of appeasing the crowds. Whatever one thought of the possibility of a transaction tax a month ago, those estimates have to go up today. The bigger the protests, the greater the probability that the tax is implemented.
A transaction tax would be like Prohibition. The Volstead Act just made crooks rich. It cost the government billions in lost revenue. The population came to hate it. It was bad policy that was adopted because of a visible protest movement of that time.
The left side of my brain is with Rogoff. A transaction tax would kill liquidity/capital formation. That would result in a huge spike in volatility. This, in turn, would result in broadly lower equity multiples. The connection between stocks and the economy is too tightly correlated. A very sharp downturn in the economy would have to follow. For these reasons, I’m violently apposed to a transaction tax.
The right side of my brain says, “Bring it on”. I’m confident that I can survive and thrive in that environment. Fortunes were made in the 30’s. What may come will be no different.
I do want to be clear about this. The 99% have been pushing the transaction tax. They may get what they think they want. But in the end it will result in more pain for the 99’ers. The concentration of wealth in America will just get higher and higher up the ladder.
A transaction tax that limits liquidity will not create jobs, it will end up costing the government net tax dollars. But guys like me will do just fine.
Be careful of what you wish for.
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OWS is just getting started, it is bottom up without any broad leadership. If OWS transitions like the Tea Party stuff did, it will be more or less a Tea Party on the left. That would be a full scale political revolt going into next years election; Tea Party + OWS vs The Establishment.
If OWS begins to meet each other for the purposes of organizing locally (e.g. municpal elections, state elections, etc at the library down the street) and sharing these local resources (e.g. supporting various OWS style candidates all over the US like the Tea Party did last cycle or running OWS backed candidates in various local elections), it is going to be very interesting.
Regards,
Cooter
The tea party includes democrats as well as republicans. It is about small government. Once Greece blows up and people realize that government can't help them, I suspect you will see a swing to apolitical community based groups who will step in where government has failed.
Since the Tea Party has already made an impact, I think it is safe to say those "early adopters" in the various communities have already made decisions about how to approach things that affect their community. You will find many community volunteers have decided the Tea Party is the direction for them. I see the Tea Party in the same light as I see the NRA. Both will support candidates from both parties that espouse their value system. You can chastise them all you like but they will put boots on the ground and they will get the job done. They won't "protest" in hopes of garnering influence. They will change the landscape to fit their environment. As they are formed from community leadership, they will protect those communal values they view as important.
Late to the thread CH. Hope you see my response.
You are one of the most quiet and yet well spoken posters on ZH. You have shocked me with occasional, yet brief insight, more than once. While I don't know shit about you, I would say you are not only "old" but you are wise beyond those years to boot. I don't always agree with everything you say, but you always say things I think long and hard about.
THAT is why I am on ZH.
To me, the Venn diagram said it all, OWS is the young revolt, the TP was the old revolt. Local movements without national leadership. I did, and believed, some pretty dumb shit when I was a kid. I learned, and my values/morals shifted along the way. I am willing to over look a fair bit of stupidity on the OWS side of the fence with this in mind, so long as their heart, values, and morals are in the right place.
OWS will come around in time.
Regards,
Cooter
I think OWS has legs but a severe winter (likely) may dampen enthusiasm quite a lot. The big pivot to look for might be accurate targeting of the message. So far this has been primarily a leftist loon movement. The system is a disaster, a complete house of cards fabricated by deception. OWS is asking the fabricators to fabricate differently, not to stop fabricating.
When/if the American government/military industrial/central banking/media complex becomes the target...........Then you have revolution. In my opinion we are not there yet. Not enough people hurting. Still far to many people perfectly content with facebook and dancing with the stars.
I think the American government/military industrial/central banking/media complex has been the target of grassroots politics for many generations. Andrew Jackson pulled the plug on the 2nd US bank back in the late 1830's.
The successful challenge to that complex will likely come from individuals espousing small government values and pioneering efforts to get people to help themselves.
I don't see any aspect of OWS that will morph into something like that.
OWS is targetting those people who are content with facebook and dancing with the stars. If they were interested in other segments of society, they would have a message for them.
I think OWS is a containment strategy of the democrats to keep the facebook/dancing with the stars crowd from leaving them. OWS has become the marketing brand of innovation for that crowd. The trick is to get the OWS brand to market Obama in the next election.
every society is a fabrication.
I have it in the back of my mind.... that we are coming upon a long and severe winter.
There might be cold weather, too.
Great post B.K. If I read you correctly then what I conclude is that you suggest the 'transaction tax' is really a trojen horse designed to benefit the elite? If so, that does make sense. This idea of a financial transaction tax has been floating for several years at least. These bastards are so devious!
I am a bit perplexed by one thing: You state that "I am of the 90% and I wish to be of the 95%"?
Either I am having an unusually severe brain cramp, or you may have meant to state " I am of the 10% and would like to be of the 5%"?
Based on his resume, he's a lot higher than top 10%. Likely top 3%.