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Deadlocked
This Week in Stock World Weekly: Deadlocked
(Excerpts reviewing the week and looking ahead)
Debt Ceiling Deadlock
One line of reasoning from the “no tax hikes” crowd is the inaccurate premise that the very wealthy, the top 0.1%, are job creators. If they’re the “job creators,” it might be in the public interest to protect them from excessive taxation - thereby allowing these top 0.1% to spend money on creating jobs. This is incorrect. The overwhelming majority of U.S. jobs are ‘created’ by ordinary Americans when they spend their paychecks. Consumer spending drives about 70% of our GDP. When average Americans are struggling with high unemployment, which recently popped back up to 9.2%, they are reluctant to spend money on anything beyond basic necessities. The broader U6 unemployment number - which includes the underemployed and “discouraged workers” - is 16.2%.
Meanwhile, U.S. companies are not stepping up hiring due to weakness in the economy - there is no demand. As Paul Ashworth of Capital Economics wrote, “Businesses aren’t confident enough, and the longer this goes on, the harder it is to convince them that they should be.” (Dearth of Demand Seen Behind Weak Hiring)
The impasse between the President and the Republican leadership reached new lows on Friday when talks broke down and Rep. Boehner walked out of negotiations. “The White House deal for the House would have required that alongside these cuts, tax revenues would go up by $1.2 trillion, largely through a rewrite of the tax code to eliminate many deductions and loopholes. That’s substantially less in revenue than the $2 trillion in the “Gang of Six” plan. The problem is that while much of the cutting would start right away, most of the revenue increases would be put off, in part because a tax-code revision would take months, and in part to allow spineless House Republicans to say they did not agree to any specific tax revenue increases (i.e. they planned on lying to their constituents).
“Democratic lawmakers were rightly furious when they heard about these details, calling the plan wholly unbalanced. But, in the end, it was Mr. Boehner who torpedoed the talks. He said Friday evening that he and the President had come close to agreeing on $800 billion of the revenue increases (the equivalent of letting the upper-income Bush tax cuts expire as scheduled next year — not much of a heavy lift) but could not stomach another $400 billion ($40Bn a year!) which the White House wanted to raise by ending tax loopholes and deductions.
“So, on the eve of economic calamity, the Republicans killed an overly generous deal largely over a paltry $40 billion in annual deductions. Mr. Obama was willing to take considerable heat from his liberal critics over the deal, and the Republicans were not willing to do a thing to anger their Tea Party base. As Obama forcefully said, there is no evidence that House Republicans are capable of making those tough decisions. If last-ditch talks beginning Saturday fail, they will have to take responsibility if the unimaginable — a government default — happens in 10 days and the checks stop going out.” (Weekend Reading - Deal or No Deal?)
Let Them Eat Cake
The Republicans are standing firm against raising taxes, in an era when many American corporations are already paying surprising little in taxes.
Russ Winter of Winter Watch at the Wall Street Examiner discussed the gap between what people think corporations pay in taxes, versus what they really spend. For example, Microsoft “lowers its effective tax rate a full 7% by taking foreign income to $19.2 billion from $15.4 billion, and lowering US income (and expenses) from $9.6 billion to $8.9 billion. Today MSFT is effectively a 68% foreign operation. In return it gets all the benefits of stimulus and minimizes the costs of supporting the US system...
Little wonder so much largesse flows into the hands of so few. Matt Taibbi gets into some of the particulars. Bloomberg’s Jesse Drucker estimated that Google all by itself has saved $3.1 billion in taxes in the past three years by shifting its profits overseas. If the U.S. is looking for a source to close its out of control deficits I have some suggestions...
“Mark Kreiger writes a spot on piece regarding the high end luxury bubble that includes this gem - ‘The social crisis facing the country as a result of the most egregious plundering in modern American history will spell the end of the ‘high end’ theme. Buying into this trend now is like getting long Marie Antoinette’s unsevered head in 1792.’”
One fear regarding a U.S. default is that creditors will demand higher interest in return for issuing new debt. Considering how enormous the U.S. debt load currently is (roughly $14.5Tn), higher interest rates would add a crippling burden to an already high burden. This leads to the question of how the markets would react if the U.S. defaults on its debt obligations.
Debt Ceiling & the Markets
Analyzing market action last week and next, Lee Adler of the Wall Street Examiner submits,
“Last week I worried about the possibility of a short squeeze in Treasuries if there’s no deal on the debt ceiling, because of the temporary lack of supply during the period where the Treasury is unable to issue new debt. I dismissed that outcome as unlikely. Now, having seen the markets rally in the face of all this nonsense, I’ll rate it as a tossup. For sure, the Treasury will make the interest payments and will redeem maturing bonds, and that will reassure investors, regardless of any action by the hated ratings agencies. I would not want to be short the Treasury market until it becomes a little clearer how this drama will unfold. It just doesn’t look like a good bet to me right now. In fact, in spite of the consensus bearishness on Treasuries, the charts suggest that my concern of a continuation of the rally may not be crazy at all. Sorry, Russ [Winter].
“Going into the end of next week, bears will face a huge test. The Treasury has a lot of paper to sell. Most of the new paper will settle on Monday,
August 1. On Thursday, July 28, a sizable paydown will put cash back in investors’ pockets. Continuing fears over the European situation may drive ongoing capital flight out of European paper and European banks into shark infested U.S. pool. So what will happen to all that cash?
“If Monday’s settlement is accompanied by no noticeable disruption to stocks or bonds, then that could be a sign that a perversely bullish scenario could be playing out. If bonds crack but stocks hold up, then the “stocks as safe haven” thesis would be gaining currency. That could be grounds for an upside breakout and an extended run in U.S. equities. If both stocks and bonds sell off, that could be great news for precious metals... (Why Not Having Debt Ceiling Deal May Be Bullish - Are Stocks The New Safe Haven?)
Discussing the market on Friday, Russ Winter observed,
“Friday looked like one of the strangest market days yet. Going into the weekend and hours before the wheels fell off the fiscal negotiations, the markets just drifted cluelessly higher on extremely low volume and volatility. The intermediate-term volatility, the VXZ, is now within earshot of breaking to lowest number witnessed back in 2007. The same is true of the 2-year T-Note yield. This goes beyond cognitive dissonance. There is no fear, no worry in this market. It’s completely brain dead and comatose. It’s ironic given the end-of-the-line ungovernable situation we are witnessing. I have compared it to the last days of the Soviet Union - if that system had financial trading markets. The best comment I’ve spotted on the causa proxima of all this was made in the public feedback section of another site. Someone who goes by the name ‘sbernard’ used the term ‘hubris obliviana.’ It’s such an apt descriptor that I’m going to adopt it as a Winterism.
“Wrote sbernard: ‘The truth is that Wall St suffers from a serious disease called hubris obliviana, fueled by endless government interventions, bailouts, stimulus, and Fed money expansion. One of the ‘unexpected’ consequences of this monetary heroin in that Wall St has lost all perception of risk. They reflexively have too much unending faith in the power of government to fix all their troubles. Thus, they are setting us all up for even more risk — risk the government cannot avert because it is the (weak link)!’” (Unbridled Faith in Hubris Obliviana)
For the latest update on the debt negotiations before this newsletter concludes, Zero Hedge predicts: “With 23 hours left until the Asian open (or, more importantly, 19 hours until FX trading resumes) and with today's round of talks now officially over after a one hour meeting in Boehner's office with congressional leaders achieving nothing, it is becoming clear that the final debt ceiling outcome will be "no change" in spending or taxing habits and a temporary hike in the debt ceiling, so that the soap opera can be repeated again every three months...and again...and again...and so forth for an ‘extended period of time’ as ‘transitory solutions' become the new grand consensus. At least we now know the phrase for complete, impotent incompetence on the Hill is: ‘Two tiered approach’ which is how Nancy Pelosi called the last minute attempt at compromise." (Good News: It's Almost Over After Pelosi Says Congress Looking At "Two-Tiered" Deal)
We have several option trade ideas for the coming week, two shorts (GMCR and oil) and two longs (PLX and SONC). These plays can be revised using stock strategies rather than option strategies, for those so inclined. See the inset boxes on this page (for the full newsletter, sign up for a free trial here). Have a great week!
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I don't see the rotation out of any asset other than crude amounting to much in the overall bond markets. All the 'brand x' markets are too small.
I'm looking for rotations out of everything into bonds to keep them liquid: not just Treasuries but munis, single names, etc. Junk can fend for itself but the rest is a gigantic nut that IS too big to fail.
Q: The Fed will add funds but what will they accept as collateral?
A: More crap, which gets to the heart of this debacle: the whole thing is more of the Bernanke Money Laundry. Except it works in bear markets.
Except ...
Don't mind the gas lines ...
A couple of highly visible programs that Obama supported serves as a reminder of how extraordinarily inefficient the government is with my money (and yours). The White House’s Council of Economic Advisors reports that the stimulus added or saved just under 2.4 million jobs — whether private or public — at a cost of $666 billion. That’s a cost to taxpayers of $278,000 per job. Similarly, Edmunds determined that Cash for Clunkers cost taxpayers $24,000 per vehicle sold. Do you think these are isolated incidents? How can you possibly support raising taxes with this kind of mismanagement of it’s revenue stream? Or do you simply support more taxes because you know it won’t affect you? How about focusing some effort on making government programs and agencies more efficient? I’m guessing it could save Trillions. You Liberals keep saying that the rich people deserve to pay more. I say BS – get your house in order and then if they can prove they are operating efficiently and still don’t have enough money then we can discuss increasing taxes.
President Obama wants the debt limit raised by 2.4 trillion so the issue won't come up again before the election. Does that mean the US Gov't is planning on borrowing 2.4 trillion in the next 18 months?
Revenues can be increased only marginally. If we dont make massive cuts to spending its good night ilene.
Always have had a problem with the 49% that pay no taxes voting to raise the taxes of the 51% so that they get a larger share of the un-earned spoils.
The mistake made by the Marxists on increasing taxes for the "millionaires and billionaires" is that the floor is merely $250K. Most Americans, especially true conservatives, realize that the uber wealthy don't create jobs, especially the Wall Streeters, although they do pump monely into luxury goods and high end real estate. Tax increases, even 100% of all income above $2 million, wouldn't make a dent; the problem instead could be resolved by forcing all multinationals doing any business in the US to have at least a minimum tax regardless of loopholes and deductions.
After the big reset, the best solution might be a flat tax, excluding food shelter and clothing, or simply a 20% VAT (permanent, no increases ever)and elimination of the IRS.
forcing all multinationals doing any business in the US to have at least a minimum tax
Such a step would drastically increase taxes on the millionaires and billionaires, you realize.
Pull your focus off income tax for a moment, and you realize the very logic you espouse is something you'd call "Marxist."
(Which in itself makes no sense, as Marxist utopia is stateless. Whatevs. No need to read any of it just to have an opinion on it.)
The elimitation of the IRS and a 10 page tax code alone would save 100's of billions a year
always easier to blame 1 than to blame 500
both parties are in a pickle now.
GOP need the '1' for the 'contributions'. (don't tax them!)
Dems need the 500 for the votes. (don't take away their welfare!)
One way or the other we're going to get "austerity". If we aren't scared enough to pass the spending cuts willingly, the elites are more than willing to tank the markets and really scare the shit out of everybody, then they'll find a few more politicians willing to screw over their constituents.
It's a charade anyway. The governemnt can't be honest with us and tell us the reason we need some cuts now is they just gave away $13 trillion to worthless bankers and financial elites, they spent ALL of the SS trust fund, and the top .1% of Americans are just tired of paying for anything.
No matter how bad some of the bets are in this casino, some will NOT be allowed to lose a penny.
Spin it baby! When did the White House hire you to write their propaganda ilene ?
Bump!
All of this theater is just another rendition of Good Cop, Bad Cop. In the end, the taxpayers are destined to get it, in the end!
You say that companies are not hiring due to lack of demand. This is disingenuous. Most corporations are not hiring due to lack of any coherent future vision of the regulatory landscape just a few years out.
We have a multi-trillion dollar socialized medicine bill which will mandate coverage or fines for any employer with over 50 employees winding its way through the courts, we have the EPA shutting down coal power plants and planning lawsuits to shut down natural gas plants as well, we have the EPA also planning to bypass Congress and implement Cap and Trade in 2013, etc.
Lack of demand is well down the list of reasons that companies are not hiring at the moment.
"Lack of demand is well down the list of reasons that companies are not hiring at the moment."
With high levels of unemployment and MASSIVE public AND private debt it should be pretty clear that THE economic engine that is "consumerism" is stalling and that THIS is why companies aren't hiring. Companies are starting to realize that resource acquisition is becoming more difficult: yeah, "regulations" have an impact (if Easter Islanders had had a better understanding of the importance of their nest/environment and hadn't cut down all their life-sustaining trees then maybe they'd be here today?), but eventually the wall would be hit (and then, NO matter what transpired we'd suffer the big reversal of economies of scale).
Here's how things would look w/o regulations: http://www.chinahush.com/2009/10/21/amazing-pictures-pollution-in-china/
This Sarah-Palin Drill-Baby-Drill point of view is about as shallow as one can get. It is, as Dr. Albert Bartlett would put it, "Strength through exhaustion."
To venture past two-dimensional thinking investigate these:
1) Term "pushing on a string;"
2) Jevons Paradox;
3) What happens when economies of scale work in reverse.
[4) Dr. Albert Bartlett's presentation Arithmetic, Population and Energy]
Thanks for playing!
Greed makes one forget that money, gold, silver et al, are derivatives in the sense they have no intrinsic value, instead deriving their value from the goods and services being produced. Apparently nobody seems to be interested in producing anything anymore, just hoarding.
I don't think it's that people don't want to produce anything anymore as much as it's that they don't KNOW what to produce. Think about it, the paradigm is shifting. We're no longer going to be an entertainment-centric consumer society (aka couch potatoes). Just look at the top stock market companies: http://www.iweblists.com/us/commerce/MarketCapitalization.html
What to produce when oil and electrons become harder to harness? The only thing that I could come up with is farming... when things get tough it's the fundamentals that matter.
We need to stop fucking around with money & start producing more STUFF. Money has no meaning without STUFF. What are seniors going to need when they retire, paper fiat money or STUFF?
While we're at it we need to let the market produce money while they're producing STUFF. We don't need the guvmunt, banks & the Fed producing money. They just print it & give it to the rich, pompous assholes. And everybody wonders why the real productive economy is in the tank.
OT: @Sacrilege: here we have an example of a partisan newbie with skoshi' reasoning and a grar-beard with more reasoning. How does that play into your evaluation - Ned
This article seems to lay the majority of blame for the deadlock on the republicans. And yet the republicans, if history is any indication, have the most to
lose if the U.S. were to default on their debts. So if they are to blame, they may
be shooting themselves in the foot, so to speak. I believe the whole debate is
just a scare tactic to get the public on board for another unspeakable transfer
of wealth to the rich before the total collapse of the system which must be
evident to almost everyone in government by now.
Your reasoning/questions seem to be somewhat along the lines of what I'd brought up a long time ago- if TPTB sit on top because of the System, then why the heck would they knowingly topple it? My argument is that they have ZERO control of the inevitable: resource depletion is striking globally (in the past it toppled individual nations in a more isolated way), and without the necessary resources to fuel needed "growth" (which is the same as INFLATION) TPTB's control will falter and fail (all of which is the reason why I don't spend any energy worrying about any NWO).
NOTE: an argument has been put forth that TPTB are stockpiling resources and that much of the population will be jettisoned so that TPTB will have an ample supply of resources for future use. I think that this is a reasonable thesis, one that I can't dismiss, but I believe that any implimentation is likely to meet with severe uncontrollables (read "it'll really be a crap-shoot"); the VERY tippy top of the pyramid will still probably go for it, throwing out the ballast that is the next closest buffer- they'll end up running naked and scared...
NOTE2: addendum to the first NOTE- I could be considered to be stockpiling, though my acquisitions are only for producing food (to be sold, shared/bartered). I figure that if the masses end up killing farmers that it would be a world that I wouldn't want to be part of anyway...
You are right about the article's assumption. I disagree with that notion though. The Democrats have more to lose, specifically the White House. We have a president whose has yet to pass any good legislation while simultaneously abandoned the liberal cause. Obummer has already been dubbed "like Hoover". People are unemployed and pissed off already. It will be forgotten in 16 months as elections take place who drove us into default (correct answer of course is both parties). The White House is going to get the blame, plain and simple.
Wish they'd stop being so good to us, lol.
http://youtu.be/yBBWUZfgRiw