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Guest Post: Ceilings, Cliffs And TAG - 3 Immediate Risks
Via Lance Roberts of Street Talk Live,
The recent market sell-off has not been about the re-election of President Obama but rather the repositioning of assets by professional investors in anticipation of three key events coming between now and the end of this year - the "fiscal cliff", the debt ceiling and the expiration of the Transaction Account Guarantee (TAG). Each of these events have different impacts on the economy and the financial markets - but the one thing that they have in common is that they will all be battle grounds between a divided House and Senate.
While there has been a plethora of articles, and media coverage, about the upcoming standoff between the two parties - little has been written to cover the details of exactly what will be impacted and why it is so important to the financial markets and economy.
Fiscal Cliff
One of the primary reasons for the market sell off since the announcement of QE3 has been in anticipation of the some of the largest tax hikes in the history of America which will take place at the end of the year. These tax hikes will impact families and businesses, the middle class and the rich, the economy and the markets.
In 2001, and then again in 2003, President Bush and Congress enacted tax cuts to help restart the economy post the tech bubble, 9/11 terror attack and recession. Primarily these tax cuts were focused on small business owners, families, and investors and, while dubbed the "Bush Tax Cuts" became the "Obama Tax Cuts" when they were extended in 2010.
On January 1, 2013 the biggest hit to the economy will come from the increase of personal income tax rates. The top income tax rate will rise from 35 to 39.6% which is a 13% increase in taxes for the majority of small businesses that create roughly 70% of the employment in the U.S. However, more importantly, the lowest rate will jump a whopping 50% from 10 to 15%.
At the same time many of the itemized deductions and personal exemptions will also expire which has the same mathematical impact as higher marginal tax rates. The table below shows the effective changes.
The important point not to be missed is that higher taxes are likely coming regardless of any potential "deal" in regards to the "fiscal cliff." Higher taxes means less dollars going to consumption which is what creates the much needed demand on businesses to warrant increased employment and production. Higher taxes on businesses reduces the dollars available for capital investments, expansions and production. The net effect of higher marginal tax rates combined with new, or higher, taxes will slow economic growth and reduce revenue to the government.
Furthermore, higher tax rates on savers and investors, will reduce dollars flowing into the financial markets as dollars seek the lowest cost of investment. Furthermore, with interest rates already low, rising taxes makes capital investments less profitable. Therefore, capital will remain mired in "cash" rather than being deployed in productive investments which would spur future economic growth.
Obama stated repeatedly during the Presidential debates that he would not raise taxes on the "middle class" yet there are twenty new, or higher, taxes in Obamacare that will impact a broad cross section of the population. Some of these have already gone into effect such as the tanning tax, the medicine cabinet tax, the HSA withdrawal tax, W-2 health insurance reporting, and the "economic substance doctrine", however, more will go into effect on January 1st including the Medicare Wage and Salary Tax and the Medicare Investment Tax as detailed in the table above. Furthermore, medical device manufacturers will have to pay a new 2.3% tax on their products which will ultimately be passed along to the middle class through higher premiums. Industry analysis suggests that this tax alone will lead to losses of more than 43,000 jobs and over $3.5 billion in compensation.
Lastly, one of the biggest tax tragedies coming from Obama's healthcare plan is the "Special Needs Tax". There are thousands of families with special needs children in the United States, and many of them use FSAs to pay for special needs education. Under current tax rules families can make unlimited contributions to FSA's to fund a broad spectrum of needs from treatments to education. Under Obama's new plan these FSA's will be capped at $2500 and then indexed to inflation after 2013. This is an effective $13 billion tax hike for these families.
The impact of all of these taxes is that there will be less money for individuals and businesses to spend and invest in the coming months ahead if the "fiscal cliff" occurs in full. This equates to roughly a $537 billion dollar hit to GDP in 2013, equivalent to a 3.5% reduction, which would push the economy into a deep recession.
Debt Ceiling
At the same time as Congress will be discussing what taxes to raise, keep or reduce - they will also be forced to deal with an impending debt ceiling debate. As a brief reminder the "debt ceiling" debate during the summer of 2011 pulled the financial markets lower by 10% in just three short weeks as the stand off between the House and Senate led to threats of U.S. default and ratings downgrades. With the Treasury Department once again warning congress that the debt ceiling will be hit by the end of November, well before the original estimation of 2013, the stage is already set for another showdown between President Obama and the conservative Republicans.
The debt ceiling is a statutory limit set by Congress. The statutory limit of debt issuance by the Government has been raised over the years by Congress as the country has grown. A common misconception is that by raising the statutory limit that Congress is authorizing NEW spending - this is not the case. Congress must raise the statutory debt limit to cover spending that Congress has ALREADY committed to spending such as Social Security, Medicare, and Defense.
The chart below shows the history of Federal debt issuance as compared to the statutory limits set by Congress.
The problem, of course, is in the acceleration of spending. While the current Administration is busy convincing the American public that the "rich" just need to pay their "fair share" the simple reality is that the U.S. faces a "spending problem." While increasing taxes sounds like a simple solution on the surface, as discussed above, it leads to lower economic growth rates as each dollar that is diverted into taxes removes a dollar from savings or productive investments.
Currently, it requires every dollar of revenue brought in from taxes just to cover non-discretionary spending. This leaves all discretionary spending coming from the issuance of additional debt. From 1993 to 1997, during the Clinton's two terms as President, the debt ceiling was raised 4 times for a total increase of $1.8 trillion. President Bush then raised it during his two terms 7 times for a total of $5.37 trillion. Obama, during just one term as President, has increased the debt ceiling 6 times for a total of $5.08 trillion. The current run rate of debt increases is clearly unsustainable in the long term.
The negative impacts of debt on economic growth are not widely discussed (see Debts and Deficits: Killing Economic Prosperity) but prior to 1980 it took roughly $0.50 of debt to create $1 of eocnomic growth. The current Administration has increased Federal debt 45%, along with roughly $29 trillion of other funding, bailouts and stimulus, to garner a total of 7.1% economic growth during that period - or roughly $5.40 of debt for each $1 of economic growth. That really isn't a good return on investment.
The last debt ceiling debate ended with a steep market sell off, contracting economic growth and a downgrade by Standard & Poors of the U.S. debt rating. In the end the debt ceiling was increased. No budgets were adopted. Spending continued and debt now exceeds 100% of GDP at $16.25 Trillion.
The battle lines are once again being drawn with the Republican controlled House pushing back against the Democratic Senate demanding cuts in spending, tax code reform and no increases in taxes. The Senate wants the debt ceiling raised without spending cuts and tax rate increases. Fitch and Moody's has warned of downgrading U.S. debt if the "fiscal house" is not put in order but Obama is demanding higher taxes on the "rich" and is unwilling to compromise on entitlement programs.
For investors this is round two of the same boxing match that ensued last year. Ultimately, the debt ceiling will be raised. The U.S. will NOT default on its debt (we are a sovereign currency issuer and as such can print money to meet our obligations) and the U.S. will not go bankrupt. However, the rhetoric of such things happening, combined with the potential delay of resolving the "fiscal cliff," could well create a sharp selloff in the financial markets.
TAG
While everyone is afraid of falling off the "fiscal cliff" there's another issue looming large into the end of the year that could put further financial strains on the economy and the financial markets. The Transaction Account Guarantee (TAG) program, which was initiated at the height of the credit crisis when depositors were fleeing banks for fear they would go under, is set to expire at the end of this year.
The TAG program was put into place by the FDIC to up regular deposit insurance from $100,000 to $250,000 and unlimited insurance for all non-interest bearing transaction accounts. It is the second part that's most important as it comes to an end.
When the unlimited insurance expires the cash of corporations, businesses and depositors, which totals more than $1.4 trillion, becomes uninsured. This could create some serious negative repercussions for small to medium size financial institutions which could be impacted by deposits fleeing into the safety of short-term U.S. Treasuries.
There are two negative consequences for the economy and the financial markets. The first is that many small and medium size financial institutions could face solvency issues leading to another, yet much smaller, financial crisis in the U.S. Secondly, the too-big-to-fail (TBTF) banks which are primarily responsible for the last credit crisis are likely to become too-BIGGER-to-fail. As the unlimited insurance on their deposits expires businesses will move money elsewhere, and since the Government has already proven that they will not allow the biggest banks to fail, they are the most likely recipients of fund flows.
The problem, for the financial system and the economy, is that as TBTF banks continue to swell the risk of another financial catastrophe increases. As the guarantees vanish depositers will likely move money to money market funds which requires fund managers to invest that capital for a return. With an ever increasing cash balance the options for investment becomes more restricted and requires excessive risk taking. History, as a guide, tells us that the TBTF banks are not good risk managers, aka JP Morgan's London Whale, and the next time a financial crisis occurs - a bailout may simply not be an option.
For individuals this also means that borrowing and transaction costs will continue to escalate. This cost, like higher taxes, reduces the savings available for consumption and investment leading to reduced aggregate end demand and lower economic growth.
Likely Outcome
These are the three big risks going into the end of the year as I see them - and each one has the ability to impact the financial markets and the economy. Combined they could be disastrous.
While it is highly expected that the Obama, and the Senate, will find common ground with the Republican led house - this is an assumption that I would not be so sure of. Congressional elections are coming up very soon and the "Tea Party" candidates were sent to Washington with a mandate to get Washington into fiscal order. The House already rolled over once during the previous debates in 2011 on the promises of spending cuts being made. The Administration failed to follow through. Therefore, it is highly likely that this particular debate on the fiscal cliff, and the debt ceiling, could turn out much more contentious than expected.
Do not misunderstand me. A deal will eventually be reached and the debt ceiling will be raised. The U.S. will not default on its debt and the country will not be forced into bankruptcy. However, the impact to the financial markets, and ultimately the economy, from a prolonged battle could be far more damaging that investors currently believe.
Furthermore, taxes will go up in 2013, of this I am sure. The reality is, however, that most of the current tax rates will likely be extended short term along with a deferral of the taxes imposed by ObamaCare into 2013. There will also be spending cuts that will agreed to which will likely be more symbolic in nature than effective. Reduced defense spending is almost a given but that will have a direct, and negative, impact on economic growth.
The financial markets and economy are currently under attack from a recession in Europe, a slowdown in China, rising costs, high "real" unemployment, and the potential for sharply rising taxes at a time when income growth is stagnant. The risks of a recession are rising as earnings are rapidly deteriorating - quite simply this is a formula for a more protracted market correction.
I remain hopeful that our elected leaders will allow cooler heads to prevail and that they will begin to work towards solutions that alleviate some of the risks of economic contraction while setting forth logical plans for fiscal reform. However, while I am hopeful of such progress, "hope" is not an investment strategy to manage portfolios by. If I am right things are likely to get worse before a resolution is reached - but maybe that is why the "investment professionals" have already been heading for the exits.
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All of that is wrong. None of those matters can trigger the global credit default swap tsunami that can flow from a Greek and/or Spain default.
The sell off is because Greece has re-assumed its place in the headlines.
I'd say the sell-off was because every Bull was invested in the market and had no chips left
..or maybe the algos ran out of micro-chips
Unless you're a public-private scam I doubt anyone gives a crap about the fiscal cliff, Govt could go tits up tomorrow and nobody would notice. Companies are not dependent on Govt, it's quite the reverse for the State dependencies in DC
All you guys who still work are fucked
WTF. Where do all these people come from claiming "things are likely to get worse" before a "resolution of the fiscal cliff" is established," when in reality, things are going to get worse from a fundamental, macro & micro economic vantage point no matter what or what doesn't happen regarding the "fiscal cliff?"
The "fiscal cliff" is immaterial. It's a non-issue. It's a fruit fly or even smaller gnat on an 800-lbs Gorilla's ass. It's a sell-sider's straw man AND a sell-sider's red herring.
We're actually in an economic depression that's merely being hidden by deficit reliant government spending and a GDP bump that is an illusion as it's generated by debasement of currencies/fiat printing (consumption is falling in real terms, but prices are rising much faster than that consumption is falling, in real terms).
The U.S. and many developed & emerging economies are contracting, and have been, for some time.
To understand what this now clearly entrenched, long term trend does to equity markets, pull up a chart of the Nikkei, circa-1989 forward.
There aren't/can't be any exceptions to what you'll see; the product of debt dependent "faking the numbers" until reality calls the bluff.
100 % correct 'TIS'... The global economies are contracting. Putting a band-aid on U.S. spending issues has nothing to do with lack of global demand.
Just to be clear, I meant to write that:
...because prices are rising in real terms at a rate higher than official BLS garbage in-garbage out equations indicate, GDP can still be shown to be flat or expanding, even if real consumption AND real productivity are falling...
It's important to be precise when discussing such technical matters.
Thanks "TIS", I appreciate that. Your original post was crystal clear for me... ;-)
+1
The scary thing is there seems to be only about 10,000 people on the planet that grasp what you are saying and even less that give a rats ass.
I talk to PhDs all day long who couldn't explain QE if their life depended on it.
Blows my mind!
I've been locked into SPXU, 3x short S&P 500 for 13 months now saying evry quarter "they won't fall for this shit again will they?".
What do you know they take it hook line and sinker.
The only place I see Greek fire is right here on ZH!
The msm has the whole fucking planet on lockdown.
+100 for your insight.
They call QE "printing money" 99% of the time, even Zero Hedge. It's not, it's writing bad checks.
At the outset of this piece, the author states that Obama's re-election is not the reason for current broad market weakness -- then, he goes on to ennumerate all the Obama-specific negatives which _will_ negatively impact the market.
Yet more 'Street dissonant jabberwocky.
-1
That was as far as I made it into the article. He says it wasn't the re-election, but all the shit that is not going to get fixed because of the election. Beg pardon? I will give him this, it wasn't just Barry who got re-elected, the rest of the do-nothing congress is back too.
The recent market sell-off has not been about the re-election of President Obama but rather the repositioning of assets by professional investors in anticipation of three key events?
Really? And Obama and his cronies have no influence on these three key events? I got this far and quit. Utter dipsticks.
(bent over, straining)
Knukles, you're going to give yourself a hernia.
More likely hemorrhoids!
"Not about Obama"?
Would Romney have kept the Bernank?
No huge fan of Romney, but NOT about Obama? Not even some?
I guess it all still Bush's fault...
They may stop blaming Bush soon. I saw this link on drudge: http://www.politico.com/news/stories/1112/83979.html
The AFL-CIO pres is blaming Romney and his Bain-style buddies for the failure of Hostess. So maybe Romney can take the heat for the next four years.
We are likely into a bounce early next week, but after that, we are heading down once again.
http://bullandbearmash.com/chart/sp500-hourly-shows-upward-momentum-week/
The devastation has only started - poor folks at Hostess - all 18500 of them.
"Let them bake cakes"
M. A. (sans head)
Seriously? $32.50 an hour and pension for working at the twinkie factory? They didn't want to take a cut to their pensions and closed it down. The union will give them 2 years of wages as severence and the government pension guarantee corp will bail out their pensions. They probably wanted it to close. McDonalds sales were down last month for the first time in 10 years, so they'll be looking at Wendys when their severaence and unemployment run out, but still it'll be a long vacation.
"Obama stated repeatedly during the Presidential debates that he would ... "
Is Lance Roberts so naieve that he takes a campaign promise as an honest commitment? Especially Obama with his track record?
"Obama stated repeatedly during the Presidential debates that he would ... "
Doesn't. Mean. Shit.
Telepromter-driven means never needing to remember one's position, promises OR alliances.
"...the investment professionals are headed for the exit", yeah to the exits that lead to where the PM's are
pardon, se vous plait ------
the only thing that makes a shit is the fuckers producing stuff --- non-crooked entrepeneurs & indians --
obamer, bernanke, diamond, et al are all delusional, useless assholes.
when the producers stop producing ---
that's it --------- keep an eye on the producers ---------
without them there's no guvmunt, banks, wall street, army, navy, police, economists, bloggers, tv, internet, nothing -------
don't believe it? try growing some fucking tomatoes -------
0bama killed the stock market the first time he won the presidency.
I agree with Bill Fleckenstien’s take:
“If you liked the last four years you’re going to love the next four years because it’s going to be more of the same only worse.”
(KWN 11-14-12)
All these factors have not escaped the stock market.
Today, by closing down, the Transports have flashed a primary bear market signal.
Not a good omen for the stock market.
Here you have the details:
http://www.dowtheoryinvestment.com/2012/11/dow-theory-special-issue-afte...
The election is over and now it's time to stick it to the taxpayer while the Obamas go on their next vacation using AF-1.
How ironic that Romney invented Obama care, vowed to get it repealed if elected, and now it will be his legacy even though he didn't win?
So food prices are going up and we woill be making less. The tax increases will be nullified for the working man through lower gas prices because of the slower economy. The rich are really going to get it though.
Fuck Congress.
Sellof or not. I don't care becouse i make money either way COPY TRADING
http://www.randycass.com/blog/five-things-i-learned-this-week-november-18th-2012/
According to Morgan Stanley:
First, Governments are in a fiscal mess because of pro-market policies over the last couple decades (Less regulation, lower taxes, etc…)
Second, they need to transfer that mess to the private sector by reversing the investor friendly policies that contributed to the current situation.
Third, because politics are as polarized as they have ever been, this process will be lengthy and full of uncertainty and drive people to hold less risky assets until it is completed.
In short, Investors are in the awful position of waiting for multiple shoes to drop but are faced with uncertainty about when and how those shoes will kick them in the rear. If you believe in the thesis none of it bodes well for earnings or multiple expansion going forward.
crap... pure crap, obama re elected meant major unsurtanty for the future and a surely anti business environment, and great for bond because Helicopter ben and his policy stay. run up before election was unplaced faith that 50%+ of the country has not been replaced with brainwashed mindless degenerates, they were wrong.
" Reduced defense spending is almost a given but that will have a direct, and negative, impact on economic growth. "
Nonsense. Defense spending is the ultimate Keynsian pork barrel. The idea that spending hundreds of billions of dollars a year on foreign wars and high tech toys is good for the prosperity of Americans as a whole is beyond stupid.
You would not be able to sit at your little computer and type this drivel if it was not for the military inventing the internet.....and your wi fi...navigation...thousands of items you use today come from the military...your computer is one by the way...the planes you fly your fat ass on...there are bad people out there that want to kill us....you should know that...google the middle east...so we always have a military...and I hope the best in the world...because a lot of the world hates everything but Muslims...
Yeah, 1 guy, 1 year, connected 2 computers with a wire. He couldn't have done it unless he was wearing a funny hat and a medal. Thing is, how many millions are on the tit, this year(and for the rest of their lives) when you include the contractors? What if all that effort was used for something constructive, other than rebuilding Iraq and blowing it up again. There are the side issues too. They were going to purchase hundreds of cargo planes from italy(that nobody wanted) in order to get Italy to be pro coalition(like we need italy) to the tune of $30-$50 million each. Pro coalition so we look good bombing people in mud houses with machetes and gas cans and civil war rifles, which we don't bomb very often over 10 years either. Now the 21 planes that were delivered are going onto the scrap heap to rust since italy wont honor any maintainence contract if we try to sell them since we broke the contract. Huge waste of resources. Certainly not the only example of material resources the military simply throws away without even planning the next mess. The planes weren't even a year old. Time to close down some of the 700-800 foreign bases(they don't even know how many) like Ron Paul wanted to do and not build hundreds more in the Asian theatre. China has nukes, there's no reason to take a bb gun to a bomb fight.
I'm glad I already have most everything I need, and low bills too.
From Yahoo...interesting
POLLWhat moves are you making ahead of the fiscal cliff?
What garbage. There is no "fix", period. Stop right there. The world's economies are contracting as 99% of the EARTH does not have additional WAGES to spend or invest.
Too much uncertainty. That's usually due to a lack of leadership. That's Obama.
Here's another member of the Ministry of Backstops about to join the bailout club with FHA. The PBGC ( Pension Benefit Guaranty Corp. ) has gone $ 34B in the hole.
http://www.washingtonpost.com/business/economy/pension-benefit-guaranty-corp-running-34-billion-deficit/2012/11/16/7c1a54da-303a-11e2-9f50-0308e1e75445_story.html?hpid=z3
this is arse about face.
the US is already over a fiscal cliff.
these so called "tax hikes" and "benefit cuts" represent monies that should have been in place all along to NOT put the US further in debt that it cannot pay back via federal deficit funding,
these tax hikes and benefit cuts are necessary because the banks have been bailed out by the tax payer. that is what a bail out means. the bail-outs must be paid.
the banks should be shut down and any remaining capital should be returned to the federal government, which is after all the agent of the tax payer.
new banking laws, probably along the lines of those recommended by Volcker can be set down, using the knowledge gained from the abusers of power (the powers that fuck up = ptfu) like baldheaded monsters from goldman sachs.
That's just great, now they're taxing tanning. I'm going fishing Monday and it's suppose to be in the 70s and sunny. I'm taking sunblock for a long day. Am I suppose to hire an expert to figure how much to send them and what is the penalty if I'm wrong? I knew they were going to put chips in cars to charge for being in the high occupancy vehicle lane or speeding and such, are they going to put chips in our shoes to charge us for sun? I vote no.
Is this the lousiest recovery of all time?
Check it out: The number of people currently on food stamps in the US is at a record-high of 47.1 million. That’s more than twice as many recipients than in 2007 when the crisis began. And the percent of Americans living below the poverty line has skyrocketed, too. It’s gone from 12.3 percent in 2006 to 16.1 percent today. According to the Census Bureau, nearly 50 million people in America are now living below the poverty line. In other words, if you’re poor in America your numbers are growing and things are getting worse. Some recovery, eh?
And it’s not just the poor who are hurting either. The middle class is getting clobbered, too. Unemployment is still way too high (7.9 percent) and, according to the Fed’s Survey of Consumer Finances, middle income families have seen nearly 40 percent of their net worth go up in smoke since 2007. The bulk of the losses are attributable to the giant housing bust of ’07 which wiped out $8 trillion in home equity leaving the majority of baby boomers unprepared for retirement. It’s a desperate situation that no one seems to want to talk about, but the reality is that millions of people are going to have to figure out how to scrape by on next-to-nothing or work until they’re too senile to punch a clock. As far as these folks are concerned, the recovery is just a big joke.
So who’s really benefited from the so called recovery?
Well, that’s a no brainer: Wall Street and the 1 percenters, that’s who. Fed chairman Ben Bernanke has pumped enough uber-cheap money into financial markets to fill a small ocean, all with the clear intention of keeping stocks bubbly so his fatcat speculator friends can cream the system and take home even bigger bonus checks. The Fed’s quantitative easing program has sent stocks into the stratosphere, in fact, all three major US indices have more than doubled since the program was first launched in 2008. There’s only one drawback; it doesn’t do jack for the real economy. Oh, and another thing, its effect on stocks is only temporary, the equivalent of a sugar rush.
.....
Bernanke’s smart enough to know that more-of-the-same (QE) won’t get the economy back on track. He knows that Koo is right. But that doesn’t mean there will be a change in policy. There won’t be, mainly because QE reinforces the caste system where all the goodies go to the silk-stocking hotshots at the top and everyone else gets table scraps. It’s just plain old class warfare. And, guess what: their class is winning.
http://www.albanytribune.com/16112012-welcome-to-the-lousiest-recovery-of-all-time-oped/