Myths, Cliffs, And The 2% Solution

Tyler Durden's picture

The Cliff is dead; long live the Cliff.  Yesterday’s impressive market rally was a great way to kick off the New Year, but (as ConvergEx's Nicholas Colas notes) we do have 251 trading days to go before we can lock in those gains and dance a celebratory jig.  The market’s psychological pendulum swings between extremes of “Macro” and “micro” focus, and we shouldn’t take it for granted that the stock market’s positive take on the Fiscal Cliff negotiations portend a better economy, a stronger financial picture for the U.S., or any of the actual nuts-and-bolts which hold together the framework of corporate earnings and cash flows.  Colas' prime concern is that the increase in Social Security tax withholding by 2 percentage points – back to its pre-2011 12.4% - will take a chunk out of the spending power for tens of millions of households.  In the abstract, the amounts involved are not huge – perhaps 50 basis points of GDP.  But everything counts when GDP growth remains stubbornly subpar.

And…  Republican-leaning states have a disproportionate share of lower-income households that will feel the pinch especially keenly.  Not good news for the next Cliff…

Via ConvergEx,

Yesterday’s rally in global equities – especially U.S. stocks – is difficult to explain, at least with conventional reasoning. The deal struck between Democrats and Republicans leaves a lot of unanswered questions, including a still-needed increase to the Federal Debt Limit, spending cuts to replace the 2011 sequestrations no one liked, and a reasonable approach to containing the long term growth of health care expenses in programs such as Medicare and Medicaid.  The market’s positive response was a bit like giving a gold medal to the last man across the finish line, more in celebration of his effort than the result.

No – yesterday’s move seemed emotional rather than reasoned, and for that reason I would like to take a brief trip into the “Psychology of myth.”  The foremost philosopher on the subject, a college professor named Joseph Campbell, essentially wrote the book on the topic in 1949.  His work, The Hero with a Thousand Faces, outlines what Campbell calls a “Monomyth” – the most fundamental form that many cultures’ most important stories all share.  Here is how he describes the essence of the form:

“A hero ventures forth from the world of the common day into a region of supernatural wonder; fabulous forces are there encountered and a decisive victory is won; the hero comes back from this mysterious adventure with the power to bestow boons on his fellow man.”

If you’ve seen the Star Wars movies, you’ve seen Campbell’s paradigm at work; George Lucas openly credited his work as central to the “Mythology” of the story.  The Grateful Dead were also huge fans, as was Bob Dylan and Jim Morrison.  Some critics suggest that the Harry Potter books are straight out of Campbell’s description, although JK Rowling is quiet on the comparison.  In any case, whether you are talking about ancient myth, religious stories from Islam, Christianity, Judaism, or movie blockbusters, it is hard to argue that this storyline captures the human imagination in a very predictable and unusually compelling manner.

I know this is a stretch, so I will hasten to a conclusion.  The bottom line is that investors went on a journey over the last few weeks.  It is easy to be glib and say, “Oh, everyone knew it would work out all right in the end…”  It would also be wrong.  The U.S. political scene may not qualify as ‘Supernatural wonder,’ and we certainly haven’t had a “decisive victory.” But investors and market observers were certainly worried about the potential outcome of the debate – including the possibility of a “No decision.”  So when we get a solution, even a half-baked one – the response is visceral. It fits the “Monomyth” narrative I quoted above, and now the market “Bestow(s) boons on his fellow man.”

If you don’t agree that impersonal financial marketplaces will succumb to cultural analysis, let me turn a hardened eye to the oddest bit about yesterday’s close-on-the-highs fireworks: most workers are seeing their taxes go up and their take-home pay go down in 2013 as compared to last year.  Yes, in the midst of Democrats happy over higher tax rates for the “Rich” and Republican relief that defense cuts won’t kick in just yet, no seems to be too much worried that paychecks are getting smaller for just about anyone who works “On the books” in America.  A few particulars:

  • The employee portion of Social Security tax withholding goes up to 6.2% from 4.2% on January 1, 2013.  Employers have until February 15th to make the change from the previous rate, but the IRS bulletin on the topic instructs employers to make up any difference due from late adoption by March 31, 2013. See here for complete details:
  • Approximately 79.1% of all U.S. households make less than $100,000 and are therefore subject to the entire impact of the Social Security tax.  The income cutoff is now $113,700, to be precise.  It’s hard to know exactly how many of these households are retired or not in the workforce, but let’s say it is most of the households making less than $25,000 (25 percentage points of the 79.1% noted above). This still leaves just over 50% of all U.S. households, or +50 million families and other related groupings of people under one roof.
  • How much less will these households be taking home?  Assuming an average income of $50,000 – a decent approximation – that is $1,000/year.  Yes, that is 3 iPad minis, or one MacBook Air, or two nice flat screen TVs (or one awesome one), or an unlocked iPhone 6, or a washer/dryer combo…. Or.. Or… Or…
  • In reality, though, these households live largely paycheck to paycheck, so it pays to look at how much money they spend on a daily basis, out of pocket.  The Gallup organization has that math (see here: and the number is currently $61/day for households which earn less that $90,000/year.  Remove $1,000 (which works out to $2.74/day) and that is a 4.4% decline in spending power.  We’re really not talking about iPads or smart phones.  This feels more like eating out, family vacations, and extra school supplies or trips.  Discretionary items that may well define subjective assessments such as consumer confidence, in short.

  • Not to get overly political here, but it pays to remember that income levels by state skew quite strongly based on the “Red-Blue” divide.  As we show in the accompanying table, the average household income for states which sided with President Obama is $55,558/year.  The same math for the states which went for Governor Romney is $46,979/year, or 15% lower.  The Social Security tax is regressive – losing $500/year for someone making $25,000 probably hurts their well-being more than the $1,800 in lost income for a household earning $90,000.  Other credits may help the lower income household once they file their returns, but that doesn’t help much when the paycheck is smaller than you thought.

In summary, as much as the whole Joe Campbell “Myth” explanation may seem a bit squishy, I remained anchored to the thought that capital markets responded with emotion rather than logic in response to the “Cliff” debate.  I know we aren’t talking about huge numbers with respect to the Social Security tax issue – maybe 50 basis points of GDP growth this year.  So it isn’t like a huge swath of the S&P 500 is going to miss earnings because of this.  But companies which rely on this middle class consumer clearly face an uphill struggle in 2013.  And the same word – struggle – applies to the next battles in Washington: the Federal Debt Limit, spending cuts to replace the 2011 sequestration requirements, and the growth in medical expenses, just to name three.

If there is a bright side, it seems to be that capital markets think government is more “Zero” than “Hero,” and any resolution is greeted warmly, in the spirit of the Monomyth.  So we may well be on track for more “Relief rallies” if Washington can remain focused on action.  Now we just have to hope that there are enough boons to go around.  

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bnbdnb's picture

I just decided this year, it will be cheaper to settle my irs debts later (at 1/3 the original owed), after all other debts are gone.


IRS, kiss my ass.

Careless Whisper's picture

The Careless Whisper HIDDEN IN PLAIN VIEW News Update & Threadjacking


NYTimes Op-Ed: Retired Federal Agent Says Drug Cartels Don't Trick Banks Into Laundering Their Money - They Partner With Them

IvyMike's picture

(from the article)
"...shouldn’t take it for granted that the stock market’s positive take..."

I thought "TEH MARKET" knew everything.

Until it doesn't, right?

Bicycle Repairman's picture

No shit?  Really?  I knew this 30 years ago.  Thank you NYT and, no, I 'm not clicking on your site.

Snakeeyes's picture

What's the problem. Pork Barrel Harry, Obama and McConnell gave millions in corporate deductions while raising personal taxes. Crony capitalism (socialism) at its worse.

Grill Boss's picture

You are fully aware that the IRS has been proven in court (more than once) to have ZERO legal standing, authority, or jurisdiction to operate in the USA aren't you?

LawsofPhysics's picture

No spending cuts, and no new revenue?  Fail. Now about those treasury yields...

Stock Tips Investment's picture

The government is going to have to cut expenses. Very quickly see which sizes the additional revenue to be achieved with the agreement between Democrats and Republicans. However, the reduction in expenses is key to reducing the deficit. Meanwhile, it is likely that gold and other commodities continue rising in price.

LawsofPhysics's picture

Unfortunately, in order to actually do anything or create anything of real value you actually need real inputs, like commodities.

centerline's picture

Food prices starting to climb again too.  Same with insurance costs (all around).  The real hit to disposable income is going to be pretty noticeable.

kridkrid's picture

The squeeze is really just starting. This is going to hurt. For most, it will start out as "first world problems"... But will advance rapidly.

centerline's picture

I have to say that I was quite amazed at how 2012 played out.  Nothing really blew up in terms of cost of living.  But, we all know it was papered over and bills will eventually come due.

I have a really bad feeling lately. "Spidey senses" tingling that the "squeeze" is going to really kick in this year.

Tsar Pointless's picture

Our household is among those losing around $1,000 of income per year as of Tuesday.

All for a program from which neither of us will benefit, all for the benefit of those who increasingly become more conservative, more hateful of government, yet ever more reliant upon government for their very existence and subsistence.

Orwellian double-think, if you will.

Just like my uncle. A former postal carrier, now retired, living off his government-funded pension, government Social Security, free medical care from the VA (he is a VietNam veteran), and a whole host of other government programs. Yet, he hates the government, and is fearful that his guns will be taken from him.

Some people's kids.

LawsofPhysics's picture

"Yet, he hates the government, and is fearful that his guns will be taken from him." -


He is going to need those guns in order to kill his dinner when the government checks stop coming.  You might want to show a little more respect for those who served and survived.  They might know just a bit more about the ways of the world then your cry-baby ass.  Unless of course you are saying that people don't have a right to surive.  Care to clarify your position.  Shit, another walking contradiction from the "you owe me" generation.  No one owes you shit until you have created something of real value or sacraficed something of real value dumbass.

Tsar Pointless's picture

I've sacrificed so that corporations can continue raping and pillaging the people and land of this Earth, just as did my uncle.

We only did it in different ways.


LawsofPhysics's picture

You haven't sacraficed shit.  But you will soon enough.

Tsar Pointless's picture

Yeah? You promising or threatening me?

LawsofPhysics's picture

Obviously not a smart person (probably why you are unemployed, and for a long time I suspect), so let me spell it out for you.


It's a guarranty motherfucker.  Right now every monetary system in the world and all currencies are collapsing, period.  Fraud is the status quo, there have not been any real consequences for bad behavior for quite some time now.  The currency is backed by nothing but trust and with the exception of local alliances no one trusts anybody else right now.  The moral hazard remains and in order to address it, the elite power brokers would have to indict themselves.  Ain't going to happen, ergo everyone suffers.  Besides, common fucking sense  tells you that building an honest system requires hard work and sacrafice.  You claim that this is what you want, but clearly don't get it.  Troll harder loser.

Grill Boss's picture

You are losing because your country has been servicing a bankruptcy since 1933 (not 13) and the constitution was destroyed in 1781 with a few simple word changes


the country was designed to fail, not by the founding fathers but by those who truly hate your freedoms.... and we know who that is dont we?

q99x2's picture

The worse the economy the better the stock market. New normal for bankster thefts. Europe is ready to get physical and markets there are headed to the moon.

LawsofPhysics's picture

Exactly like every other currency collapse in the history of the world.

centerline's picture

Just waiting for the "Shazam" moment (reference to old ZH article that made everyone laugh).

That moment may be coming soon.  Is the S&P painting some big F-ing bull flag or going to tank H&S style?  Assuming any sort of TA is still valid, time wise we are about in position for a critical move.

AldoHux_IV's picture

Tax withholdings are now the new real measure of inflation or the result of letting the state decide prices for you thanks to the fed-- as long as cpi can be 'adjusted' everyone's spreadsheet looks good in the ivory tower.

Banks win again.  This is going to be a slow bleed before 'Murica realizes it and then it'll be too late.

scatterbrains's picture

Don't  the dems need boner (the ultimate teabagger)  to survive so the repubs will continue to lick their (dems) balls ? What happens if the repubs shit can his ass ?

SmoothCoolSmoke's picture

Blah, blah, blah.  Kicking the Can works....there is no recent  evidence to the contrary. 

odatruf's picture

Can we stop with the "X is dead; long live X" meme?

It's already worse than "now, more than ever" used to be.


CrashisOptimistic's picture

The Social Security tax is RACIAL more than it is regressive.

Minorities do not live as long as whites and will not collect these pensions.  Whites will, longer.  This tax increase on an increasingly minority workforce is to fund white retirements.

There is no way this injustice will be allowed to continue.

Steve in Greensboro's picture

You are right. Social Security redistributes wealth from black men to white women (due to their life expectancies).

But black men must want that, because they vote Dem. How is this an injustice if the victims vote to be victimized? Sounds like pure, unmixed justice to me.

kridkrid's picture

It's the same sort of injustice as dumb "conservative" white dopes enlisting in the military. They stand to lose their lives vs. an additional 2% of wage theft. It's the system vs. the people. We need to wake up and end the system.

LawsofPhysics's picture

How much money are black men putting in again?  

kridkrid's picture

Those who are not a head count/revenue stream for our corporate owned prison system, quite likely for their involvement in a victimless crime (though clearly not exclusively)... And those who have managed to escape the tyranny of the welfare state... Those people are paying 12.4% of their income in the form of a payroll tax, up from 10.4%.

LawsofPhysics's picture

Personally I have more black friends who aren't paying any taxes.  Most of whom are entrepreneurs, so to speak.

kridkrid's picture

Hell, if I had it to do over again, I might choose the same profession. Here's to hoping that your friends don't end up as a head count for Marriott.

LawsofPhysics's picture

Shit, the other half of my brothers are running the place.  There is more than one revolving door in society today.

kridkrid's picture

A sort of broken window fallacy, I guess. Politicians running on "three strikes and you're out" or some such tough on crime BS... Lobbied, of course, by Marriott and all of the other parasitic profiteers who generate revenue through the head count, most of whom are publicly traded companies firmly planted in most large pension holdings. Oh the tangled web. Back in the day, Anderson Consulting would say, you'll either be a partner here or a customer.

kridkrid's picture

It's both, really. This board tends to have more people who are apt to like the mythology provided by the Republican Party even when their actions completely contradict their words, but here is a fantastic example of the mythology of the left. They don't give a fock about poor people or minorities, no matter what the rhetoric might suggest. Fock anyone who considers himself or herself either a republican or a democrat. You are a sheep.

odatruf's picture

Unless they like the results they are getting and feel perfectly happy with it all.  In whih case, here's to hoping they share what they are smoking...


AldoHux_IV's picture

Long live the ponzi! Special interest needs to get their money from somebody and that somebody is you!

retiringteach's picture

gdp, purchasing power, etc etc--when will you sheeple learn that the key to the stock market is the stock market!--nothing else--and the market is headed higher-once the djia makes new highs-like russell-years of public outflow will reverse's picture

Tracy Browning, a 38-year-old Louisville woman, was jailed after she allegedly tried to purchase several iPads with a food stamp card, then fled to another location where she tried to make the same transaction.


koaj's picture

william dudley would be proud

rosiescenario's picture

Death by a Thousand Cuts....(or lack of cuts, as it were) drones (the worker bee type, that is) are going to pay a bit more for SSI, a bit more for state taxes, a bit more for federal, a bit more for gas, health insurance, car insurance, etc. To paraphrase Everet Dirkson, pretty soon we're talking real money... that willnot be spent on products, just on food and shelter.

H E D G E H O G's picture

Your article is just fine and dandy, except the Gorilla in the room is TRILLIONS OF DOLLARS IN DEBT FACT! This is not mythology, and you can write, spew, whine, hope, stick your head up your ass, look the other way, pray to God, get drunk, play the market, whatever! THIS DEBT IS THE BOTTOM LINE, AND NO BULLSHIT OR KICKING THE CAN IS GOING TO MAKE THAT FUCKING GORILLA DISAPPEAR.

CrashisOptimistic's picture

The plan is, somewhat, to just make it disappear.  When the Fed buys bonds and puts them in inventory they count as national debt.

But the Fed will never demand that the money they loaned the US Govt (buying those bonds is lending money) be repaid.  When the bond matures, they'll just trash the document and forget it.  

So only the non Fed portion of that debt need ever be repaid.  In fact, interest paid on those Fed held bonds is returned to Treasury.

It's all bullshit.  Don't you see this?

hooligan2009's picture

seems a total ban on straddling the divide is not restricted to the USA

Bicycle Repairman's picture

I love you Wall Street guys getting all hot and bothered by SS and the payroll tax.  You couldn't give a shit about J6P until you need his grassroots support or you want to steal his money.

The real theft is military spending.  Start cutting the MIC.

koaj's picture

and who do you think finances both sides of every war...

Tsar Pointless's picture

...and then runs commericals lauding the "sacrifices" made by "the great men and women of our military" for keeping us "free".

Yes, yes. Militarism and financialization go hand-in-hand, don't they?

You really CAN'T have one without the other.