One element of the President's budget is a sham.
While Kyle Bass notably remarks that pinpointing the end of a 70-year debt super-cycle is naive, the combination of the resurgence of nationalism (impacting trade with China) and the dreadful impact of the earthquake/tsunami (drastically changing Japan's supply chain) has secularly shifted Japan's trade balance for the worst at a time when the current account is already negative. "They are all in denial," Bass notes as the government has failed to deal with its problems over the last 20 years. Simply put, Japan needs a Schumpeterian 'creative destruction' moment instead of the constant rolling of debts and expanding of government balance sheets to paper over the cracks. The 'moment' feels like it is now, he notes, expanding that "JPY could hit 200," as they lose control; following two decades of volatility-smoothing, the chance of a disorderly collapse are high. Critically, he fears, "the social fabric of Japan will tear," as with one-third of the nations at retirement age, the fallout from the policies of Abe-Kuroda could cause them to "lose 30-50% of their life savings." What is perhaps even more concerning, he adds, "you are starting to see the central banks not trust each other." At a certain point in time, "nationalist interest takes over the global [G7] kumbaya," and that is occurring now. "The insidious nature of a runaway inflation is that it bankrupts the middle class... leading to social unrest globally."
As the fast-money flabber-mouths stare admiringly at the rise in nominal prices of Japanese (and the rest of the world ex-China) stock prices amid soaring sales of wheelbarrows following Kuroda's 'shock-and-awe' last night, it is Kyle Bass who brings these surrealists back to earth with some cold-hard-facting. Out of the gate Bass explains the massive significance of what the Japanese are embarking on, "they are essentially doubling the monetary base by the end of 2104." It is a "Giant Experiment," he warns, but when you are backed into a corner and your debts are north of 20 times your government tax revenue, "you're already insolvent." Simply put, Bass says they have to do something and they have to something big because they are "about to implode under the weight of their debt." For a sense of the scale of the BoJ's 'experimentation', Bass sums it up perfectly (and concerningly), "the BoJ is monetizing at a rate around 75% of the Fed on an economy that is one-third the size of the US!"
While immigration was pretty far down on the priority list at this time last year, recently the topic has taken a front seat in lawmakers’ chambers down in Washington. ConvergEs's Nick Colas notes that policymakers on both sides of ideological spectrum are establishing positions and recommendations for reform, and are familiarizing themselves with some of the lesser-known facts about immigration. In a nutshell, he explains: immigration is not all about border crossings from Mexico and undocumented workers. There are many more figures – and costs – associated with immigration, most of which have palpable and measurable impacts on the US economy. From GDP growth to the health of the housing market, immigration’s influences may not be widely known, but should be in order for policymakers and investors to make informed decisions.
"All this money printing, massive debt, and reckless deficit spending – and we have 2% inflation? I'm beginning to believe that either the deflationists are right, or the Fed's interventions are working." While a low CPI may be puzzling in the midst of massive, global currency abuse, there are three realities about inflation that convince us it's not only coming, but will catch an unsuspecting citizenry off guard. Let's take a look at why we're convinced inflation will be one of the next big catalysts for the gold price...
The most positive aspect of last night’s deal was that a deal was reached at all, and that some steps have been taken to counter moral hazard. However, overall, this is a bad deal for Cyprus and the Cypriot population. Cypriot GDP is likely to collapse in the wake of the deal with the possible capital controls hampering the functioning of the economy. The large loan from the eurozone will push debt up to unsustainable levels while the austerity accompanying it (along with the bank restructuring plan) will increase unemployment and cause social tension. There is a strong chance Cyprus could become a zombie economy – reliant on eurozone and central bank funding, with little hope of economic growth. Meanwhile, the country will remain at the edge of the single currency as tensions increase between members with Germany, the ECB and the IMF now looking intent on a more radical approach to the crisis. The eurozone took this one down to the wire. But late last night, after a week of intense back and forth negotiations, a deal was reached on the Cypriot bailout. Below we lay out the key points of the deal (the ones that are known, there are plenty of grey areas remaining) and our key reactions to the deal.
Can't get enough of Cyprus? Then here is yet another post-post-mortem from Goldman's Jernej Omahen, once more trying to put some very silvery lining on this particular mushroom cloud, and providing some useful facts in the process. "As part of its rescue package, Cyprus introduced a one-off tax on deposits. This “tax” can be viewed as both (1) a depositor bail-in, and/or (2) a wealth tax. Cyprus aims to capture €5.8 bn of tax revenue in this way, which compares to the total bailout package of €10 bn. In absolute terms, the amounts are low; regardless, the market focus on potential read-across will be high, in our view. The tax on depositors is setting a precedent, which is likely to have an impact beyond the immediate term, in our view. Resilience of, in particular, retail deposits was an important element of stability during crisis peaks (e.g., Spain). Post the Cyprus precedent, however, it is reasonable to expect that the deposit volatility in stressed sovereigns could rise, for two reasons: firstly, perceived risk of deposit bail-in will have increased; secondly (independent of failing bank issues), perceiving savings as a potential tax-base – for wealth taxes – is new."
The more time passes, the more skeletons emerge from the closet. So what’s the punishment for an industry that has literally destroyed countless communities across the American landscape? Trillions in taxpayer bailouts and even more control over our government. They say “it would’ve been much worse without the bailouts.” Tell that to Detroit...
Thirty cities at the center of the nation’s most populous metropolitan areas faced more than $192 billion in unpaid commitments for pensions and other retiree benefits, primarily health care, as of fiscal 2009. Pew notes that these cities had 74 percent of the money needed to fully fund their pension plans but only 7.4 percent of what was necessary to cover their retiree health care liabilities. Cities typically count on investment earnings from their pension funds to cover two-thirds of benefits. During the Great Recession, though, returns were lower than expected, and unfunded pension liabilities grew in nearly all of the cities. Even cities with well-funded systems struggled to keep up their yearly contributions as local tax revenue plummeted during the recession, and while pension assets have largely returned to pre-recession levels, they still must make up for years of lost growth, as liabilities continue to rise. So pressure for reforms is not expected to lessen. New York and Philadelphia may have the largest unfunded liability per household, but it is Chicago and Pittsburgh that have the lowest funding levels for pensions and the lowest retiree health care funding levels - while Washington D.C. tops the list in both. Benefits down, taxes up.
Hauser's law contends that Federal tax revenues rarely rise above 20% of GDP, regardless of where nominal tax rates are set. The implicit dynamic here is that when taxes exceed 20% of GDP, participants modify their behavior to lower their taxes. Corporations will shift operations overseas. Some high-wage earners will simply work less, reducing their income to lower tax brackets. Small business owners will decrease their compensation, cut back their workload, or simply bail out. Others will leave the high-tax market and slip into the cash/informal economy where the tax rate is zero. In a $15 trillion economy, this suggests the maximum Federal tax revenue that can realistically be collected is around $3 trillion. Currently, Federal tax revenues are around $2.5 trillion, and Federal spending is about $3.8 trillion. That leaves a $1.3 trillion deficit that is filled with borrowed money. Tradeoffs will have to be made. That is the essence of adulthood. Too bad we've become a nation of spoiled adolescents.
The political balance has changed substantially over the last year, from the cosy days when Merkel met Sarkozy and Monti kept the Italians in order. Germany faces full elections in September this year, and it will be difficult for Chancellor Merkel to win, given that her party, the Christian Democrats, did badly in the local German elections in January. The German voter has generally been more concerned with Germany’s relative economic success, bringing low unemployment, than the intractable problem of supporting other Eurozone nations. Given Merkel’s political difficulties, she is likely to be slow to subscribe Germany’s full commitment and can use the excuse that she can only be expected to match the other large contributors – who are by the way, France, Italy, and Spain. It is likely to be a political virtue for her to take a tougher line. It would therefore be a mistake to think that Germany is going to continue to fund profligate governments. Since the ECB has already created the precedent (quote from Mr Draghi: “Whatever it takes”), the ECB will have to end up creating the money required.
As Greece's painfully desperate fight to collect tax revenue, any tax revenue, using traditional methods meets failure after grotesque failure, driven by such unconventional stumbling blocks as running out of ink with which to print tax forms, striking tax collectors, and repossessed (or stolen) tax department computer equipment, the necessity to prove to Europe that Greece is doing something to fill the income side of its reformist ledger has forced it to turn to the glaringly illegal. "Greece’s General Secretariat for Information Systems has completed an application that will allow the state’s monitoring and collection mechanism to access the country’s banking system via an online connection and let the government have access to depositor bank accounts. The application, which will let the Finance Ministry troll through the accounts of all depositors suspected of tax evasion means online inspectors can scour through records of deposits, loans, credit card use and other data without permission from the account holder." What is troubling is that while this happens in the US on a daily basis, at least the NSA has to dig through data illegally, and can't use what it finds against citizens in court. In Greece, however, any trace of personal privacy in the insolvent state is now gone, and in a way that is made very public and clear to all citizens. The result will be an even greater hit to all forms of electronic spending (remember that all bulk cash transactions are prohibited), and a collapse in all economic transactions, leading to an even more acute depression, and an even greater need to yet another "bailout" from Europe (this one will be the last surely, as it will be after this it will be different).
Recent news about Federal plans to "help" manage private retirement accounts renewed our interest in the topic of capital controls. One example of capital control is to limit the amount of money that can be transferred out of the country; another is limiting the amount of cash that can be withdrawn from accounts; a third is the government mandates private capital must be invested in government bonds. Though presented as "helping" households, the real purpose of the power grab would be to enable the Federal government to borrow the nation's retirement accounts at near-zero rates of return. As things fall apart, Central States pursue all sorts of politically expedient measures to protect the State's power and the wealth of the political and financial Elites. Precedent won't matter; survival of the State and its Elites will trump every other consideration. All this raises an interesting question: what would America look like at $5000 an ounce gold?
And another AAA-club member quietly exits not with a bang but a whimper:
MOODY’S DOWNGRADES UK’S GOVERNMENT BOND RATING TO Aa1 FROM AAA
Someone must have clued Moody's on the fact that the UK is about to have its very own Goldman banker, which means consolidated debt/GDP will soon need four digits. In other news, every lawyer in the UK is now celebrating because come Monday Moody's will be sued to smithereens. Cable not happy as it tests 31 month lows, which however also explains why the Moody's action has another name: accelerated cable devaluation. Those who heeded our call to short Cable when Goldman's Mark Carney was appointed are now 1000 pips richer. Also, please sacrifice a lamb at the altar of Goldman: It's the polite thing to do.
One of the recurring memes of the now nearly 4 years old "bull market" (assuming the recession ended in June 2009 as the NBER has opined), is that corporate profits are soaring, and that despite recent weakness in Q4 earnings (profiled most recently here), have now surpassed 2007 highs on an "actual" basis. For purely optical, sell-side research purposes that is fine: after all one has to sell the myth that the US private sector has never been healthier which is why it has to immediately respond to demands that it not only repatriate the $1+ trillion in cash held overseas, but to hand it over to shareholders post-haste (see recent "sideshow" between David Einhorn and Apple). However, a problem emerges when trying to back this number into the inverse: or how much money the US government is receiving as a result of taxes levied on these supposedly record profits. The problem is that while back in the summer 2007, or when the last secular peak in corporate profitability hit, corporate taxes peaked at well over $30 billion per month based, the most recent such number shows corporate taxes barely scraping $20 billion per month!