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!
Whether you're aware of it or not, a great battle is being waged around us. It is a war of two opposing narratives: the future of our economy and our standard of living. The dominant story, championed by flotillas of press releases and parading talking heads, tells an inspiring tale of recovery and return to growth. The other side, less visible but with a full armament of high-caliber data, tells a very different story. One of growing instability, downside risk, and inequality. As different as they are in substance, they both share one fundamental prediction – and this is why you should care: This battle is about to break. And when it does, one side will turn out to be much more 'right' than the other. The time for action has arrived. To position yourself in the direction of the break you think is most likely to happen. It's time to choose a side.
The current government stance on Marijuana and Online/Casino Gaming is making their position from a legal standpoint look completely arbitrary and lacking in credibility.
It looks like what may be good for the environment is actually bad news for the government.
House Votes On Debt Ceiling Suspension Wednesday As Pelosi Calls It "Gimmick Unworthy Of Challenges We Face"Submitted by Tyler Durden on 01/21/2013 12:35 -0500
While it is not news that the GOP has proposed a temporary debt ceiling extension that would suspend the provisions of the debt ceiling target until May 19, as was reported last week, however which would demand that the Senate do something unthinkable, and something it has not done for 4 years, namely pass a budget by April 15, it is news that as The Hill reports, the vote to suspend the debt ceiling in the House will take place "as soon as Wednesday." From The Hill: "While past measures to address the debt limit have simply increased the borrowing cap, the House bill would actually suspend the debt limit for three months. Then, on May 19, the debt limit would be automatically increased from $16.4 trillion to accommodate whatever additional borrowing the Treasury had done during that time frame." As we explained last week, this is merely a plan to shift fiscal (ir)responsibility into the Democrat camp, as it is virtually impossible that America can have a budget now or ever again. After all with $1 trillion deficits as far as the eye can see, the possibility to bluster and claim one is fiscally responsible while demanding $4 trillion in debt until 2016, will hardly fool the majority of the people any more of the time. Sure enough, Pelosi's response has made it quite clear this entire plan is DOA: "the proposed three-month debt- limit increase does not relieve the uncertainty faced by small businesses, the markets and the middle class. This is a gimmick unworthy of the challenges we face.”
The hyper-correlation of Japanese stocks (Bass - The people that buying Japanese stocks, are picking up a dime in front of a bulldozer) and the JPY have led many to believe that Abe's miracle promise will be just the ticket to bring the nation's two-decade slump to an end - a 2% inflation target is all you need. However, in a brief CNBC interview, Kyle Bass explains that not only are 99.9% of people wrong about the crisis (explaining the critical aspect of the abrupt turn of twenty years of the 'procylicality of thought' - that deflation is the norm), but Abe's actions have actually brought forward the date of the "detonation of Japan's Debt Time Bomb. Bass goes on to discuss the US Housing stabilization, European stress, and China's economic opacity (and tensions with Japan), but leaves us with the clear and present danger in Japan that the clock has started on the qualitative shift in participants' minds that the situation is untenable (signs are already among the elite with recent JPY-extricating M&A deals) and "All of the components for this [bomb] to go off 'all of a sudden' are in place." Must watch.
After witnessing the fighting of undeclared never ending wars, passage of freedom destroying legislation like the Patriot Act & NDAA, approval of pork barrel spending to the tune of hundreds of billions, rule by Executive Order, using ZIRP to extract hundreds of billions from senior citizen savers and give it to criminal Wall Street banks, forcing the American people at gunpoint to replenish the Wall Street banks with $700 billion after they had committed the greatest financial fraud in history, and a continuing trampling of the U.S. Constitution, the American people continue to remain willfully ignorant of the truth. The American Dream is dead. We’ve allowed a rich, privileged, elite few to achieve hegemony over our economic and political system with their control of the media and manipulation of our financial markets. They will collapse the country because they will never be satisfied with the amount of wealth and power they’ve accumulated. Their voracious greed will be their downfall.