Spend, Borrow, Tax

“In war, there are no unwounded soldiers.”

Jose Narosky

Spend, Borrow, Tax

Market Shadows Newsletter (11/12/12)

Included in this week's newsletter:



Event Horizons: Bailouts, Cliffs and a Country Divided

Traders aren’t liking the uncertainty of standing at the edge of a precipice, in the latest episode of the political saga Spend, Borrow, Tax.

Big Fat Greek Bailout Continues

The Greek Parliament voted to adopt the nation’s 2013 proposed budget, including the steep austerity cuts required for Greece to receive the next installment of its much needed bailout. 

The budget will save 13.5 billion euros over the next two years, raise the retirement age from 65 to 67, and cut pensions by 5% to 15%. It will also reduce salaries in the public sector by as much as 30%, eliminate bonuses, and change labor laws.

The Greek people are furious about the multiple rounds of belt-tightening, with cuts to pensions, pay, and jobs. Unemployment is over 25%. 

The country’s two largest trade unions urged members to protest the cuts and new plans to eliminate thousands of public sector jobs. As many as 70,000 people demonstrated outside the parliament in Athens, with people throwing Molotov cocktails and shouting anti-austerity slogans. Police fought back with tear gas. (Greek Parliament takes up ‘bailout’ budgetGreece battles to avert €5bn default)

While Parliament approved the budget, members of the Troika (the European Union, the European Central Bank and the International Monetary Fund) haven’t agreed on the release of the money.

On Monday, the Financial Times reported,

Greece is battling to raise funds to avoid defaulting on a €5bn debt repayment this week as international lenders remained deadlocked over how to reduce its overall debt even as Athens won parliamentary approval for its 2013 austerity budget.

The country’s debt management office has announced plans to cover the €5bn debt through a treasury bill auction on Tuesday, but Greek banks expected to buy the issue can only raise about €3.5bn of collateral acceptable to the European Central Bank, according to two senior Athens bankers…


The ECB has not given permission for Greece to maintain a temporary €17bn ceiling for T-bill issuance due to be reduced this month to €12bn, leaving the country without a financial safety net while it waits for a much-delayed €31.5bn aid payment from international lenders. (Greece battles to avert €5bn default)

Once Upon A Fiscal Cliff

Fast Money reported, "Two of the most influential market prognosticators today — Pimco’s Bill Gross and Goldman Sachs’s Jim O’Neill — both warned clients over the weekend of the perils of the coming “fiscal cliff,” when tax increases and spending cuts kick in at the end of the year..." (‘Fiscal Cliff’ Mess Is a ‘Grand Canyon’: Bill Gross)

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We predict a lot of handwringing and theatrics. Our politicians will strut and fret their hour upon the stage and then be heard no more, until the next time. Classic case of “a tale told by an idiot, full of sound and fury, signifying nothing.” (Macbeth) 

As Russ Winter of Winter Watch at Wall Street Examiner opines,

The opening positions of the actors in the fiscal cliff scam appear intractable and also to be much ado about nothing. The impact ($42 bn) of allowing expiration of the Bush tax cuts on those making over $250k is a spit in the ocean in comparison to the $3.6 trillion the government spends each year. Don’t misunderstand, I am not arguing that this restored tax shouldn’t be done as an element of sounder fiscal policy. I am simply suggesting it really doesn’t amount to a hill of beans.


Of course my theory all along is that this is a pretend game that carries out a facade that there are actually ‘two parties’ in Congress who are standing on some principles. That is not the case, so as this Kabuki Theater gets played out, remember the ultimate goal is to protect the looting interests of the kleptocratic oligarchs who really call the shots. Already, reference to a “small package”, or a “down payment” on a “deal” is becoming common. (A Fiscal Cliff Deal, Much Ado About Nothing)

Even if there is no final resolution during Congress’s lame duck session, there will be an eventual compromise that leaves no one happy. Then another debt ceiling drama will ensue.

The “cliff” consists of a series of tax and expenditure measures which have already been legislated to take effect on 1 January 2013, and which taken together would tighten fiscal policy by $502 billion in 2013, and $682 billion in 2014 (3.9 per cent of GDP). Legislation has to be amended if this is not going to take place, which is why both parties have the ability to block progress. Unless the House Republicans agree on a compromise with the Senate Democrats, and the President, this fiscal package will be automatically triggered. Furthermore, the federal debt ceiling needs to be increased in the next couple of months, which also gives the House Republicans the kind of blocking power they used in July 2011. (Anatomy of the US fiscal cliff)

As 2012 comes to an end, and the country fractures more deeply along party lines, consider these words:

The mood of the country continues to blacken. A simmering anger boils beneath the surface of an everyday façade of normalcy. The middle class majority is being squeezed in a vice, with the rich powerful plutocrats on Wall Street and in Washington DC stealing their hard earned net worth through financial scams, the gutting of our industrial base and a tax system designed to benefit those who write the laws on one side and the parasitic willfully ignorant underclass that is sustained only through the extraction of taxes from the working middle class on the other side. Our society has become a hunger games tournament, with the few benefitting while the many scramble to survive. The stench of class warfare is in the air. The generational resentment and rage is palatable as the Millenial generation has taken on a trillion dollars of student loan debt at the behest of the Federal government, Wall Street and older generations, only to graduate into a jobless economy. The generational contract has been broken, as the older generations will not or cannot leave the workforce due to their own financial missteps. Younger generations are being denied entry level positions, even as the older generations expect them to fund their retirements and healthcare. This presidential election will only exacerbate the anger, disappointment, bitterness and fury among the populace, no matter who wins. ~ Strauss & Howe, 1997.


Popularly Accepted Election-Related Expectations

By Paul Price

Many predictions about investor behavior have been widely broadcast. They have been spoken about with such frequency that they’ve become accepted as fact. I’d like to challenge a few of them here.

It is probably true that the federal income tax on dividends and capital gains will be higher in 2013 than it is currently.

With that in mind, Wednesday’s 313 point drop in the DJIA likely served to ingrain and reinforce people’s belief that the actions described below are sure to happen...

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