Monthly Archives: February 2013

Sequester

I’ve mentioned once or twice…OK maybe a few times more how bad an idea it is to cut the Federal budget right now. Oh it can be cut and should, but not now while still climbing out of a recession. I even talked about how much less unemployment we would have right now if we had grown government (like during the Reagan and Bush administrations. There have been few believers. Unfortunate.

But now with sequestration a few days away, somebody is actually getting, and more importantly transmitting, the same message.  Not just anybody, let’s hear it for Fed Chairman Ben Bernanke. He deems it “significant headwind” From his comments yesterday:

    “The challenge for the Congress and the Administration is to put the federal budget on a sustainable long-run path that promotes economic growth and stability without unnecessarily impeding the current recovery.

 

Significant progress has been made recently toward reducing the federal budget deficit over the next few years. The projections released earlier this month by the Congressional Budget Office (CBO) indicate that, under current law, the federal deficit will narrow from 7 percent of GDP last year to 2-1/2 percent in fiscal year 2015. As a result, the federal debt held by the public (including that held by the Federal Reserve) is projected to remain roughly 75 percent of GDP through much of the current decade.

 

However, a substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery. The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise. A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO’s estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.”

 

“To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run. Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget.”

It’s getting less lonely over here.

“Fed News Sends DOW into a Dive”

Between the article itself and the MSN headline they’re trying to make news when there is none. You professionals should be able to do better than that. If you’re going to write about the market give me the facts. Knock off doing what all the computer algorithms are already trying to do i.e. create your own trading outcome.

Here’s the fact: the market went down today a total of 108.13 points Woo hoo, that is a whopping seven point seven tenths of just one percent.  Not even a single whole percent, certainly not news unless you’re in the business of trying to create some where there isn’t by using words like “concern”, “volatile”, and “slide”.  Hello, did anyone think QE would last forever? Nope, and neither did the market. Well except it seems MSN Money editors.

Low Taxes verses Economy

Taxes and the Economy

Congressional Research Service Report

We heard it over and over last year how low lower taxes stimulate the economy. Not so it turns out. Interesting research here called Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945. It doesn’t matter if we look at the marginal rates or long-term capital gains rate the hard data just doesn’t add up to creating anything good.Most interesting and controversial is that this Nonpartisan Tax Report Withdrawn After G.O.P. Protest, released not far ahead of November’s election by the Congressional Research Service was pulled following GOP pressure. Yes, it was unfortunately just before the election, and yes the verbiage is a bit off so go ahead and ignore the verbal summary, ignore the timing, in fact ignore anything at all that could by either party be considered partisan. Just take a look at the data from 1945 until now and you see a some compelling realities:

  • Lowering marginal tax rates does NOT increase economic activity nor impact the GDP.
  • Lowering capital gains rates does NOT increase economic activity nor impact the GDP.
  • Lowering marginal tax rates and/or capital gains tax rates does NOT increase saving and investment.
  • Lowering marginal tax rates and/or capital gains tax rates does NOT increase U.S productivity.
  • Lastly, lowering capital gains and/or marginal tax rates DOES make the wealthy wealthier and add to the significant and growing U.S income inequality.

In hindsight it is pretty clear to economists why there was party pressure to hide this report. Nearing the end of a hard fought, expensive campaign the facts here don’t just challenge but completely destroy the central tenant of conservative economic theory being put in front of voters, that reduced tax rates increase economic growth, increase saving and investment, and boost productivity (increase the economic pie).

Look at the data, in the end, lowering taxes on the wealthy just makes them wealthier, the rest of us see no impact. Surprise!

Financial Transactions Tax

Greg North has a great one here in his discussion of Why the U.S. Could Use a Financial Transaction Tax.  For years I have been frustrated with the sheer volume of computer driven, speculative and high frequency trading in the market today. I and others, believe it causes havoc within the “free” market where in so many ways it creates it’s own successes and failures. All we have to do is take a look at the average time a stock is held by investors (roughly just 22 seconds) to see trading today is far from what the market was created to accomplish; allow average people to make capital investments in business.

 

“In January, 11 European countries implemented a Financial Transaction Tax (FTT), which places a small tax on stocks, bonds, and other products traded in financial markets. They expect to raise billions of dollars in revenue, and there are signs the idea for a similar tax may be gaining traction in the United States. Senator Tom Harkin and Rep. Peter DeFazio are reviving their Wall Street Trading and Speculators Tax Act, which includes an FTT but died in committee in 2011.”

 

Read the post. I see this as a great way to reduce the impacts of speculative trade and achieve more stability in the market. Kind of what the Long Term Capital Gains Rates were conceived to do before being watered down. Fantastic idea.

 

What Inflation?

In a discussion the past few days an educated, knowledgeable, articulate friend, was professing the effects of Quantitative Easing (QE) on inflation. His position being QE is devaluing the US dollar and inflating prices for those on fixed income. Mine being it has not. Inflation occurs when demand exceeds supply, nothing more, nothing less. But in this case more importantly I simply have to ask; what inflation?

Inflation over the past few years, specifically since early 2009 when QE began, has been nearly zero. It actually dropped toward deflation in 09 then has hung in the lowest of single digits since. 2012 for example inflation ran just two decimal zero something percent. Oh how we would love to have seen that in the 70s verses that decade average over seven percent! So I have to ask again; what inflation?

    My friend went on to point out how several metals have gone up significantly since QE, how the price of heating oil has shot up along with fuel. All true of course, then Energy Transitionwent on to point out how the only heating product that has not risen in price is natural gas because of the improvements in technology making it more abundant. I believe he just made my point. Where oil demand is outpacing production, we have seen price inflation, where gas production has outpaced demand the price is neutral, even lower. Sure sounds like supply and demand to me.

Metals; of course have gone up. With the inflation mongers howling inflation due to QE for now nearing five years, a lot of wealth has migrated toward precious metals. Ah there is that pesky demand exceeding supply again with the price inflation. But again nothing to do with QE.

US Historic CPI Inflation

US Inflation

So back to the point; what inflation? We can slice this a couple ways first by looking at annual inflation data over the past decade. Yup, miniscule.

Financial verses Trade Weighted Dollar

US Trade Weighted Dollar

Or we can look at the dollar value relative to other currencies. Well nothing there either. We can however see big drops beginning in the 80s and again in 01-03. No QE going on then.

So where is the argument coming from? Well a lot of mainstream “experts” have been yelling about inflation fears as I mentioned earlier for about five years. I’m really torn as to whether this is just big dollar politics where if you yell loud enough and long enough people will just believe it on faith. Or whether the inflation mongers had once studied blues progressions. I remember one of my blues instructors telling me “don’t worry if you hit a wrong note…just hold it until it gets right.” Meanwhile; show me the inflation.