Between ECB head Draghi's comments and the endless money-printing by the Fed, no one dares short the market, even though the economic news is lackluster. We just keep buying the dips!
Thursday, January 10, 2013
About as expected! However, the trend appears to have turned modestly lower, since this is the fourth week in a row that claims have been higher than expected.
from Zero Hedge:
Initial claims came, saw and missed for the 4th week in a row, printing at 371K, on expectations of a decline from 372K to 365K. As happens at the end of every year when employers turn on the pink sheet machine, the not seasonally adjusted number soared from 490K to 552K in the week ending January 5, a difference to the seasonally adjusted print of 181K. This is to be expected. What was unexpected is that the last week print saw its first downward adjustment in what seems years (it actually is years), with the December 29 week claims number declining from 372K to 367K, probably as a result of all the year end guessing that goes on to assist the other guessing that goes into the seasonal adjustment guessing.
What a surprise! Despite that stocks were rising sharply this morning, reaching what appears to be a fresh five-year high for stocks, a revised Philly Fed survey shocked the financial markets back to reality. This is just one indicator, so it is likely it will once again be shrugged off as anecdotal, despite that there is a growing trend toward more economic ennui and slower global activity.
Today's chart thus far:
Tuesday, January 8, 2013
Monday, January 7, 2013
The first truth is that the current tax rates cannot support the promises made to middle-class Americans. The most unaffordable items in fiscal projections are Social Security for everyone and government-sponsored health care for the middle class. You cannot preserve these even with Draconian slashing of military, infrastructure, welfare, education, and other expenditures.
The second truth is that you cannot pay for the Life of Julia, or any vision of a cradle-to-grave welfare state, without massive and increasingly regressive middle-class taxes. The poor don't have the money to pay for a European-style welfare state, and the rich, rich as they are, don't have anywhere near enough.
Not only that, it's easy to tax middle-class assets and transactions — things like payrolls, sales, and real estate — but soaking the rich means taxing investments. Investments are complicated and can be restructured to minimize taxes. Also, investments are the lifeblood of economic growth. Raising significantly more taxes from the rich also requires higher marginal tax rates — and their rates are already quite high. High marginal rates distort the economy and yield less revenue than anticipated because they increase the rewards for legal and illegal tax avoidance.
That's not to say it's impossible to get more money from the rich, but it's tricky and past attempts have typically been less effective than forecast and often counterproductive. Moreover, even under the most optimistic assumptions, taxes on the rich — or taxes on businesses, financial transactions, or anything else aimed at the rich (and often hitting others) — will still not cover a large fraction of the costs of a European-style welfare state. Ask the Europeans — they’ve tried it all and failed.
Even under the most optimistic assumptions, taxes on the rich will still not cover a large fraction of the costs of a European-style welfare state.To be in our political center today, you have to deny both these truths and pretend that if we sharpen our pencils and make a bunch of wildly optimistic assumptions, we can close a few tax loopholes, cut some waste from spending, and maybe nudge upper-income tax rates up a little, and continue merrily on the same big-and-growing-bigger government path without unfortunate consequences. This is a “balanced approach,” as it ignores both mathematical truths equally, but the denial of clear reality means this approach is doomed to fail.
Surprisingly, many progressive pundits are moving away from their traditional complaint that America’s tax code is too regressive, favoring the rich. They are starting to tell us, albeit only after an election mainly contested on these issues, the truth: to fund the European-style social welfare state which they advocate, we must tax everyone more.
For example, Ezra Klein, blogging for the Washington Post on December 7th, , “The need for tax receipts to grow underscores the necessity of finding an efficient way to collect them. Experts say that should include tax reform and new tax sources that take the pressure off the income tax, such as a value added tax or a carbon tax.”
Klein is mild compared to Eduardo Porter, who in the New York Times on November 27th, “Many Americans may find this hard to believe, but the United States already has one of the most progressive tax systems in the developed world” and “Taxes on American households do more to redistribute resources and reduce inequality than the tax codes of most other rich nations.” Mr. Porter, it is shocking to see you argue in the New York Times that the United States is a progressive paragon! Those in the Occupy Wall Street movement must be surprised to learn that you, one of their standard-bearers, think the United States already does considerably more redistribution than Western Europe!
These pundits know the math. To achieve anything like the European-style entitlement state they advocate, we need to tax everyone a lot more, not just the 1 percent. Despite all the drum circles protesting the inequitable distribution of resources, the wealthy just don’t have enough. The middle class and even the poor must step up to carry more of the burden if this is our desired endgame.
In his November 27th op-ed, Porter also writes “The experience of many other developed countries suggests that paying for a government that could help the poor and the middle class cope in our brave new globalized world will require more money from the middle class itself,” and “Big-government social democracies, by contrast, rely on flatter taxes to finance their public spending.”
What we cannot have is the Life of Julia at no additional burden to 99 out of 100 of us.In a similar vein, Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and a former economist for Vice President Biden, writes, "It's perfectly reasonable for the White House to begin collecting more revenue from folks who have done by far the best in pretax terms." But wait a moment for it — he then adds, "But ultimately we can't raise the revenue we need only on the top 2 percent."
Note the use of “2 percent,” a number the president himself has begun using more often. It is a small but telling evolution from decrying the “1 percent.” One wonders if the Occupy Wall Street protestors have corrected their signs to read “We are the 98 percent”? Are those in the 98th percentile already saying “They came for the 1 percent and I said nothing…”? According to the more honest progressive pundits above, it will not be long until the 50th percentile is saying it too.
If we take the logic of a Porter or Klein or Bernstein seriously — and we should — their prescription for taxes is nearly the opposite of the president’s public stance. Let’s say what Porter and others are saying but in plain English (or, failing that, let’s just underline a lot).
If we are to redistribute like Europe, we must tax like Europe. The middle class must pay more taxes and they must pay a larger share of the tax burden. The president, in contrast, is vowing to raise taxes on only the rich. One wonders if President Obama would have won the election if he had warned voters that “to pay for Obamacare, stimulus spending, increased regulatory oversight, and the rest of the big government wish list I believe important, we need to raise the level and share of taxes paid by the middle class”? One also wonders why more progressive pundits were not as clear about their goals and the necessities pre-election as they are starting to be now.
The choice the country faces is simple. We can have big government and the Life of Julia (at least for a while, but that is another essay), with everyone paying through the nose and the middle-class share of taxes rising not falling, or we can return to the American tradition of limited government, with everyone paying a smaller burden to the state, with relatively limited services for, and relatively light taxes on, the middle class. What we cannot have is the Life of Julia at no additional burden to 99 out of 100 of us. Nobody, Left or Right, really thinks that math works, no matter what they may say in public.
Surprisingly, many progressive pundits are moving away from their traditional complaint that America’s tax code is too regressive, favoring the rich.So what happens if we continue down the current path, with perhaps some small amount of revenue raised from some additional taxes on the rich? Remember, the only way to finance a big European-style state is to have it paid for by massive taxation of everyone, mostly the middle class. Right now we are avoiding honest debate on this fact, perhaps because those desirous of this change know the middle class would rebel if it saw the future bill it will have to pay. Instead, large government benefits are being continued and increased, and still new ones introduced, with little accurate discussion of who will ultimately pay.
What happens historically when benefits are bestowed without a bill also coming due is that we get hooked on them. Then, even when they become disasters not worth their cost, people are terrified to change them, as giving something up is indeed quite frightening.
Of course, as a byproduct of this growth in the state, many of us believe we also suffer a terrific erosion of liberty, free-enterprise, and individual responsibility and initiative.
Finally, after we become fully addicted to the latest increase in big government, the bill will ultimately be presented to everyone including, and in all likelihood over-emphasizing, the middle class and the poor. The people who were promised they would be untouched will see the largest proportional hikes. That’s exactly what has happened in Europe. We have seen this movie before, but this time we don’t need subtitles.
In other words, if we told everyone the ultimate destination right now, the country would likely reject it. But if built up in this piecemeal manner with benefits up front and the bill presented later, it can become reality.
The way to boil the frog of freedom is slowly.
We may, with open eyes, choose the reassuring security of big government with a far larger safety and subsidy net and far higher taxes for all — by no means just the “rich” but in fact more so on the middle class — and likely the sclerotic growth and dependency of Europe. Or we may choose the opposite. But we deserve an honest debate about this critical issue. A debate missing from the last election.
Cliff Asness is managing and founding principal of AQR Capital Management.
As Congress and the President wallow in finger pointing and fiscal
gridlock, Federal Reserve Chairman Ben Bernanke plows ahead with his
plan to disguise the country's economic ills by carpet-bombing us with
freshly printed money. Aided and abetted by the gnomes in the Bureau of
Labor Statistics -- who are doing their best to convince us that
inflation remains at historic lows -- Ben has promised to conjure up $1 trillion a year out of thin air until unemployment returns to a politically acceptable 6.5 percent.
Where is all that new fiat currency going, and why haven't we seen it show up in double digit inflation? The answer should frighten you.
The narrative being promoted in Washington is that Helicopter Ben's money is being loaned to businesses so they can expand and hire more people. Oh yeah, and it's also supposed to finance cut-rate mortgages to help stabilize the housing market. Achieving both of these goals will supposedly goose up "aggregate demand," the magic elixir that purportedly makes economies grow. Mainstream journalists, who blithely call a reduction in the rate of growth of government spending a "budget cut," dutifully parrot the party line.
It's a great story except for one problem: There is no evidence it is true.
According to the astute number crunchers at Zero Hedge, total issuance of commercial loans since September of 2008 has gone down by $120 billion. Think about it -- who wants to lend money when the government artificially sets inflation-adjusted interest rates below zero? Spend two minutes in the real world and you can see the consequences for yourself. At a recent meeting between a local banker and a client of mine the banker complained that, "There are now 10 pecker-checkers for every pecker in the loan department!" Compliance paperwork has become so burdensome, and risk aversion so high, that only corporations that don't need loans can get them. As a result, small businesses, the classic engine for job growth, go begging while Fortune 500 companies park record levels of cash on the sidelines.
Yes, mortgage rates have hit rock bottom. But underwriting standards have gone through the roof. My wife and I -- she's a doctor; I'm a venture capitalist -- recently refinanced the mortgage on our condo. It took three months to get approval, despite the fact that the loan amount was for less than 30 percent of the condo's appraised value and we have perfect credit scores and no other debt -- and this only after we provided every bit of documentation short of proctology exams. What chance does a first-time home buyer have in a market like this?
So, where is Ben's money actually going? The data show that it is being stuffed onto the balance sheets of the Too-Big-To-Fail (TBTF) banks, some of which only became "banks" overnight when their brokerage businesses faced imminent collapse. Recapitalizing these "banks" after their housing market malinvestments and the crash of their derivatives casino -- the inevitable outcome of Alan Greenspan's money printing to fuel Fannie Mae's doomsday machine -- has been the principal goal of both the Bush and Obama administrations.
With the boundaries between Goldman Sachs, Treasury, the Fed and the administration virtually disappearing; the big banks' Democratic and Republican handmaidens running interference; and the media distracted while pursuing pissant stories about debit card fees, consumer protection rules, and shareholder gadfly proxy access; all is hunky dory in TBTF land.
But what happens to all that freshly printed money after it gets parked on bank balance sheets if it's not loaned to businesses and consumers? Perhaps we could sleep at night if it just sat there, as a cushion against the recession that lies ahead. But unfortunately, the "banks" appear to have flocked back to the derivatives casino, confident that as officially recognized TBTF institutions they are free to privatize gains, gorging on bonuses while the sun shines, knowing they can socialize their inevitable losses.
To see how much of your money they are playing with, take a look at the scariest economic chart of 2012.
If you think this makes the banks less vulnerable to shock, think again. Much of this balance sheet cash has been hypothecated in the repo market, laundered through the off-the-books shadow banking system. This allows the proprietary trading desks at these "banks" to use that cash as collateral to take out loans to gamble with. In a process called hyper-hypothecation, this pledged collateral gets pyramided, creating a ticking time bomb ready to go kablooey when the next panic comes around. (They don't call it gambling, they call it "hedging," which is a legitimate investment function, but I defy you or any regulator to define the difference.)
Remember JPMorgan's London Whale, the character that racked up $6.2 billion in trading losses before he was shown the door? Like cockroaches, you can expect more where he came from.
We have learned nothing. The Dodd-Frank bill enacted to make sure "this never happens again" has accomplished nothing. The Sarbanes-Oxley bill enacted after the last crisis to make sure "this never happens again" accomplished nothing.
Well, nothing except grind the wheels of legitimate commerce to a halt while crony capitalists with the right connections in Washington party like there's no tomorrow.
And who can blame them? Anyone who believes our innumerate Congress and the career civil servants who staff our regulatory agencies can outsmart the wizards of Wall Street is dreaming. These government buffoons couldn't catch Bernie Madoff even after someone shoved a roadmap to his fraud scheme in their hands, or find a way to prosecute Jon Corzine when he was caught red handed looting client accounts.
So buckle up for the next roller coaster plunge, followed by the inevitable rush in Washington to "do something," namely bail out the same banking potentates that trashed the economy last time. Naturally, this will require tiding the economy over by printing even more money -- all of which will explode into double digit inflation the moment key players realize that money at rest quickly evaporates if left at rest under an inflationary regime.
And when all of this comes to pass, like clockwork journalists and pundits will be sure to blame it on capitalism! As if real capitalism could exist when investors aren't obliged to bear the risk of their own losses. Foisting losses on taxpayers, then debauching the money supply to cover it up, is not capitalism. Alas, it has become business as usual.