Category Archives: Economy and Meltdown

D.C. Finalizing Plan for Assault on Metro NYC


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Bloomberg has a story today that has special meaning for me (Link):

 

 

Background

 

– The USA has a tax that very few pay. It is called the AMT (Alternative Minimum Tax).

 

– AMT became law in 1969 when it was (shockingly) revealed that (get this):

 

155 people earned more than $200,000 and legally didn’t pay any taxes.

What is it today? 15Mn?

 

– AMT (functionally) eliminates most tax deductions (the mortgage deduction is excluded).

 

– AMT is not linked to inflation. As a result, the threshold for being subject to this tax has fallen every year.

 

– If applied to all taxpayer today, the AMT would clobber the middle class. It would change the way charities and churches are funded. It would discourage people from having children. It would discourage home ownership. It would crush people who live in states where there is an income tax.

 

-Congress is well aware of the problems with AMT. Every year for the last ten they have rolled over a "patch". The yearly exemption reads (sort of):

 

If you didn’t pay AMT last year, you don’t have to pay this year either! Vote for us early and often!

 

The language from Congress could also be read:

 

If you were unlucky enough to have been socked with AMT last year, we’re going to stick it to you again. Sucker!

 

Note: I’m one of the suckers. I’ve been paying this for the last 15 years. It has added up to big bucks.

 

Consider the Fiscal Cliff as a Wordle:

 

 

AMT sticks out. It is the basis upon which some compromise could be reached to avoid the most significant consequences of falling off of that cliff. A few examples of why AMT could become negotiating bait.

 

-If applied as the law is now written, AMT would raise a ton of revenue ($1Trillion++ over ten years). But politicians could say that “they” did not “raise” taxes, or create “new” taxes.

 

-The cost of AMT rises with income. It is a “progressive” tax. Democrats like that.

 

-Republicans want to broaden the base. AMT accomplishes that as well.

 

-Everyone wants to eliminate deductions (a stealth tax increase). AMT most certainly accomplishes that.

 

-AMT minimizes petty fraud of the IRS.

 

Note: How many people create an extra thousand or two of deductions out of thin air every year? Answer: Many. The IRS has no resources to find out. But with AMT, there are no deductions at all. Problem solved.

 

So who is going to get hit with AMT? A lot of folks is the answer. In 2010 only 4.4 Mn souls got hit with AMT. If Congress does not vote on another patch, that number will jump to 33Mn in 2013 (750% increase!).

 

Bye bye child deduction. You can’t deduct those charitable contribution you make. But by far the worst hit comes from the loss of deductions for local property taxes and income taxes paid to the state. The question of who will get hit the worst narrows down to the states that have high income taxes and also ridiculously high property taxes. Numbers 1, 2 and 3 on D.C.'s target list:

 

New York

Connecticut

New Jersey

 

The Big Apple is in the middle, and will suffer the most. Not only do NYers pay their state 8%, but they have to kick in another 2% for the privilege of living in town. Very big money is involved. All of these deductions could be lost on New Year’s Eve. Ten million people in Metro NY could get hit. It would be like Congress dropping stink bombs on Times Square.

Note. I absolutely promise that you come to hate the AMT. It will cost you, but worse, it will influence your decisions as to where you live, how much you give, how you invest, whether you should have a child and a whole bunch of other things. Oh, and you can forget about inventing those charitable expenses every year (and sweating an audit).

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David Rosenberg's New Normal: "The Economy Does Not Drive The Markets Any More"


Bill Gross may be credited with inventing the term ‘the New Normal‘, although his recommendation to purchase gold above all other asset classes, something which only fringe blogs such as this one have been saying is the best trade (in terms of return, Sharpe Ratio, and the ability to sleep soundly) for the past three and a half years, he is sure to be increasingly ostracized by the establishment, and told to take all his newfangled idioms with him in his exile to less than serious people land. Which takes us to David Rosenberg, who today revisits his own definition of the New Normal. And it, too, is just as applicable as that of the Pimco boss: “The new normal is that the economy doesn’t drive markets any more.” Short and sweet, although it also is up for debate whether the economy ever drove the markets in the first place. But that would open up a whole new conspiratorial can of worms, and is a discussion best saved for after Ben Bernanke decides to save the “housing market” by buying more hundreds of billions in MBS and lowering mortgage yields further, even though mortgage rates already are at record lows (something that mortgage applications apparently couldn’t care less about as we showed last week), while “avoiding” to do everything in his power to boost the S&P, which recently was at 5 year highs, and certainly “avoiding” to listen to Chuck Schumer telling him to do his CTRL+P job, and “get to work” guaranteeing Schumer’s donors have another whopper of a bonus season.

From Gluskin Sheff:

THE NEW NORMAL REVISITED

Markets are going in the opposite direction of the world economy if you’re positioned fundamentally, you’re positioned against these clowns.

John Burbank, Passport Capital, ECB Bazooka Faces Pefipherai Tests. page 12 of the weekend FT

What’s extraordinary is that the euro is rallying almost because the ultimate taboo of central banking is being violated, the proactive financing of fiscal imbalances through the central bank balance sheet Before this all other QE was to further monetary policy when the interest rate lever had been exhausted. Here it’s financing a government deficit because the market won’t is the ECB going to be a fiscal inquisitor or enabler?

Louis Bacon. Moore Capital (same article)

Indeed, the data and the markets have gone their separate ways just about everywhere on the planet because of this ever-rising threat of additional policy stimulus (see Optimism over Central Banks Lifts Risky Assets on page 11 of the weekend FT). Shorts are getting squeezed as a result. Wednesday is a key day from that perspective … the consensus is now widespread that the Fed will announce a $600 billion QE extension, likely in MBS.

Who would have thought that in a week that saw such an awful pair of data from two critical reports like ISM and nonfarm payrolls that the S&P 500 would have managed to rally 2_2% and the Nasdaq hit a new 12-year high? Not even the main earnings development, Intel cutting its sales guidance, could elicit much of a market reaction.

Page M3 of Barron’s (The Trader) cites three reasons for the extended bullish sentiment last week_

1.    An electrifying speech by former President Bill Clinton.

2.    Mario Draghi pronounced the euro to be “irreversible- and laid out a plan to stabilize beleaguered euro-zone nations_

3.    China did its part for the markets Friday when it announced a plan to spend $157 billion on 60 different infrastructi ire projects.
Clinton. Draghi. China.

The horrible employment data? That showed up in the tenth paragraph (imagine zero job growth outside of three sectors- leisure, professional services and health/education).

The new normal is that the economy doesn’t drive markets any more.

The correlations today are tighter with yield spreads between Spain and Germany (the overall positive tone globally coincided with Spanish 10-year yields sliding below 6% for the first time since May alongside a 20 basis point jump in German bund yields … this has become the pulse for financial market confidence in general). In fact, we ran correlations between daily changes in 10-year spreads and in the S&P 500 level and found that the correlation has gone from -13% from 2000-2011 to -33% since 2011 (2011 to now, meaning widening in spreads is associated with negative returns on the S&P500 and that inverse relationship has been magnified nearly three-fold in the past two years).

The Historic Demise Of The Ever-Shrinking Dollar: An Infographic


The almighty Dollar is looking less mighty these days. By almost every measure, the purchasing power of the US Dollar is in precipitous decline. The following infographic, whose contents should be well-known to our readers, visualizes the sad state of affairs that the average American seems to have ignored for far too long. And since the whole world is now engaged in the 4th year of all out currency debasement one can safely channel Lester Burnham and say it’s “all downhill from here.”

Shrinking Dollar Infographic

Infographic By Wholesale Gold Group

Guest Post: Matthew Stein Asks "How Prepared Are You?"


Submitted by Adam Taggart of Peak Prosperity,

During the height of the ‘Goldilocks economy’ of the mid-1990s, Mat Stein wrote When Technology Fails: A Manual for Self-Reliance, Sustainability, and Surviving the Long Emergency [9], a master compendium of do-it-yourself preparation skills.

Fast-forward to today’s Great Recession, drought-stricken, $100+ oil, post-Katrina, post-Fukushima world — many are realizing the prudence of taking basic precautionary steps to reduce their vulnerability to whatever the future may bring. Whether you’re concerned about the fallout from a breakdown of today’s weakened global economy, or simply want to be better able to deal with the aftermath of a natural disaster if you live in an earthquake/hurricane/flood/wildfire/tornado-prone part of the world, the personal resiliency measures Mat recommends make sense for almost everyone to consider.

In this interview, Mat begins with his universal advice for developing basic preparedness — a 72-hour kit covering the basics needs for living, an emergency plan for your family, lining up local and out-of-town contacts, etc. — and discusses specifics on what gear to procure and steps to take in unexpected emergencies. For more protracted periods without access to central services, many more situations are covered in his books [10] and at his website [11].

It’s important to note that Mat isn’t a doomer bent on fanning fears of a zombie apocalypse (though those concerned about social collapse will find much utility in his work). Like Chris, he believes that our current fossil fuel-driven, hyper-consumptive, and over-leveraged way of life is not sustainable. So before the unsustainable, by definition, stops – it’s best to invest now in developing the skills and habits that will serve us in this new future;  one sure to place a higher premium on self-reliance.

On the Rule of Threes

The Rule of Threes give you an indication of, in a crisis time, where your energies really should lie.

The Rule of Threes basically says:

  • If you’ve got 3 seconds without blood flow, meaning a heart attack or critical injury, then without blood flow to the brain in 3 seconds you pass out.
  • If you have 3 minutes without oxygen flow — either you aren’t breathing or you don’t have access to oxygen — you’re out.
  • If you have 3 hours without proper shelter or clothing in extreme weather – extreme heat or extreme cold, you get hypothermic or hyperthermic — you start to die or lose your ability to think and function.
  • If you have 3 days without water and you have to be physically active and it is fairly hot outside, then people start to die. Water is extremely critical.
  • Most people in America could live at least 3 weeks — and many of us far longer than that — without food. You may not be happy. You may not feel good. You might not have a lot of energy. You could do it.

On the scale of things, that gives you an immediate priority list of what things you must address and deal with. Obviously the life-threatening things have to be dealt with first.

On the Approach to Developing Resilience

There are three big buckets of preparedness. There is stuff you have. There is stuff you know. There are the skills and things you can do. This is also including your mindset.

The most important is the skill set, including the mindset. You take that with you wherever you go.

 

A lot of people have plenty of money. By all means, gather stuff. Gather supplies. Store food. Have some beans, Band-Aids and bullets — the three B’s. Beans means your food and supplies. Band-Aids means medical skills and medical knowledge, medical supplies. Bullets means the ability to protect yourself. Again, that is not really my bag, but it’s a necessary evil.

 

Get the stuff. Even if you are not really great at using some of these things, you can trade. You can barter and you can share. You can team up with people. The lone wolf in a collapse situation will probably not do very well, unless he is super-MacGyver. Someone who is meaner, tougher and better organized will come along and take all his cool stuff away from him. It is really in groups that people will do better. Think medieval times, castles, villages and groups. There was safety in numbers. People have skills and talents. It really takes a village to pull through.

 

Think about your strengths. Naturally if you can develop all three areas, great. If not, if you are stronger in one, focus on that. If you do not have money, focus on your skill set. If you are likeable and get along well, if you have great skills and talents, then you will probably manage pretty well. Maybe you are older and you are not very strong you cannot do much. If you have good financial reserves, then you can stock up on things. You will be able to team up with a whole bunch of people. They will be thankful and grateful for you, if and when that day comes when that stuff is needed.

Click the play button below to listen to Chris’ interview with Mat Stein (59m:45s):

Click here to read the full transcript

Is The Fed Losing Faith… In Itself?


The cracks in the Fed’s narcissism started to show at Jackson Hole, where Bernanke’s speech did nothing for the market; and as the FT points out, the biggest worry on display was whether these bureaucrats, sitting at the heart of every mature economy, still have the power to influence demand. Lurking behind many debates was this question: if central bank policies are so omnipotent effective, why is the global economy not growing faster? Everyone’s favorite honest-dwarf Fed Governor, James Bullard, summarized perfectly:

“I am a little – maybe more than a little bit – worried about the future of central banking. We’ve constantly felt that there would be light at the end of the tunnel and there’d be an opportunity to normalize but it’s not really happening so far.”

 

What I’m worried about is this creeping politicization.”

With monetary financing of governments on the increase (unconditionally by the Fed and conditionally by the ECB), it is clear that more radical options are increasingly mainstream as the textbook is not providing the answers.

 

Via The FT: Not So Different This Time

 

There are a few possible reasons why repeated rounds of central bank communication and quantitative easing, as the policy of buying long-dated assets in an effort to drive down long-term interest rates is known, have not brought about a strong recovery.

 

One is that something structural has changed to hold back growth. Speaking from the floor in Wyoming, Donald Kohn, another former Fed vice-chair now at the Brookings Institution, raised the possibility of “something deeper going on”, perhaps related to savings behaviour or the changed distribution of income between labour and capital.

 

Another is that the tools work, even if current conditions blunt their effect. If there are new headwinds, then the answer is to use them more aggressively. That is the mainstream view among central bankers.

 

“A balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks,” said Ben Bernanke, the Fed chairman, in his remarks at Jackson Hole.

 

A third possibility is perhaps the most alarming for central bankers such as Mr Bernanke, who have staked their reputations on successive rounds of quantitative easing: that it simply does not work.

 

In his presentation at Jackson Hole, Columbia University professor Michael Woodford presented evidence that, to the extent asset purchases have lowered long-term interest rates in the US, their effect was indirect. People saw the purchases as a signal that short-term interest rates will stay lower for longer, he argued.

 

That paper gave the assembled central bankers some food for thought, but will have little bearing on their immediate policy choices.

Woodford’s paper (page 83-86 of most note):

mw

 

If the Fed itself is admitting it is becoming irrelevant and obsolete, then perhaps regimes are changing.