Category Archives: Economy and Meltdown

Guest Post: More Lies About Your Taxes…


Via Simon Black of Sovereign Man blog,

In 1936, the US government began circulating a series of pamphlets to explain its brand new Social Security program, plus the associated taxes. Initially, the Social Security tax was set at 2%. The government promised it would rise to 3% in 1949, with no additional increases EVER:

“[F]inally, beginning in 1949. . . you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.”

In 1949, the tax rose to 3% as scheduled. But it only took five years for the government to break its promise. The tax rose to 4% in 1954, 4.5% in 1957, 5% in 1959… and continued to rise for decades. On January 1st it will be 12.4%.

Politicians routinely make bold promises about tax policy… and they almost always end up being lies. Raising taxes, i.e. plundering the wealth of citizens, is one of the oldest tactics in the playbook for insolvent governments, and you can be 100% certain that your taxes will increase despite any promises to the contrary.

Perhaps most dangerously, politicians fail to understand that raising tax rates does NOT actually increase government tax revenue.

In the US, for example, government tax revenue has consistently been 17.7% of GDP since the end of World War II, plus/minus a very tight band. Similarly, the British government has consistently collected 35% of GDP in tax revenue.

Yet over the decades, tax rates have been all over the board… from 0% to over 90%! Plus variations in corporate profits tax, payroll tax, estate tax, capital gains tax, dividend tax, and (for the Brits) VAT.

Rates go up, rates go down… it doesn’t affect overall government tax revenue one bit. Despite the obvious facts, though, politicians keep raising tax rates.

On January 1, 2013, the US government will impose what my tax attorney calls the biggest tax increase in the history of the world. And some of the rate increases are simply extraordinary.

The estate tax exemption, for instance, is being slashed by EIGHTY PERCENT! And the amount that the Obama administration will tax the rest of your estate will increase to a whopping 55%!

Moreover, dividend tax rates are set to rise from 15% to as high as 43.4%. This affects not only US taxpayers, but everyone on the planet who invests in the US stock market.

Remember Finance 101– the price of a stock is theoretically the present value of discounted future cash flows. In English, this means that share prices should rise and fall based on the market’s expectations about future earnings… and over the long run, future dividends.

As a result of this tax policy, many investors who own shares in US companies will now see their after-tax dividends slashed by 33%. And since their investment returns are falling so dramatically, it stands to reason that the investments themselves become less valuable.

This is putting a lot of downward pressure on stock prices, affecting almost everyone who currently owns US shares– pension funds and retirement accounts, rich and middle class, US and non-US citizens alike. It’s as if the US government is hanging a sign over the country saying “PLEASE DO NOT INVEST HERE.” It’s genius.

This is the tip of the iceberg. Taxes will keep rising. Investment returns will be destroyed. Any incentive to start a business will be destroyed. Any benefit to your heirs for what you have worked your entire life to pass on will be destroyed.

All of this because a handful of morally bankrupt individuals who run financially bankrupt governments fail to understand simple truths about tax policy.

Bear this in mind over the next few weeks, because many new taxes will take effect on January 1st, and it’s imperative to take defensive action first. I strongly recommend consulting with your tax advisor as soon as possible.

Citi Has First Reaction To Moody's Downgrade: Not Surprising But More EURUSD Downside


From Citi’s Steven Englander:

Moody’s downgrades France to Aa1 from Aaa — negative outlook

Moody’s cited  deteriorating economic prospects, loss of competitiveness, structural issues and uncertain resilience to negative shocks. They also cite France’s funding costs (even though borrowing rates are close to record lows.)  On the negative outlook, Moody’s says “Moody’s would downgrade France’s government debt rating further in the event of additional material deterioration in the country’s economic prospects or difficulties in implementing reform. Substantial economic and financial shocks stemming from the euro area debt crisis would also exert further downward pressure on France’s rating.”  The comments are fairly general, as with the US downgrade last year. If anything the emphasis on the deteriorating growth picture may add some pressure for the ECB to ease but with france 2yr yields at 11bps, its growth prospects would probably benefit more from an easing of sovereign concerns in the peripherals than from a cut in ECB policy rates.

Moody’s alsdo reminds that “Moody’s currently also holds negative outlooks on those Aaa-rated euro area sovereigns whose balance sheets are expected to bear the main financial burden of support via the operations of the EFSF, the ESM and the ECB. Apart from France, these countries comprise Germany, the Netherlands and Austria.”  So the French downgrade may presage others to come

As with the US downgrade last year, little of what they cite is new and the downgrade reflects a reality that has probably long applied to France and applies to a number of the remaining Aaa countries as well. At today’s 90, France’s CDS was trading a little higher than  Poland and Estonia and a little below Qatar, Abu Dhabi and Belgium. The 10yr spread versus Germany is in the range of the last three months, and close to where it was in August 2011 before Spain became a major issue.

With EUR now at 1.2773 versus 1.2816 just before the announcement there is probably more downside till the kneejerk reaction is out of the way. But on the whole it seems likely that this more reflects an already existing reality than new information for the market so the downside should be relatively limited, and nothing that could not be cured by an aggressive Fed indication on balance sheet expansion.

Where Will S&P Futures Re-Open?


It seems the bond market was onto something today in its lack of exuberance. Following the after-hours FrAAnce downgrade, which very conveniently happened 2 minutes after the ES quiet period started, EURUSD has tumbled giving the day-session’s gains back and retraced back to where Treasuries ended the day. This would infer S&P futures open down notably – around 1370-75 (note 1377 was closing VWAP and may be support).

 

 

Chart: Bloomberg

Facebook Does The Reverse Gravity Thing, Defies Logic? No, Actually It's Quite Logical…


A couple of weeks ago after Facebook reported, I posted Hey Muppets, Only Another 100% Climb In Share Price To Go Before You Break Even With MS/GS/FB Investment Advice. You see, I warned about FB a half of a year before the IPO (reference the FB IPO Analysis & Valuation Note – update with per share valuation released exactly 5 months ago on 05/21/2012 (click here to subscribe)) stating that this thing was coming to market at multiples of a realistic valuation. So, what did Facebook’s bankers do? They raised the offering price even more. Makes sense doesn’t it?

Well, it makes more sense than the lock-up of hundreds of millions of shares ending, flooding the market with excess supply and the price of the stock…. increases!!!

Well, there may be a logical reason for this. By now, the more astute early investors in Facebook either read my analysis or somehow have come up with similar conclusions independently. That being the case, these guys had massive unrealized capital gains and a strong incentive to preserve them. Thus, they did what every hedge fund should do but what so little ever seem to do. What is that you ask? They hedged. I would assume that as soon as FB shares became available for short and/or puts started trading, these guys competed with me to get short in order to lock in whatever gains they still had left. That being the case, once the lock-up period expired, and actual sales occurred it was offset (and possibly then some) by the supportive buying created by the short position covering.

Of course, this is just a theory, but its a plausible one. Only time will tell if it holds water, for if the upward price pressure was cause by short covering, it will be over by mid-week and we should see a marginal decline.

I also happened to do the same on the Max Kesier show…

Subscribers who haven’t refreshed their viewing of our Facebook research should do so now – (subscription only) FaceBook IPO & Valuation Note Update. Pro and instititional subscribers are welcome to peruse the downloadable Facebook Valuation Model, allowing you to input your own assumptions in the very unlikely event you may not agree 180% with me 🙂

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Additional Facebook analysis, valuationa and commentary.

On Max Keiser, go to the 13:55 marker for more on Facebook…

One Less In The AAA Club: Moody's Downgrades FrAAnce From AAA To Aa1 – Full Text


After hours shots fired, with Moody’s hitting the long overdue one notch gong on France:

  • MOODY’S DOWNGRADES FRANCE’S GOVT BOND RATING TO Aa1 FROM Aaa
     
  • FRANCE MAINTAINS NEGATIVE OUTLOOK BY MOODY’S

Euro tumbling. In other news, UK: AAA/Aaa; France: AA+/Aa1… Let the flame wars begin

From the release:

Moody’s decision to downgrade France’s rating and maintain the negative outlook reflects the following key interrelated factors:
 
1.) France’s long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labour, goods and service markets.
 
2.) France’s fiscal outlook is uncertain as a result of its deteriorating economic prospects, both in the short term due to subdued domestic and external demand, and in the longer term due to the structural rigidities noted above.
 
3.) The predictability of France’s resilience to future euro area shocks is diminishing in view of the rising risks to economic growth, fiscal performance and cost of funding. France’s exposure to peripheral Europe through its trade linkages and its banking system is disproportionately large, and its contingent obligations to support other euro area members have been increasing. Moreover, unlike other non-euro area sovereigns that carry similarly high ratings, France does not have access to a national central bank for the financing of its debt in the event of a market disruption.

 

RATINGS RATIONALE

The first driver underlying Moody’s one-notch downgrade of France’s sovereign rating is the risk to economic growth, and therefore to the government’s finances, posed by the country’s persistent structural economic challenges. These include the rigidities in labour and services markets, and low levels of innovation, which continue to drive France’s gradual but sustained loss of competitiveness and the gradual erosion of its export-oriented industrial base.

 The rise in France’s real effective exchange rate in recent years contributes to this erosion of competitiveness, in particular relative to Germany, the UK and the US. The challenge of restoring price-competitiveness through wage moderation and cost containment is made more difficult by France’s membership of the monetary union, which removes the adjustment mechanism that the ability to devalue its own currency would provide.

Apart from elevated taxes and social contributions, the French labour market is characterised by a high degree of segmentation as a result of significant employment protection legislation for permanent contracts. While notice periods and severance payments are not significantly higher than they are in other European countries, some parts of this legislation make dismissals particularly difficult. This judicial uncertainty raises the implicit cost of labour and creates disincentives to hire. In addition, the definition of economic dismissal in France rules out its use to improve a firm’s competitiveness and profitability.

Moreover, the regulation of the services market remains more restrictive in France than it is in many other countries, as reflected in the OECD Indicators of Product Market Regulation. The subdued competition in the services sector also has a negative effect on the purchasing power of households and the input costs of enterprises. France additionally faces significant non-price competitiveness issues that stem from low R&D intensity compared to other EU countries.

Moody’s recognises that the government recently announced measures intended to address some of these structural challenges. However, those measures alone are unlikely to be sufficiently far-reaching to restore competitiveness, and Moody’s notes that the track record of successive French governments in effecting such measures over the past two decades has been poor.

The second driver of today’s rating action is the elevated uncertainty with respect to France’s fiscal outlook. Moody’s acknowledges that the government’s budget forecasts target a reduction in the headline deficit to 0.3% of GDP by 2017 and a balancing of the structural deficit by 2016. However, the rating agency considers the GDP growth assumptions of 0.8% in 2013 and 2.0% from 2014 onwards to be overly optimistic. On top of rising unemployment, France’s consumption levels are being weighed down by tax increases, subdued disposable income growth and a correction in the housing market. Net exports are unlikely to drive economic activity in light of reduced external demand, in particular from euro area trading partners such as Italy and Spain.

As a result, Moody’s sees a continued risk of fiscal slippage and of additional consolidation measures. Again, based on the track record of successive governments in implementing fiscal consolidation measures, Moody’s will remain cautious when assessing whether the consolidation effort is sufficiently deep and sustained.

The third rating driver of Moody’s downgrade of France’s sovereign rating is the diminishing predictability of the country’s resilience to future euro area shocks in view of the rising risks to economic growth, fiscal performance and cost of funding. In this context, France is disproportionately exposed to peripheral European countries such as Italy through its trade linkages and its banking system.

Moody’s notes that French banks have sizable exposures to some weaker euro area countries. As a result, despite their good loss-absorption capacity, French banks remain vulnerable to a further deepening of the crisis due to these exposures and their significant — albeit reduced — reliance on wholesale market funding. This vulnerability adds to the government’s contingent liabilities arising from the French banking system.

Moreover, France’s credit exposure to the euro area debt crisis has been growing due to the increased amount of euro area resources that may be made available to support troubled sovereigns and banks through the European Financial Stability Facility (EFSF), the European Stability Mechanism (ESM) and the facilities put in place by the European Central Bank (ECB). At the same time, in case of need, France — like other large and highly rated euro area member states — may not benefit from these support mechanisms to the same extent, given that these resources might have already been exhausted by then.

In light of the liquidity risks and banking sector risks in non-core countries, Moody’s perceives an elevated risk that at least part of the contingent liabilities that relate to the support of non-core euro area countries may actually crystallise for France. The risk that greater collective support will be required for weaker euro area sovereigns has been rising, most for notably Spain, whose economy and government bond market are around twice the combined size of those of Greece, Portugal and Ireland. Highly rated member states like France are likely to bear a disproportionately large share of this burden given their greater ability to absorb the associated costs.

More generally, further shocks to sovereign and bank credit markets would further undermine financial and economic stability in France as well as in other euro area countries. The impact of such shocks would be expected to be felt disproportionately by more highly indebted governments such as France, and further accentuate the fiscal and structural economic pressures noted above. While the French government’s debt service costs have been largely contained to date, Moody’s would not expect this to remain the case in the event of a further shock. A rise in debt service costs would further increase the pressure on the finances of the French government, which, unlike other non-euro area sovereigns that carry similarly high ratings, does not have access to a national central bank that could assist with the financing of its debt in the event of a market disruption.

Today’s rating action on France’s government bond rating was limited to one notch given (i) the country’s large and diversified economy, which  underpins France’s economic resiliency, and (ii) the government’s commitment to structural reforms and fiscal consolidation. The limited magnitude of today’s rating action also reflects an acknowledgment by Moody’s of the French government’s ongoing work on a reform programme to improve the country’s competitiveness and long-term growth perspectives, with key measures expected to be outlined in the National Pact for Growth, Competitiveness and Employment. Moreover, on the fiscal side, the European Treaty on the Stability, Coordination and Governance of the Economic and Monetary Union (TSCG), known as the “fiscal compact”, will be implemented through the Organic Law on Public Finance Planning and Governance.

RATIONALE FOR CONTINUED NEGATIVE OUTLOOK

Moody’s decision to maintain a negative outlook on France’s government bond rating reflects the weak macroeconomic environment, and the rating agency’s view that the risks to the implementation of the government’s planned reforms remain substantial. Moreover, Moody’s currently also holds negative outlooks on those Aaa-rated euro area sovereigns whose balance sheets are expected to bear the main financial burden of support via the operations of the EFSF, the ESM and the ECB. Apart from France, these countries comprise Germany (Aaa negative), the Netherlands (Aaa negative) and Austria (Aaa negative).

WHAT COULD MOVE THE RATING UP/DOWN

Moody’s would downgrade France’s government debt rating further in the event of additional material deterioration in the country’s economic prospects or difficulties in implementing reform. Substantial economic and financial shocks stemming from the euro area debt crisis would also exert further downward pressure on France’s rating.

Given the current negative outlook on France’s sovereign rating, an upgrade is unlikely over the medium term. However, Moody’s would consider changing the outlook on France’s sovereign rating to stable in the event of a successful implementation of economic reforms and fiscal measures that effectively strengthen the growth prospects of the French economy and the government’s balance sheet. Upward pressure on France’s rating could also result from a significant improvement in the government’s public finances, accompanied by a reversal in the upward trajectory in public debt.

COUNTRY CEILINGS

France’s foreign- and local-currency bond and deposit ceilings remain unchanged at Aaa. The short-term foreign-currency bond and deposit ceilings remain Prime-1.