Taxes and what is really going..?

Republicans shift stance on taxing wealthy, by James Politi, FT

 

Buoyed by his re-election, the president has said he is willing to compromise on fiscal policy but wants higher taxes on the rich as a condition of any deal. John Boehner, Republican speaker of the House of Representatives, has said he is willing to put “revenues” on the table, though he has not offered much detail on where those additional funds would come from.

 

I may be reading the lines too aggressively, but it seems that the Blues and Reds are really united to raise taxes. So far I’ve gathered that the Republicans are willing to eliminate deductions if Payroll tax is put back into place. In elastance, tax revenue is probably not where the true negotiations are occurring. The real negotiations have to be occurring on the spending side.

Personally I would like to see a cap on net-deductions, not the elimination of any specific deductions that could be biased against certain regions or states.

 WOW! It’s WebStory!

Japan and another way to think about it.

FT recently wrote an article about Japan.

 Many of Japan’s economic indicators have deteriorated since September, leading economists to predict that the nation has entered its fifth technical recession – two consecutive quarters of contraction – of the past 15 years.

My semi-liberal education has tainted me with the belief that most economic growth is a result of pollution, exploitation, and unaccounted inflation. I have also found it easier to break down economics by perceiving data such as GDP growth as a zero sum game. 

It is fair to say from 1950-1990 Japan did quite a bit of polluting and monetary expansion. Conversely, post 1990 to present Japan has reduced pollution and not been increasing money supply. Japan would be a fairly advanced system if their powers at be were able to control pollution and inflation simply by driving the yields down of their treasuries.

The idea is not far fetched if one were to think of examples on the converse. Ie.  high yield nations and their pollution levels…

 WOW! It’s WebStory!

Investment grade yield

Corporate yields are extremely low considering 10 year treasuries are still hovering around 1.6%. This yield clearly shows an inverse relationship with American Equity values.

What does all this mean? The world investor clearly has faith in the American Dollar and Financial system. While it is one thing for Treasuries to have low yield, it is another when both treasuries and corporate bonds are low in unison. The balance sheet for both the treasury and corporations must be looking good.

There is one area of concern though. MBS loans have been gobbled up by the Feds. Thus leaving little room outside of treasuries and corporate bonds for fixed investments. In essence, the Fed’s purchases may continue to force investors to invest in risky assets such as Corporate debt as opposed to collateralized obligations.

 I love WebStory!

What caused Greece and Spain to be in their current scenario?

Loose lending standards of course.

Mish over at his blog continues to believe  that… “Big government and absurdly strong unions destroyed Greece and Spain.”  He then compares the mess to California.

 

Mish’s view on the cause is distorted.  Governments do not collect taxes based on services rendered, but they collect taxes based on a percentage of revenue.  As a result, they spend based on a percent of revenue.

If you follow the logic, loose lending standards help increase revenue… Once the lending standards were tightened, we saw a loss in revenue, which resulted in a serious belt tightening.  In essence, under our current financial system, lenders control the government spending.

While I do not hold big government spending totally unaccountable for the scenario they are in, it would naive to say they are to root of the evil that has created the scenario we see today.

toll roads are here (the west and south)

Toll roads are popping up in the west and the south.  It is only a matter of time before all of our highways are tolled.  The need for additional state revenue and possibility of gas-less cars has created this demand.  Technology has also made the cost of installing tolling infrastructure cheaper.

Tolling in LA(LA TIMES)

The greater issue than the revenue from the tolls itself, is how it will shape modern traffic.  Tolls will systemically slow urban sprawl.  As a result, cities and states will save expenditures on the planning and constructing of new infrastructure.  Families will also save money from having to move due to economic blight associated with sprawl.

The economic effects of this will be quite large.

 

Energy Independence.

When the seasons change I tend to obtain higher mpg on my car and truck.  This has occurred for me the last ten years in Texas.  An assumption I have to make is that during the change in blends, the refiners phase out some of the ethanol they normally put.  In this latest seasonal change, oil has been inexpensive, and it is also possible that that gasoline on a per gallon basis is cheaper than ethanol here in south Texas.

This brought attention to another popular topic.  Energy independence.  I have usually thought the concept has been purely commercialized by our oil companies.  I have begun to question myself.  WIth a mix of ethonol, oil, gas, and solar our nation can be easily energy independent.  While previously, the context of energy independence had been ridiculous.  Yet as we begin to pull our troops and shut our foreign factories down, there may be a true master plan.

Are Republicans really considering pulling troops back and truly persuing an energy independence plan?  The republican party may be changing faster than we realize.  Then again, the days of cheap oil in Brazil, Russia, Mexico seem to be non-existant.  

corporate cash hoarding and low interest rates

The Economist recently provided a primer on the existence of low interest rates while corporations continue to hoard cash.  Our current circumstance can be broken into two contrasting philosophies, provided that you are a believer of open market signaling.

1)The private sector may be signaling that there is little ROI if they were to invest in training, capital equipment, and research and development.  As a result, it may be wise for the government to follow a similar strategy.

2)The private sector may be hoarding cash and treasuries in hopes of driving interest rates down so that the government can fund investments into infrastructure and r&d.

The first philosophy appears to be the strategy that was employed since the millennium.  The second appears to be a more hopeful and ideological philosophy that had be employed in many nations around the world post WWII.  There may be a resurgence in this.

It is very difficult to think of capital improvement projects in America.  Let me know if you have any ideas.

 

IT spending and technology

Any one else notice the decline in IBM and HP advertisements on national television?  This trend really did not come to mind till I realize the recent struggles by Network Appliance.  Network Appliance is an advanced data storage systems located in the heart of silicone valley.  They are usually a leading indicator of capital good spending.

Most the news clippings indicate that IT is struggling due to the European slowdown.  While this is a reasonable argument, there must be a few other factors in play.  In general, coporations and their employees are becoming more technologically savy.  While it was acceptable for executives to be inept with technology in the booming 90’s, this trend has reversed.  Executives need to be relatively savy simply to survive for security and communication purposes.

Consequently, executives now in the position to purchase IT products are better prepared to make purchasing decisions.  The direct and indirect implications are lower profit margins for outfits such as IBM, HP, Oracle, and SAS.  I assume European executives were simply a couples year behind Americans in the adoption of computer systems.

In all honestly, I am simply hoping that the slow down in IT sector is really a result of the maturation in the industry.  Otherwise, the IT spending drop may be a negative economic indicator that will be biting us in the near future.

ha – operation twist

Bernanke has decided to continue with operation twist, and continue to subsidize those folks on the long bond..

 

Surprisingly, deflation hit the streets.  The long bond went up, commodities/oil down, and same with equities.  The dollar also strengthened against both the euro and yen.

Can investors afford to ever leave the treasuries as long as Ben keeps pushing yields down?  The net result is a withdrawal in bank deposits substituted for treasures.  What incentive do investors have to invest in riskier mortgages and corporate debt in a lower rate induced deflationary cycle?

Investor are also loving the cuts in taxes via cuts in pensions.  As long as concessions continue to be made as a result of deflation, is there really an incentive for investors to support the increase in liquidity?

 

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 Yields contin…

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Yields continue to drop with euro and oil.  It makes sense.  The strong euro has long supported high oil prices.

It really looks like global de-leveraging will end soon.  Obviously, if governments keep bailing out banks, the banks will continue to contract the money supply.  Yet, once the bailouts end, there really is no incentive to de-leverage.

Once pensions and social security are trimmed, governments will have incentive to leverage/inflate again to collect tax revenue.  Is the time coming?  Maybe not today, but it has to be somewhere between today and 10 years from now.

i’m looking at 60 equity – 40 fixed on the short end of the yield curve for now.