Thursday, September 15, 2011

Raising Taxes One Page At A Time.

On the one hand the President is fond of saying that he won’t raise taxes on the middle class, on the other hand the Republicans would have you believe that they are adamant about not raising income taxes under the current economic situation. With both the President’s and Congress’s approval ratings abysmally low it would be fair to say that the public has caught on to the game and they’re not buying the story from either side.

While looking through a list of taxes that have been raised a few days ago I came across one at the bottom of the list that made my blood boil. It was a $26 Billion tax on what is know as “Black Liquor.”

So what is Black Liquor and how does putting a $26 Billion tax on it affect the economy, the country and you? No it’s not a tax on Thunderbird or Ripple. The simplistic definition given is that it is a tax on particular type of bio-fuel. Well, yes and no. If the administration is so gung ho on so-called “Green Jobs” why are they leveling a huge tax on a bio-fuel?

Having worked for years for various companies that manufactured and supplied boiler cleaning equipment to the paper industry, black liquor is something I know a little bit about. I can say this in that I have patents for innovations in the design of this equipment.

Anyone who has driven by a large paper mill knows it’s a large, complex if somewhat malodorous operation. Turning wood pulp and rag stock into paper requires chemicals, lots of chemicals, and produces a considerably sized waste stream containing some very nasty and highly toxic by-products. Not the kind of stuff you can bury in a landfill or hold in a waste pond. If they were to leak into the water table the results would be disastrous.

With disposal not an option, the paper companies process these chemicals into a substance called red liquor and then further process it into the black liquor “bio-fuel” that is now subject to being taxed. This is then burned in specially designed units called Recovery boilers, so named because the burning allows the paper makers to “recover” the energy the chemicals contain and use it to generate electricity that is then used in the paper making process or sold into the electrical grid.

I won’t go into the details of the complexities and dangers involved in burning black liquor or red liquor, which is even more complicated, here. But as usual as with any ill-conceived tax policy, the problem is in the unintended consequences.

As a result of this foolishness every kilowatt of electricity sold into the grid by the paper makers just got more expensive. Every piece of paper you use just got more expensive. And every consumer product you buy, from cereal to light bulbs to laundry detergent, if it is packaged in paper or cardboard, it just go more expensive. Your children’s school supplies just got more expensive. Every administrative function in government and in business that requires a piece of paper just – got – more – expensive.

So when you go to the store and buy those things you need and you get angry because it cost more this week than it did last week or last month, now you know why. As you look at that receipt and your blood pressure rises, remember it cost more too and it’s reflected in the total at the bottom. So you might want to take a piece of that now more expensive paper and write a note to the President and your Congressman and let them know how this little known, unadvertised and ill-conceived tax just made your life more difficult and expensive. Let them know that its just this kind foolishness is how we get saddled with ever increasing inflation, and that that is the most pernicious, destructive tax of all.

Tuesday, September 13, 2011

They Said What? .... Again

Well it looks like the Euro zone gurus are trying to stay ahead of the curve. In last night’s post I speculated that the latest MOPE of the Chinese buying Italian bonds would be shown to be bogus before markets opened on Wednesday. Even with the European market up today, feeding off of yesterdays delusion, the ECB may be preparing for the collapse of yesterday’s MOPE by spreading today’s MOPE. Namely that it’s not the Chinese but the Russians who are going to come to the rescue of the European bond market.

Apparently even this rumor was not deemed enough to inspire the necessary MOPE as within a few hours it was revised to throw possible Brazilian involvement in the mix in hopes of trying to create some perception of a trend.  The half-life on this was pack of lies was made even shorter than expected when the Brazil's Central Bank policy head Mendes met with the press saying that the "Euro is less important in Brazil international reserves", and "Brazil seeks reserve currencies with solid fiscal positions." Oops! Looks like at least one of the prospective victims aren't in the mood to be associated with the Euro debacle even if only in an unsubstantiated rumor.

Seriously “they said what?” After China, then Russia, who’s next, India, Papua New Guinea, or maybe Easter Island? Lord knows they are trying to raise the dead.

Monday, September 12, 2011

They Said What?

With the ever accelerating disaster scenario that is the Euro zone, trying to keep up with rumor/crisis/solution du jure is enough to leave a strong mind with a serious case of confusion (what I call the “they said what?” syndrome) and a weaker one in a state of psychotic dislocation.

Just last Friday the rumor of the day was that Greece could default or withdraw from the Euro over the weekend and that German banks were scrambling to put actions in place to cover the losses the German banks would incur. Oh what I would have given to be a fly on the wall hearing the behind the scene conversations at the G7 meeting in Marseille this weekend. Not so remarkably the public statements were long on hyperbole and short on substance.

By late Sunday the futures on all the major markets were in the red. By the end of trading in Europe all the markets closed down with the French CAC getting hammered down by over 4%, based on concerns of their exposure to Italian Bonds.

It looks like the decision coming out of the G7 meeting was to tell the Greeks with “great firmness” to shut the hell up about possibly defaulting as the bankers had a bigger problem on their hands with the disastrous, nearly bidless Italian Bond auction. With the DJIA continuing to decline the Italians then released a story that they had had discussions with the Chinese requesting they intervene and buy the undesired and undesirable bonds.

Whether the almost immediate reversal in the DJIA, with surprise, surprise financials like BofA and Citi leading the way, was actual investor interest or intervention by the FED is yet to be determined, if at all. If I had to bet on that one I know where I would be putting my money.

Never mind that the Chinese have not even said if they were going to buy any Italian Bonds, the rumor that they might was just the excuse needed for another manipulative intervention. Never mind that they are presently looking at getting burned on the Portuguese and Greek bonds they have already purchased. More MOPE (management of perception economics) was needed and that’s what we got.

With each new rumor/crisis/solution having a half-life shorter than the one before, the Chinese intervention story will probably be shown up as bogus by the time markets open Wednesday if not before. At this point only a fool would speculate what the next round of rumor/crisis/solution/MOPE will be, never mind how absurd it will sound. I can however be pretty sure my first reaction will be “they said what?”

Friday, September 9, 2011

And Now That The President Has Spoken ….

When looked at strictly in terms of tone and delivery the President gave a brilliant speech last night. That was all he really needed to do in order to shore up his political base. For this group little more than something perceived as a brilliant rhetorical flourish is all that is required to perpetuate the swooning and fainting that was the hallmark of the 2008 campaign.

Anyone who watched the speech with any degree of a critical eye, regardless of their political leanings, saw something entirely different. What we saw was in fact little more than the opening salvo of what promises to be a long and arduous political campaign. As with any campaign speech it was long on rhetoric and very short if not devoid of substance. Every time this man speaks he can’t help but further demonstrate his total absence of understanding how economies actually function. The kool-aid drinkers and the na├»ve may have been impressed, the markets were not. The DJIA dropped 200 points the second the opening bell rang, and as I post this it is down 322 points. All of the global markets, across Asia and Europe are similarly down.

The markets visceral reaction to last night’s speech does not come from anything that was said. The devil is in the details, as the old saying goes, or in this case the complete absence of details. Talking about reforming the tax code is one thing, failing to give any specifics only adds to a perception of a clueless and ineffectual administration. A perception that has so far only been reinforced by failed initiative after failed initiative. (“Shovel ready wasn’t as shovel ready as we thought.”). Talking about “reducing regulation” absent any specifics and then immediately coupling it with insistence on maintaining unspecified “basic protections” rings hollow at best and disingenuous at worst, or more just plain cynical politics as usual.

Where was any mention of allowing companies to repatriate off shore assets and cash without having to pay a huge, confiscatory tax penalty? Where was any mention of policy that would make it easier to exploit our own energy reserves as opposed to extending aid to Brazil and others to help them exploit theirs?

All I heard was a willingness, nay eagerness, to shove another $460 billion down the rabbit hole of ill-prepared and ill-conceived government spending. Much was made about “creating” thousands of jobs in the construction industry, nothing was said about any guarantees that these jobs would go to unemployed Americans and not to the legions of illegal aliens that continue to flood across the border.

It’s pretty clear in my mind at least that this speech was crafted to pump an intellectually shallow base and at the same time guarantee that it will be Dead On Arrival in Congress. Thus providing the President the ammunition he seeks for his opening volley of rhetorical manipulation for the just opening campaign season. He so much as said so in the close of his remarks.

The President was right about one thing the large and growing number of unemployed and those living paycheck to paycheck and wondering if the next one will cover growing energy and food prices can’t afford to wait 14 month until the next election before anything is done. But this speech pretty much guarantees that they are going to have to. The only thing he really cares about them is how easily can whip them up with more empty rhetoric and platitudes and then use them as cannon fodder in the 2012 political wars.

Thursday, September 8, 2011

Before the President Speaks

On the eve of the President’s “Jobs Speech” I thought it might be a good time to return to my previous proposal on taxation and job creation. Slightly revised and edited verbiage for clarity but the substance remains the same.

The question of course is what can actually be done to substantively improve the economic situation? Well here’s my 2 cents worth just for starters.

Reform the corporate tax code to create multi-tiered system.

Tier one: If your business income is derived from the manufacture, transport or sales of real physical goods you get taxed on that income at a very low rate. This would apply from top level heavy industry all the way to the bottom where the mom and pop shop is selling gas and potato chips. There should be differentiations within this rate depending upon what percentage of components or raw material goods are derived domestically and what percentage are imported. This would encourage the expansion of on shore business to produce or procure components or raw materials here at home rather than importing them. In other words, a tariff by other means.

Tier two: If your business income is derived from speculation, i.e. just moving money from one pile to another and not actually producing any real goods as exemplified by the FOREX carry trade, commodity speculation, stock and bond trading, you get taxed at a much higher rate and have severe restrictions placed on what are allowable deductable expenses. This would not include the individual who trades within small accounts or their own 401K or IRA to try and make a few extra bucks to put their kids through school or make their retirement a little easier. We’re talking large institutional speculators trading on their own accounts not managing the accounts of individuals below certain threshold levels.

This tier would not apply to transactions wherein these same institutions make loans to businesses engaged in tier one activities or mortgages or car loans and the like, provided they keep those loans on their own books and maintain a real interest and indeed risk in how well those loans perform. The very minute that they bundle those loans into CDOs (collateralized debt obligations) all previous and future income becomes taxed at the tier two rate. If they simply sell those loans to another entity, any profit derived over and above the normal expected rate of return on that loan would be taxed at tier two rates, except in the case where the proceeds of the sale are then used to extend further business and job creating loans.

Tier three: Over a set period of time either phase out and then ban OTC derivative trades and the creation of CDOs or tax and regulate them at such a rate as to make them completely unprofitable. Ban the issuance of CDSs (credit default swaps) to anyone other than the primary risk taker. Ban financial and securities firms from taking out CDSs on the securities they have sold to their customers either directly or indirectly through subsidiary companies.

Don’t hold your breath waiting to hear any of our politicians talking such common sense as long as the revolving door between Wall Street and the Treasury Department remains in operation. Even suggesting it would unleash a pestilence of lobbyists and under the counter campaign contributions to kill it like nothing that has ever been seen.

We have been suckered into believing the fixed pie theory. It’s a fallacy perpetrated by the left and the banks. The money exists, government policy, and in this case tax policy, must be changed to pull it out of speculative none productive applications and into manufacturing and trade where real wealth and jobs are created, the economy expands and the pie gets bigger.

Wednesday, September 7, 2011

The Game Goes On And The Suckers Buy In

Now that the German Supreme Court has succumbed to the pressure (bribes, threats?) and given tacit approval to Angela Merkle continuing to use German GDP as a piggy bank to prop up the failing Euro, looking at the market reaction one might think that once again “all is right with the world.” Well I for one am not buying it. This is nothing more than markets moving on the delusion du jure, and the HFT algos exploiting this latest MOPE (management of perception economics) to wring yet a few more tons of fiat out of the suckers before the next dose of reality sets in and the downward trend returns. Just when the internal German political reaction sets in remains to be seen, although I suspect it won’t take long.

In the meantime as the equity markets rebound on this so-called “good news” (good for everyone but the German investors, savers and consumers) the bankers get another opportunity to proclaim that "gold is in a bubble" and whack its price down a bit so that as they attempt to cover their huge short overhang on the COMEX and the LBMA they can at least reduce the size of their losses even if that means paying huge cash premiums because they can’t actually deliver the physical goods.

By reducing their short positions, even if only marginally they can put forth more propaganda that the light at the end of the tunnel can be seen and they won’t really get crushed by a short squeeze or a derivative collapse. Once again the “big lie” is in play as they fully well know that that light that they see is the onrushing train of the Hong Kong Metals Exchange. Once this exchange is fully operational in late October it will be 100% backed by physical bullion. If even only a small percentage of those pension funds, hedge funds or mutual funds, never mind private investors holding COMEX or LBMA paper certificates move their holdings to the Hong Kong exchange then the jig is up, game over, they can’t deliver. The COMEX and LBMA default, precious metals derivatives implode and quickly take out all the other derivatives based on whatever Wall Street marked to the value of unicorns fantasy in a massive collapse of confidence.

2011 may well end up making 2008 look like a stroll in the park. Someone might want to invest in some spike strips to put across the runways of whatever private Long Island airstrips the Wall Street tycoons have their Gulfstreams parked at.

Tuesday, September 6, 2011

Beware the Ides of …….. September?

There is a dirty little secret in the financial world. A secret that might be whispered about behind closed doors but is seldom if ever discussed in the open. That being that each year as the calendar rolls around to September fear (some might argue insanity) begins to grip the hearts and minds of the power elites and knowledgeable historians alike.

You see it’s this period when financial calamities and wars have a nasty tendency to set in. The signals that this may well prove to be one of “those” Septembers have already begun. When the otherwise aloof, stable or independent (choose your own adjective) Swiss begin to succumb to the financial insanity sweeping the rest of Europe and the U.S. you might want to do a little more than scratch your head about it.

You see over the last few months, as the chaos and uncertainty in the Euro zone has metastasized there has been a flight of not just Euros but also U.S. Dollars into the Swiss Franc. Being such a small economy relative to the rest of Europe and the US there simply not enough Swiss Francs to go around, and as a result as when anything in demand becomes scarce, it price goes up. This has caused the Franc to appreciate against the Euro and the Dollar by nearly 40% since June of last year. This in turn has played havoc with Switzerland’s ability to export goods by essentially pricing it out of the market.

In reaction the Swiss have now decided to join the global race to the bottom in currency devaluation. At first they announce that they were going to simply print more Francs to meet the demand, but even that had a minimal effect on its soaring exchange rates. So today it would appear that the Swiss have decided get fit for a straight jacket and announced that the Franc will be fixed at 1.20 Francs to the Euro. Immediately the Franc went over the cliff, falling nearly 8% in a matter of 20 minutes.

But this may be only the beginning. On Wednesday the German Supreme Court is expected to announce its ruling on the Constitutionality of Germany’s further participation in bailing out the PIIGS. The results of local elections coming in across Germany in the last few weeks have pretty well indicated that the population has had enough of Angela Merkle’s policy of using Germany’s economy as the bailout bank for the rest of Europe. The political pressures falling on the court must be tremendous. If they rule that further participation is unconstitutional the EFSF (European Financial Stability Fund) and any further discussions of disbursements to the PIIGS may fall apart within days if not hours. If they rule that it is constitutional and Merkle continues to sacrifice German GDP to the preservation of the Euro political chaos in Germany may be in the cards in the very short term. Just ask yourself; just when has political chaos in Germany ever turned out well for the rest of Europe or indeed the world?

Let’s be honest here, all this chaos in the financial markets, all of it, is the result of politicians and bankers trying to bend the natural forces of markets to their will. Be it fiat currencies, price fixing and/or manipulation, it never works out in the long term. It’s almost a constant recurring theme of history matched with human arrogance and hubris that “this time it will be different”. Well maybe I should take that back a bit. This time will be different, this time the results will be much worse!

All the proponents of a “New Age” have said that man must develop a “collective conscience” to survive in an ever changing and modern world. Well I think they have achieved it, except it’s not a new enlightened consciousness, it’s a collective insanity of thinking that a certain set of people know better than the common sense of the “great unwashed”. The hubris of the powers that be trying to impose their delusions on the rest of the world that they are actually in control of events and that by mere force of will markets and nations and people can be forced into compliance to their will.

Only problem is in spite of the propaganda to the contrary it isn’t working. Aren’t these very same “powers that be” the titans of Wall Street and their wholly owned politicians in Washington? Why then have their vaunted institutions fallen into not just disrepute but near term financial collapse? Aren’t they “Too Big To Fail?” Wasn’t all that TARP money and stimulus spending supposed to save them and us as well? Explain to us please how B of A falling from over $50 a share to under $7.00 a share is a reflection of stability and control. Yes B of A may be an extreme example in the percentage of decline (smells like Lehman Brothers to me) but almost all of the big banks have fallen off over 50% from their highs. How do they then justify paying their executives huge bonuses (with taxpayer dollars no less) when their performance has been so abysmal? How long do they think the people will continue to buy the load of garbage coming out of Washington that they can fix the unfixable just as long as all the rest of us just tighten our belts and do with a “little” less so the banks can survive and continue paying those bonuses?

Now that Swiss Francs, financial stocks or Treasury Bills can no longer be able seen as a “safe haven” against the chaos we just might want to look at what can be expected to happen to gold and silver. It’s almost vertical trajectory over August, in spite of high volatility can hardly be dismissed as “unexpected” or irrational flight into a “barbarous relic.”

Does any sane person think that the banks and politicians here will not react to their defacto “loss of control” exactly as their counterparts in Europe have done? Do they actually think that people here will buy into the meme of less for the people and more for the banks any more than the Europeans have? Well maybe they do, but that is just further demonstration of the depth of their delusions and the heights of their hubris. For them no warnings need be heeded, no events need be seen as precedent, at least not until they have their corporate jets warmed up on the runway and they flee to their extradition free haven of choice and they leave the rest of us to reap the cost of the chaos they have sown.