Ignore the Hole

All eyes seem focused today on what our friend the Ben is going to say at Jackson Hole, Wyoming. Well, all signs are that it ain't going to be QE3 just yet, though I would not rule out some symbolic economic trick to try to support the markets.

The bigger question in my mind is why this is getting all the attention when our friends in Greece are on the verge of losing their battle. Seriously, they have tapped into their Emergency Liquidity Assistance (ELA) for the first time and this is not a good sign, not good at all:

http://www.telegraph.co.uk/finance/financialcrisis/8723588/Greece-forced-to-tap-emergency-fund.html

And Finland's refusal to support more aid to Greece without collateral seems to be a roadblock the EU has yet to figure its way around. Greece is not the biggest domino in this game but it may be the first with the only question being whether it is big enough to knock over the next one in line, which I will leave you to define for yourself. Indeed there are probably two separate rows of dominoes into which a Greece default will fall; first is the banks and second is other sovereigns. I suspect there is nothing Ben is going to say in the Hole that can come close to eclipsing what we are seeing in Greece.

Update: Okay, ignore what I said above about Bernanke. He came out this morning and said exactly what I thought he should say (though not necessarily what I thought he would say). No QE3 or other stimulus from the Fed presently, economy slow but moving along, and it is up to Congress and Obama to fix this mess as there is little the Fed can do. Now I think he should have been saying this a year ago when he launched QE2, but better late than never. Mind you, if Greece defaults and banks start to fail, I see a quick reversal with QE3 in our future, but for now so far so good.

Surprisingly to me, the market has taken the lack of news (which was expected) quite well. Perhaps some folks agree that there is nothing for the Fed to do and doing nothing is better than wasting resources doing stuff that does not work. Still, the market being up on nothing from helicopter Ben is a bit surprising to me. I mean, after all, you have the worsening situation in the EU (which did impact EU markets heavily today), the reduction in consumer confidence (which was expected but not quite so low), the reduction in second quarter GDP (again expected but not so low), etc., but the market is up nicely. Go figure.

Disclosures: None

So What Changed?

Seriously, what changed? We went from a couple of weeks of high volatility, mostly in the down direction, to a relatively upbeat, low volume market. Spreads are down on sovereigns in Europe as well, mostly. Markets seem relatively calm. Now there is no outrageously positive news or anything to change the negative news that existed last week or the week before. So what changed?

I read that there is a Bernanke effect. He is speaking at Jackson Hole on Friday and many expect him, just like last year, to announce a new QE or some other "trick up his sleeve." I actually read someone's post today about how wonderful Bernanke is and how effective his QEs have been - seriously, I am not making this up. After noting a prediction of Ben pulling another stimulus out of his hat, the writer noted:

"The past QEs have been so darn effective! We had one of the biggest market rallies in history from March 2009 to March 2011. It's so powerful, why not use it?"

I kid you not, this is what the guy posted and while I initially thought he was being sarcastic (a concept my seven year old daughter gets), he was not in the least. This guy really believes that helicopter Ben is the next Messiah. He refers to Ben as the guy who saved us from the worst depression in history and calls him a "hero." And he apparently does not notice the coincidence between the market being oversold and down around 50% in March 2009 and then recovering somewhat, whether Ben did anything or not. I am not making this stuff up about what this guy says. He must be Ben's son or cousin or publicist or something. Don't believe me, read it for yourself:

http://seekingalpha.com/article/289499-bernanke-is-loading-his-gun

Now I believe this guy is sincere, but I also believe he has not done his math. Sure, Ben dropping money will help the market for a while but if you look the market is not significantly better than when QE2 was enacted, and it just ended a month ago. There are no discernible long term benefits from either QE. They did not solve or fix debt problems, they just provided short term liquidity. We still have a debt problem. It may turn into a liquidity problem as banks in the US and Europe soon have to struggle to survive, but it is now a debt problem (at least for the US) and QE does nothing to fix this. So Ben the hero - I think not!

Let me add a caveat here. Ben's largess supported banks in the EU as much as in the US. Governments there do not guarantee deposits like the FDIC does here. Greek banks have been having a run of people taking out their money and the concept of other banks seeing similar fate is not too far removed. If this happens, there could be liquidity issues as these banks do not have funds on hand to pay their customers back their deposits. Morgan Stanley had a similar problem in 2008. It had folks asking for cash back that it did not have on hand. It ended up borrowing over $100 billion from the Fed to fund this problem - more than even Citigroup, which is twice its size. Of course it noted this borrowing to its investors (not). So the Fed does address liquidity problems. These are problems that have and will continue to plague our financial institutions for years to come. Other than saving their collective arses and preventing a meltdown, this does not revive the economy. It simply allows a very debt ridden status quo to continue. Time to pop the corks and celebrate - not!

So I ask again, what has changed? Nothing in my book. PIIGS are still about to be slaughtered, housing in the US still is sucking wind, unemployment not better, etc. etc. So where do YOU think the markets are going in the next 12 months? Prepare yourself.

Something Fun To Do

Here is a fun suggestion I have for you. Next time your employer - assuming you have one - wants to have financial advisers come in to talk to you, do a little homework in advance. My company's retirement benefits are with Merrill Lynch, which had to be bought by Bank of America to survive, and we all know that Bank of America, after its CountryWide, purchase is doing so swimmingly well. Two years ago they had financial advisers from Merrill come in to tell me how to do my investments. I was not real happy to have a company that cannot survive financially tell me how to do so. My bank, where I have an adviser, is a subsidiary of RBS, which last I checked was down around 40% or so this past couple of months. Again, where are you getting your advice?

Point is, these people cannot keep their companies alive and they are telling you how to invest your money. So research your adviser and feel free to ask during the investment meeting questions like "Your parent's stock is down over 40% in the past two months and has serious sovereign EU exposure, so why should I follow your advice?" Not saying their advice is wrong, just play with them a bit and take their advice with a grain of salt. They do not know everything and you need to do your own homework.

Disclosures: None.

I Need Data, I Need Data . . . Beep, Beep . . .

Okay, one day I read a NY Times editorial by Warren Buffet saying he is paying 17% in tax on roughly $35 million plus in income (my calculation), and then a few days later I see a former Charmian and CEO of American Express and AIG, Harvey Golub, saying he expects to pay between 80-90% in federal, state, local, Social Security and Medicare taxes this year. I am asking for more data here from anyone who knows as I a reevaluating my position on taxes but want some solid data on which to base my decision. And that I do not have.

Seriously, I am not an idiot and what I have read lately is causing me to reevaluate some things I have said here on taxes. I am not a politician so I am free to change my mind and be educated. Go figure.

I really do, as part of this education, want to better understand the differences between Buffet's 17% and Golub's 90%. I am not sure what Buffet is including in his 17%. I doubt it includes local or state taxes or real estate taxes, but cannot be sure. I am in a state with no local or state taxes, though there is a hefty real estate tax.

Still, even with these other taxes, 17% may become 30%, but no where near 80-90%. With the top federal rate at 35%, how in the hell is Golub paying 80-90%? Seriously! Maybe he is compounding the effects of income tax, capital gains taxes and estate taxes, but I would seriously like to see his calculations along with those of Buffet. Rhetoric gets us no where. And I have to believe a multi-millionaire like Golub (or billionaire)(he was after all CEO of American Express, Campbells Soup and AIG), can figure out a way to pay less than 90% in taxes, especially if Buffet is paying 17%. Seriously, Golub needs better accountants.

Now there is a lot of touting of 53% of Americans paying no tax. Here again, I would like some data. Perhaps they are making no money or not enough to be taxable. I suspect some (okay, a very small percentage) are millionaires with losses wiping out taxes or tax loopholes allowing them to pay nothing. Either way, the likes of Golub making millions saying those making a few thousand should share his pain is a bit hollow for me. Still, I want stats on how much the U.S. would make in taxes if we taxed the truly impoverished say 5% of their incomes. I have been in a place where I saved change to pay for meals and cannot imagine some in these situations (or undoubtedly much worse situations) to find 5% to pay in taxes to share the pain. They already have the pain - pain that Golub never has to feel.

Golub Challenge

Okay Mr. Gollub, here is my challenge. Let others manage your money and live in your mansion and control your money. You spend two years living off of $15,000 a year, living wherever you can afford and pay just $2000 a year to the federal government of that. If after two years of living that way - I have been there but paid more in tax - then you can decide whether those who cannot afford tax should pay it. Perhaps you have been there, but you do not act like it.

I am not saying coddle those abusing Social Security, Welfare or other programs. We need to actively investigate and end any frauds in these programs. They cannot continue with the fraud levels that exist. But fraud, tax evasion, and other illegal means of shifting the tax burdens to the honest folks need to be focused upon. Those cheating the system on both ends of the wealth spectrum need to be dealt with. But there are plenty of poor people who lived honorable lives and who have families to support and cannot help out the down and out Mr. Golub. I agree he should not pay 90% in taxes, but I have nothing that I can look at to calculate any rate for him anywhere close to this level.

And you want fairness? Well everyone pays the same rate on the same level of income, deductions and credits aside. Someone making $10,000 a year pays the same % on that $10,000 as someone making $10 million does on their first $10,000 in income. Seems fair to me.
Seriously, I DO want data on which I can analyze this issue further. I read that there are a lot of studies showing that tax increases deter economic activity. which is a proposition I do not really doubt generally. I would like stats on this and whether this still holds in the face of situations like we currently face where massive deficits are deterring economic activity. One economist I follow who bangs the bell constantly on how taxes deter economic growth is now saying we may need to bring down the deficit with higher taxes first to get our act in order. This to me spells a long slow recovery. Shh, do not tell anyone, but I have been for four years expecting a farily long recession and a very slow recovery and the government has been fighting this idea at every possible point. Indeed, they have actively been making the problem worse, so it will take longer -much longer - to fix. It is time for us to take our medicine and, unfortunately, live a decade or so healing our wounds. No one wants to face this prospect - especially with millions of baby boomers trying to retire - but sometimes the truth hurts. Open up and let it in. It will set you free.

Tell Me I Was Wrong

In February of 2009, yes well over two years ago, I supported nationalizing our big financial institutions, breaking them up and selling them off. This incuded big financial institutions like Bank of America and Citigroup. I said at the time:

http://www.blogger.com/post-edit.g?blogID=6953117324755503703&postID=8978388727868507518

Sit back and think about it. How much better off would we be if the U.S. and EU had tried to do this to the extent possible. Most of these institutions, despite trillions in liquidity support - yes I said trillions - are dead weight to the economy and their shareholders and they are still threatening economies on both sides of the pond. They still have too many bad assets, including derivatives, in their possession. We empowered moral hazard and they have not, perhaps because of it, seriously reduced their leverage and exposures. They should be gone, and this was evident well over two years ago.

Disclosures: none

QE3? Ben is an A$$

I wrote a couple of months ago that I though QE3 was baked in the cake. Odd thing is that most folks thought then it would never happen but a lot more are thinking now it might or likely will happen. Funny how a lot of market turmoil can change a lot of thinking. I am thinking right now, however, it is not too likely just yet, as three of the voters on the Fed voted against the relatively benign statement of keeping interest rates low until 2013. And that is the last time three dissented in nearly 20 years. Go figure.

http://www.businessweek.com/news/2011-08-21/jackson-hole-bankers-reflect-on-qe2-amid-pressure-for-stimulus.html

Mind you, I think helicopter Ben would do QE3 tomorrow if he could but there seem to be some more reasonable folks that he needs to convince - and let's all hope his powers of persuasion are not working too well right not. QE1 and QE2 were total failures so I am not too keen on a repeat.

Still, let's not fool ourselves on Ben's plan here or what he has been doing. He does not give a rat's a&& about the regular Joe on the street. He has been all about saving the big banks and providing them with liquidity. QE2 did this and much of it supported international financial institutions, not just domestic.

Seriously, Mr. helicopter loaned out over a trillion dollars with hundreds of millions going overseas. Don't believe me, read it here:

http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html

This guy was on a tear and throwing money at any bank or financial institution that moved. And we now know how well that worked out.

LET ME SAY ONE THING HERE YOU HAVE TO DO, READ THE LINKED BLOOMBERG ARTICLE ABOVE. IT IS EARTH SHATTERING IN ITS REVELATIONS ON THE FED.

Bottom line, the Fed has been more of a problem than a cure for a long time. Between Greenspan and Ben there has not been a lot of proper analysis at the helm. It is in need of serious brain power and really soon.

Disclosures: none