Build It and They Will Come

You see, once again the Administration takes a bass ackwards approach to fixing things. Now they want to front load for companies their ability to write off expense on investments in plants and equipment through 2011 instead of the over a longer period. In other words, the Administration is saying to companies go ahead and use some of the capital on your books to build plants and buy new equipment and we will provide billions in up front tax breaks instead of billions in over time deductions. Obviously the Administration thinks such spending will help spur the economy.

Only problem is that companies right now have more plants and equipment than they can use. Sure, maybe some equipment is a bit old and needs to be replaced but I suspect companies with the capital to do it are not holding off on needed purchases, and a tax break ain't going to get them spending capital on unneeded stuff. I just do not see it happening. Companies want solid proof that the economy is going to improve in a significant and sustained way before they spend, and they are not seeing it yet. With talk of double-dip, the EU having numerous countries in doubt and plenty of folks talking about Japan style stagnation in the U.S. for years, companies know that cash is king.

The other problem, as pointed out in this linked post, is that offer by the government really is very little financial incentive to them. If they have the money to spend in the first place they are not needing an instant deduction and with rates low waiting to get the deduction over time is not a big problem.

http://www.calculatedriskblog.com/2010/09/reactions-to-obamas-business-tax-break.html

This program is similar to what the Administration has tried with housing and cars; they incentivize folks to spend with tax credits or direct financial support but all they achieve is (1) giving breaks to those who would have bought anyway - including me on cash-for-clunkers and (2) front loading expenditures to the detriment of later spending. They consistently fail to realize that this is a debt driven recession and it can only end when debt is paid down, which will take a long time to achieve.

Don't Shed a Tear

Meredith Whitney believes Wall Street has some tough times ahead and she expects them to cut 80,000 jobs over the next 18 months. She expects 2010 bonus payouts to be down drastically and then the cuts. Now you might think good riddens but I suspect those being cut are not the idiots that produced this mess. Those idiots are still getting the big bonuses and are off thinking up new fleecing techniques to rebuild company profits. No, the 80,000 that may be let go are likely the folks at the other end of the totem pole.

http://www.bloomberg.com/news/2010-09-07/wall-street-firms-will-cut-up-to-80-000-jobs-over-18-months-whitney-says.html

Knock, Knock, Knocking at Greece's Door

The price to protect debt for the PIIGS is again reaching the record heights it saw in May. I noted a week and a half ago that the EU problems had been off the radar screen for a while but they were still there and would in time become the focus again. Well, it seems that this week they are back in focus. So what will the EU do for its next hat trick?

http://www.bloomberg.com/news/2010-09-07/u-s-stock-futures-decline-bank-of-america-citigroup-alcoa-shares-drop.html

http://www.bloomberg.com/news/2010-09-07/greek-debt-deals-hidden-from-eu-probed-as-400-yield-gap-shows-bond-doubts.html

Disclosures: None