Hmmm… Groundhog Day seems to be a bit early this year.
“Billionaires and politicians gathering in Switzerland this week will come under pressure to tackle rising inequality,” The Guardian informs us. The anti-poverty charity Oxfam is out with a study that says “the 1%” will own more wealth globally than the other 99% by 2016.
“The research,” the BBC tells us, “coincides with the start of the World Economic Forum in Davos.” The annual shindig of global elite do-gooders gets underway tonight.
Wait a minute… We thought “inequality” was the big issue at Davos last year. Why, yes, there it is in The 5’s voluminous archives: Inequality posed “the biggest single risk to the world in 2014,” according to the World Economic Forum’s annual assessment.
“The scale of global inequality is quite simply staggering,” says Oxfam executive director Winnie Byanyima — who happens to be co-chair of the Davos party this week. She’s urging her fellow do-gooders to take on “vested interests that stand in the way of a fairer and more prosperous world.”
At this moment, we step back a moment and take a deep breath.
[Breathe… breathe…]
Whenever we bring up the topic of “inequality” here at The 5, we urge you to keep two things in mind…
1. Rising inequality has everything to do with central bank policy and the asset bubbles central banks beget: “I would argue,” the estimable Marc Faber wrote in 2013, “that the Fed is fully responsible for the fact that 90% of U.S. families have had declining real incomes (inflation adjusted) over the last 10 years or so… and have experienced a decline in their net worth.”2. Whenever people who belong to “the 1%” start talking about addressing inequality, they’re sure to approach it in way that ensures their oxen will remain ungored. But if you’re unfortunate enough to belong to the upper middle class, your ox will be rendered a bloody mess.
As our acquaintance Bill Baker put it in his 2009 book Endless Money: “Tycoons such as Soros and Buffett can call for higher taxation of income. This is a very cynical and downright mendacious strategy, for they know full well this burden would fall primarily upon members of the upper middle class, who have not yet achieved the threshold that would permit them to shift income to tax-minimizing structures.”
Which brings us to the president’s State of the Union address tonight.
Over the weekend, his aides let slip that he will propose “raising the capital gains rate on top income earners and eliminating a tax break on inheritances,” reports The Associated Press. “The revenue generated by those changes would fund new tax credits and other cost-saving measures for middle-class taxpayers, officials said.”
Hmmm… The long-term capital gains tax would rise from 23.8% to 28% for couples earning more than $500,000. Meanwhile, the tax on inherited investments would be based on their original price and not their value at the time of inheritance.
So how would the “middle class” benefit?
Well… two-earner couples would get a $500 tax credit… and the child tax credit would rise from $1,000 to $3,000.
But wait! Those benefits start phasing out at $120,000. Not exactly champagne-and-caviar territory, especially if you live in a high-cost-of-living area.
Meanwhile, many of the tax benefits of 529 plans would go away. Middle-class families use these plans to save for college. They work like a Roth IRA — you put in the money after-tax, but the distributions are tax-free as long as they’re used to pay for college. Under the president’s proposal, earnings would be taxed upon withdrawal.
But, you’re thinking, none of this stands a prayer, not with the Republicans controlling both houses of Congress.
Don’t be so sure. The proposal doesn’t stand a prayer in its current form. But after some backroom dealing with the likes of Rep. Mac Thornberry (R-Texas), who knows?
From Politico last week: “The new chairman of the House Armed Services Committee is taking a bold stand for a Republican and fifth-generation Texan who represents one of the most conservative districts in the country: He’s not ruling out tax hikes as part of a deal to avert sequestration.”
“Sequestration” is an ugly Latinate word that entered the D.C. lexicon during a last-minute deal raising the debt ceiling in August 2011. It’s a term for automatic spending cuts — or to be more precise, cuts in the planned rate of spending increases. Because that’s how Washington rolls. In any event, Rep. Thornberry dislikes sequestration’s impact on the Pentagon.
Of course, he went out of his way to say he doesn’t support tax increases. Oh, no: “This is not about my preferences,” he said. “This is about having the bigger, longer conversations about how we get from here to here even though I can’t tell you that road map at this moment.”
And you, dear taxpayer, won’t be privy to those “bigger, longer conversations” until there’s a done deal. You’ve been warned.
We don’t mean to drag you down here. But we understand if the prospect of higher taxes saps you of the motivation to work harder and earn more.
So how about you work less and earn more? That’s at the core of an increasingly popular strategy among our readers. It’s also one of the methods the aforementioned Warren Buffett used to build his immense fortune.
We’ve compiled a series of eye-opening videos showing how ordinary folks like you — not investment professionals — can pocket amounts like…
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The videos demonstrate how you can do it, step by step. See for yourself… and then decide if the strategy is right for you.
So much for Friday’s rally. As the holiday-shortened week begins, all the major U.S. stock indexes are in the red. The S&P 500 has shed eight points as we write, to 2,012.
If it’s short-term noise you’re looking for, there’s no shortage of it this morning…
- The International Monetary Fund dropped its global growth forecast for 2015 from 3.8% to 3.5%
- Chinese GDP for 2014 clocked in at 7.4%, the lowest in 24 years
- The Federal Reserve used its favorite media conduit — Wall Street Journal reporter Jon Hilsenrath — to telegraph the message that it will raise the fed funds rate later this year come hell or high water
- The European Central Bank meets Thursday, when it’s liable to launch full-on “quantitative easing.”
On the one hand, the S&P is less than 4% below its all-time highs. On the other hand, as Jonas Elmerraji of our trading desk points out, “That suggests that stocks can still correct a whole lot further from here.”
Let’s zoom in on the last 18 months of the bull market going back to the S&P’s late 2008-early 2009 lows…
“We’re seeing a descending triangle forming in the S&P over the short term,” says Jonas. “If we crack the 1980 level in the S&P, then I expect to see another test of our primary uptrend.”
That said, “more downside in January doesn’t change anything about the fact that stocks are still looking bullish in the long term.”
Gold has popped another 1% today. At last check, the bid was $1,292.
“Gold Rally Due as Central Banks Add Risk,” says a headline at the Financial Times. “Incompetence and Monetary Dysfunction Make Gold Look Attractive.”
To which we’d say, when does it not make gold look attractive?
But after the surprise from the Swiss National Bank last week, it’s become fashionable to suggest central bankers might not possess the super powers attributed to them the last few years. And with ultra-low interest rates in Europe — sometimes even negative interest rates — “there is no opportunity cost in holding gold,” suggests FT columnist John Plender.
“I’m still not worried about rising interest rates in the U.S. anytime soon,” says our Chris Mayer.
Chris draws our attention to a chart of five-year bond yields in four major countries.
At the bottom, there are your negative interest rates: Yep, you have to pay the German government for the privilege of borrowing from it for five years.
“Ask yourself,” says Chris: “Why should U.S. rates go up when they are still significantly higher than those of the U.K., Japan and Germany? And remember, the dollar has been rallying. So if you decide to buy, say, Japanese debt, you get a lower yield and a weaker currency.
“The wild card is the Fed,” he adds. “The central bank may raise the rate they pay on bank reserves from its current 0.25% rate. This is a key rate, and a move up could drive longer-term rates higher. But it might not. The Fed could also target longer-term Treasury rates explicitly in a variety of ways. But again, it might not.”
In the meantime, the yield on a 10-year Treasury note has sunk near last week’s lows —
1.76%.
By way of illustrating Chris’ point further, the yield on 10-year debt issued by two perpetual European basket cases is even lower — Italy at 1.66% and Spain at 1.51%.
As we said in early December, if you’re a hotshot institutional investor looking to park a boatload of money for a “safe” short-term return, where will you go? Which country delivers a higher yield? Which has a reputation as less risky?
Sorry, if you’ve been waiting for the “bond vigilantes” to wake up and punish Uncle Sam for his spendthrift ways… you’ll have to wait a while longer.
The glacial pace of Germany’s gold repatriation appears to be picking up.
As you may recall, Germany’s central bank, the Bundesbank, asked the U.S. and France two years ago to return its gold stash. Decades ago, it made sense to keep Germany’s gold stash abroad, in case the Soviet army rushed through the Fulda Gap and launched an invasion. But with the Soviet Union long gone, the Germans asked to have their gold back.
Three hundred metric tons of Germany’s stash is held at the New York Fed. The New York Fed said it could complete the return process… by 2020. Cue the questions about whether the gold is really in the vaults.
More questions emerged when it was revealed during 2013, only 5 metric tons made it home. But this morning comes word the 2014 total was rather higher: 85 metric tons.
At that pace, the New York Fed might complete the process ahead of schedule. We’ll see…
We interrupt our usual laundry list of economic and financial failure to note what might be good news.
As one of his last official acts before stepping down, Attorney General Eric Holder has, the Washington Post reports, “barred local and state police from using federal law to seize cash, cars and other property without proof that a crime occurred.”
Longtime readers will recognize we’re talking about the practice of civil asset forfeiture. Specifically, we’re talking about a federal program called “equitable sharing”… in which local cops call in the feds to offer perfunctory assistance on an investigation and proceed to seize property with zero due process. The locals get to keep 80% of the booty.
If that sounds like a small-business owner’s worst nightmare, it is.
It was equitable sharing under which the cops in Tewksbury, Massachusetts, tried to seize a motel owned by Russ Caswell. Caswell himself was accused of no wrongdoing… but because the motel was supposedly a haven for druggies, the motel was deemed guilty. The fact Caswell would have been out $1.5 million on a property he owned free and clear was irrelevant to the cops and the feds.
Caswell won his case after fighting in the courts for years. Many others have not: “Since 2008,” the Post tells us, “thousands of local and state police agencies have made more than 55,000 seizures of cash and property worth $3 billion” under equitable sharing.
No, the new policy doesn’t end civil asset forfeiture. And skeptics point out Holder’s language is muddy. The narrowest interpretation is that only 3% of the $3 billion seized since 2008 would have been left untouched if the new policy had been in place.
“More ambitious reform,” writes Jacob Sullum at Reason, “will require action by Congress and by state legislators.”
Well now, there’s a depressing prospect…
Best regards,
Dave Gonigam
The 5 Min. Forecast
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