- Alabama’s proposed “porn tax”…
- … and the lesson if you neither live in Alabama nor consume adult media
- Prisoners in your basement, and the mother of all financial bubbles
- The screaming “buy” signal in the microcap space
- Last man standing in the “war on coal”
- Getting inside Janet Yellen’s head… the Shemitah looms… and more!
The universal first-blush reaction to the news is tee-hee. But if you give it a moment’s thought, it’s no laughing matter.
The Alabama legislature is looking to bridge a budget gap by passing a 40% “porn tax.”
“This includes pornographic magazines, adult videos and online adult rentals,” reads a dispatch from Americans for Tax Reform. The idea has already passed the House Ways and Means Committee as lawmakers race a budget deadline of Oct. 1.
We’ve read the bill. It’s only five pages or so. Conspicuous by its absence is any estimate of how much revenue the tax is supposed to raise.
Also missing is any discussion of how the tax will be collected. Of course, that’s the rub with any online sales tax — as we’ve documented periodically since 2011.
Really, how would the Alabama Department of Revenue track down every paid adult website — and identify every Alabama customer of those sites? Would the agency send enforcement agents to Estonia or Thailand or wherever if a foreign-based site doesn’t pony up?
As ridiculous as the porn tax is, it illustrates a sublime point: America’s state governments never really got out of fiscal trouble after the “Great Recession.”
Illinois gets all the headlines these days — giving lottery winners IOUs because the governor and legislature can’t come to terms on how to deal with decades of pension promises that can no longer be kept.
But Alabama? Porn tax aside, the Republican governor is going back on a campaign promise to oppose tax increases. He’s proposed higher cigarette taxes and eliminating the state deduction for FICA taxes.
Nor is Alabama the only “red” state finding it hard to make ends meet. The iconic example is Kansas — where (some) taxes have been cut but spending hasn’t.
In 2010, strapped for revenue, the state “temporarily” jacked up the sales tax by one percentage point. In 2011, Gov. Sam Brownback pushed to repeal the income tax, but settled for modest cuts, the top rate falling from 6.45% to 4.9%. In 2013, the governor started talking about making the sales tax increase permanent… with the promise that income taxes will fall further still.
The top income tax rate has since edged down from 4.9% to 4.6%. And no sooner was Brownback re-elected last year than he started talking about raising the sales tax — the better to close a $700 million budget gap.
The many state budget gaps belie the happy talk of a “recovery.” They also spotlight a theme we pursued here starting in 2011 with our executive publisher, Addison Wiggin.
We said when “the mother of all financial bubbles” finally burst, you’d feel it on the local level first — when services you take for granted are no longer there because state and local governments don’t have the money. You’d be subject to “new taxes and weird fees.”
Our thesis is taking longer to play out than first thought. But it’s never gone away, and Alabama is a vivid reminder.
Back in April, the governor threatened to free criminals from prison if lawmakers didn’t raise taxes. “You might not care about prisoners,” he said, “but when you have them in your basement, you’re going to care.”
True, that’s what state and local politicians always do — threaten to slash police and fire protection and the like before considering any other budget cuts.
All we’re saying is expect a lot more of it unless the economy finally picks up steam. And if you’ve been reading us for any amount of time, you know there’s no sign of that…
Major U.S. stock indexes are sliding, though not dramatically, as the week draws to a close.
For once, the Dow industrials are holding up best — down a third of a percent as we write at 16,275. It’s the Nasdaq and the small-cap Russell 2000 that are really hurting — both down about two-thirds of a percent.
Gold just breached $1,100, if only by 50 cents.
Crude has given up all its big gains from yesterday, and then some — down more than 3% at $44.40. Overnight, Saudi Arabia’s government put the kibosh on an emergency meeting of the OPEC nations — something Venezuela’s been pushing for.
The big economic number of the day is producer prices — ruler-flat during August, says the Bureau of Labor Statistics. Year over year, the change is minus 0.8%. Throw out food and energy and it’s plus 0.9%; this “core” rate is picking up a bit of momentum.
“Small caps are currently the cheapest they’ve been relative to large caps since the end of the tech bubble,” says a recent report from Credit Suisse.
That caught the eye of our microcap specialist Thompson Clark. “It’s a startling figure,” he tells us. “The report discusses performance. When small caps hit this level of divergence from large caps, what happens? They shoot higher. Much higher. Historically, when this event occurs, smaller stocks return anywhere from 5-15% over the following 12 months.”
Of course, microcaps have been caught up in the recent volatility. “But if the data are correct,” says Thompson, “we have a nice wind at our back for microcaps.”
Thompson aims for gains much, much higher than 5-15% in a year… but every little bit helps when you’re taking advantage of “flash action” market moves. For access to Thompson’s thoroughly researched microcap picks, look here.
If the White House is waging a “war on coal,” there must surely be winners as well as losers, right?
As our Byron King explained last month, coal stocks are being done in by a combination of weak demand and the Obama administration’s climate change rules.
In theory, the rules aim to cut carbon emissions by up to 30% by 2030, compared with 2005 levels.
In practice, here’s what that means. “What’s going on,” Byron explains, “is that Obama and his EPA have come up with a ‘hit list’ of coal-fired power plants, and their idea is to kill them off… The Obama administration is populated by people who simply viscerally HATE coal.
“Check out a map I saw at a recent energy conference showing the location of power plants that will either close (red dots) or dramatically scale back (yellow dots) under this EPA action. As you can see, these new EPA regulations are national in scale, although clearly they affect the U.S. Southeast and Midwest hardest.
“EPA regs will shut down over one-fifth of U.S. coal-fired generating capacity,” Byron sums up.
Now, let’s think about this for a moment. Coal still supplies 40% of U.S. electricity. If we lose one-fifth of that, we’re talking 8% of U.S. power-generating capacity that’ll have to come from something else over the next 15 years.
What will that “something else” be? “It’s safe to say that the next generation of U.S. power plants won’t be nuclear,” Byron suggests. “U.S. nuclear plants require about 20 years to construct and place into commission. That, along with multibillions in upfront financing.”
Renewables? “Yes, we already see rapid advances in this niche of the generating sector. Still, despite the renewable build-out overall, it’s not nearly enough to make up for electric supply that’s going away under the new EPA-mandated coal plant shutdowns.”
Not much left, then. “We’re looking at natural gas to make up the energy deficit,” says Byron, “and what a fortuitous set of events we have just now! Of course, if you read The 5, you know how fracking has liberated immense volumes of gas from ‘tight’ rock formations — shale, tight sands, limestone and more. U.S. gas output has soared in recent years, with much more to come.”
Byron has identified one player poised to emerge victorious in the “war on coal.” It will benefit most from that “Southeast hit list” on the map above. He names it in the current issue of Outstanding Investments.
“If Mr. Trump is so militaristic,” one of our regulars writes after yesterday’s episode, “give him a gun and a ticket to the Middle East.
“H.L. Mencken’s Boobus Americanus, personified. No wonder he is so popular.
“By the way, solar power may be doing well, but I’ve read that American wind power production is down about 9% last year. El Nino is doing a number on average wind velocity in this country, softening it up considerably.”
“Oh, come on,” a reader chides us after we spilled more virtual ink yesterday on what the Federal Reserve might do next week.
“The Fed is actually always post facto reacting to what has already happened in the ‘real’ economy and it does NOT anticipatorily increase rates to ‘cool’ activity. Rates go up because the allegedly free market rate has already gotten too high and the Fed has to match it.”
The 5: Well, yes. There’s a theory that short-term Treasury rates lead and the Fed merely follows when it sets the fed funds rate.
And it’s true the rate on a 1-year T-bill has shot up in the last year — from below 0.1% to 0.24%.
But we shouldn’t assume the Fed will tighten for that reason alone. Jim Rickards delivered a valuable tweet overnight, underscoring a point he made here in The 5 last week…
To clarify, that’s not the usual dollar index cited by financial media. We’re looking at the Fed’s preferred measure of the dollar — which includes many emerging-market currencies.
“But the government has changed the way they calculate inflation (and everything else),” another reader objects when we say by Fed standards inflation is low. “So how can you/we compare what level must be met to justify raising interest rates?”
The 5: As Jim Rickards has explained here once or twice, the Fed cares nothing about the fact the methodology has changed over the years… and that’s all that matters when it comes to sussing out the Fed’s future moves.
“I understand the flaws, I understand hedonics, I understand the changes, I understand what John Williams is doing,” Jim says. “I talk to my mother. She complains about the price of milk every time she comes home from the store. I get all that.
“But so what? Janet Yellen is a 165 IQ egghead who only works with what she works with. So I try to get inside her head so we can be ahead of the curve.”
“The blood moon on the 28th is not some great financial prediction,” a reader writes, weighing in on a recent topic. “It only says that something big is going to happen in the Jewish community. The last four times it happened starting in 1493, it was a significant sign for the Jews.
“I would be more concerned about the coming solar eclipse on the evening of Sept. 13. This is tied financially to the Jewish shmita. If you check the Jewish calendar on Elul 29 in 2008, 2001, 1994 and keep going back in seven-year increments, you will see a pattern that no one can explain.”
The 5: We’ve written about the shmita — popularized as the Shemitah — as well. We still can’t shake the thought that many of the people who’ve glommed onto it feel as if they missed out on all the 2012 fun.
That said, if the most dire predictions for the Shemitah materialize, we won’t have a chance to acknowledge our error on Monday!
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. If the Shemitah and the blood moon don’t cause havoc in the markets soon, here’s something that will, sooner or later — the biggest accounting hoax since Enron.
In 1977, before most of today’s Wall Street analysts were even born, Jim Rickards was doing complex tax and accounting work at Citibank.
Thanks to his accounting background, he’s just uncovered the biggest accounting hoax since Enron…
One that could wipe out millions of Americans.
The fallout will be 525 times bigger than Enron and is sure to affect all American citizens — no matter where you live, what you do for a living or how much money you have.
The mainstream media could uncover this deception anytime now.
Once you hear this story on the evening news, it will be too late for anyone to act.
Which is why he’s put together a four-step plan to prepare for the coming chaos.
Click here to see all the details.
