Why does noone see that Europe can have a nice currency union without fiscal union? I tried to put together this and some of the other bad ideas that I think are clouding the euro crisis debate in this post on the IGM/Bloomberg "business class" blog.
By artful application of bad ideas, Europe has taken a plain-vanilla sovereign restructuring and turned it into a banking crisis, a currency crisis, a fiscal crisis, and now a political crisis..
Read more here
Sunday, December 25, 2011
More Nonsense from Academic Economists
Peter Diamond (MIT) and Emmanuel Saez (Berkeley) recently published an article in The Journal of Economic Perspectives (Fall 2011 issue) entitled: "The Case for a Progressive Tax: From Basic Research to Public Policy." This article exhibits the total absurdity of modern academic economic research.
The point of the article is to show the "scientific" case for progressive taxes. Their conclusion: the highest marginal income tax rates should approach 80 percent! That is the conclusion of Diamond-Saez so-called science.
Here are a few of the assumptions in this "science:"
1. "Because the government values redistribution, the social marginal value of consumption to top bracket taxpayers ...can be ignored..."
Transalation: rich people don't value income at all so they won't miss it if it is taxed away. (Note this is an assumption!) You might wonder how Diamond and Saez know what "the government values" (or what that expression even means). They don't elaborate. They just make the statement "...the government values..." and then they fill in the blanks. Must be nice.
Here's another "scientific" assumption:
2. "Since the goal of the marginal rates on very high income incomes is to get revenue in order to hold down taxes on lower earners, this equation does not depend on the total revenue needs of the government."
Translation: regardless of whether government spends anything we should tax rich people at the highest possible marginal rate so that we can redistribute income.
3. "..the tax avoidance or evasion component of the elasticity e is not an immutable parameter and can be reduced through base broadening and tax enforcement."
Translation: By eliminating all deductions and exemptions and taxing capital gains and all other forms of revenue to high income tax payers as ordinary income, we can eliminate any tendency to avoid taxes.
Turns out this is utter nonsense. All the wealthy have to do is borrow the necessary money to live their lifestyle and not show any income at all -- ordinary or capital income. Consider Warren Buffet. He could just borrow $ 100 million per year and live on that without showing any income for tax purposes at all. Diamond and Saez are probably unaware that high income folks borrow, so they have ignored this among the myriad other things this "scientific" study has ignored.
Or, alternatively, high income folks could move to a country with more rational policies regarding income taxes. Diamond and Saez did not consider that possibility. Perhaps, they should talk to the states of California and New York to discover whether high marginal rates drive people away.
Here's the ridiculous conclusion of this "scientific" paper: "Thus we have identified basic research findings that we find relevant in thinking about practical tax setting......the case for higher rates at the top appears robust in the context of this model."
The above is what passes for economic research in modern academia, along with the argument that increasing minimum wages increase employment. Next, I guess we will be reading about how enacting maximum home price laws will revive the housing market. You can't make this stuff up. This is why tuition levels are going through the roof...to support this nonsense.
The point of the article is to show the "scientific" case for progressive taxes. Their conclusion: the highest marginal income tax rates should approach 80 percent! That is the conclusion of Diamond-Saez so-called science.
Here are a few of the assumptions in this "science:"
1. "Because the government values redistribution, the social marginal value of consumption to top bracket taxpayers ...can be ignored..."
Transalation: rich people don't value income at all so they won't miss it if it is taxed away. (Note this is an assumption!) You might wonder how Diamond and Saez know what "the government values" (or what that expression even means). They don't elaborate. They just make the statement "...the government values..." and then they fill in the blanks. Must be nice.
Here's another "scientific" assumption:
2. "Since the goal of the marginal rates on very high income incomes is to get revenue in order to hold down taxes on lower earners, this equation does not depend on the total revenue needs of the government."
Translation: regardless of whether government spends anything we should tax rich people at the highest possible marginal rate so that we can redistribute income.
3. "..the tax avoidance or evasion component of the elasticity e is not an immutable parameter and can be reduced through base broadening and tax enforcement."
Translation: By eliminating all deductions and exemptions and taxing capital gains and all other forms of revenue to high income tax payers as ordinary income, we can eliminate any tendency to avoid taxes.
Turns out this is utter nonsense. All the wealthy have to do is borrow the necessary money to live their lifestyle and not show any income at all -- ordinary or capital income. Consider Warren Buffet. He could just borrow $ 100 million per year and live on that without showing any income for tax purposes at all. Diamond and Saez are probably unaware that high income folks borrow, so they have ignored this among the myriad other things this "scientific" study has ignored.
Or, alternatively, high income folks could move to a country with more rational policies regarding income taxes. Diamond and Saez did not consider that possibility. Perhaps, they should talk to the states of California and New York to discover whether high marginal rates drive people away.
Here's the ridiculous conclusion of this "scientific" paper: "Thus we have identified basic research findings that we find relevant in thinking about practical tax setting......the case for higher rates at the top appears robust in the context of this model."
The above is what passes for economic research in modern academia, along with the argument that increasing minimum wages increase employment. Next, I guess we will be reading about how enacting maximum home price laws will revive the housing market. You can't make this stuff up. This is why tuition levels are going through the roof...to support this nonsense.
Saturday, December 24, 2011
The Poverty of "Economics"
An article in this morning's NYTimes by Catherine Rampell outlines the minimum wage increases that are coming on the 1st of January in eight states. As if lower income employees don't have enough problems this Christmas season, leave it to politicians (and economists) to make their lives worse.
The minimum wage increases will take place in Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont and Washington. Note that some of these states are controlled by Republicans, some by Democrats. This is bi-partisan mischief.
Imagine that these same states passed a law saying that a gallon of milk can't be sold for less than $ 10 per gallon. Would dozens of economists step forward with studies showing that milk consumption would be unaffected by this kind of law? Would there be a bi-partisan consensus that a minimum price of milk is a good idea and would promote milk drinking? But, precisely this kind of absurd reasoning is brought forward to defend minimum wage laws (and their increases). Economists are notorious for putting forward their partisan political views as if they were science.
Minimum wage laws are an infringement on the freedom of contract and they deny job opportunities to people who need them. Those who might wish to work free as a way of gaining skills are legally prohibited from doing so. Those with skill sets below the minimum wage level would like to have a job at a lower wage (rather than no job at all), but are forbidden by law to have that first step up the ladder.
Why not just pass a law saying that poor people should be required to stay poor by law? That would have an effect similar to that of minimum wage laws. Economists and politicians who support minimum wage legislation should be ashamed of themselves. Perhaps we should pass a law saying that economists should be paid $ 10,000 per hour or otherwise be forbidden to work. Then, perhaps, economists would begin to understand the pernicious effects of minimum wage laws.
The minimum wage increases will take place in Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont and Washington. Note that some of these states are controlled by Republicans, some by Democrats. This is bi-partisan mischief.
Imagine that these same states passed a law saying that a gallon of milk can't be sold for less than $ 10 per gallon. Would dozens of economists step forward with studies showing that milk consumption would be unaffected by this kind of law? Would there be a bi-partisan consensus that a minimum price of milk is a good idea and would promote milk drinking? But, precisely this kind of absurd reasoning is brought forward to defend minimum wage laws (and their increases). Economists are notorious for putting forward their partisan political views as if they were science.
Minimum wage laws are an infringement on the freedom of contract and they deny job opportunities to people who need them. Those who might wish to work free as a way of gaining skills are legally prohibited from doing so. Those with skill sets below the minimum wage level would like to have a job at a lower wage (rather than no job at all), but are forbidden by law to have that first step up the ladder.
Why not just pass a law saying that poor people should be required to stay poor by law? That would have an effect similar to that of minimum wage laws. Economists and politicians who support minimum wage legislation should be ashamed of themselves. Perhaps we should pass a law saying that economists should be paid $ 10,000 per hour or otherwise be forbidden to work. Then, perhaps, economists would begin to understand the pernicious effects of minimum wage laws.
Friday, December 23, 2011
Trading Fundamentals.
First of all; wish all of you Merry Christmas and Happy, Prosperous New year.
Isn’t it wonderful to put your trading on auto pilot? When you have taken a position and you know that it is going to be achieved. No more anxiety attack and looking for intraday signals. At least I find it much better this way.
Yes, the rally is not a normal, fundamental driven rally. It is a Santa rally. Fairy tale rally. But who cares? At the end of the day, if we are on the right side of the market and have been able to take our profit, we would be happy, even if the profit comes from a non-fundamental, economically bad rally. That is the reason I keep telling my readers, please do not mix economics and trading. And possibly, stop reading blogs which espouse conspiracy theories and have so far convinced you that everything is fake and should be sold.
The reason I say this because everywhere I see normally sane, intelligent people are selling the rally. They are either liquidating their long positions or entering into new short position. They are giving up the sweet easy money that is all there for the taking. And by going short at this point of time, they will have to bear agonies of seeing their position under water for a considerable amount of money and time. When the time will come to short and make money on the other side, these people will be just glad to cover their losses. Sad indeed! And guess who wins?
Every day morning, before trading starts, I tweet my readers my take on the market and how I expect it to perform for the day. Normally that’s how the trading goes, irrespective of the news flow of the day. That just proves that news is noise. The markets action tells you the future. Looking beyond the obvious helps.
Anyway, here is a daily chart of SPX with lots of straight lines. As you know the quickest and shortest way is always a straight line. And sometimes, simple things are true.
Today we broke the six month downward sloping line. That is good news for the rally. We also broke past the 1st price target, which was the closing price of December 7. The next price target is the closing price of October 27. If we can close above 1284 area of SPX in the next few trading days, then we are looking at a blow out top. That would convert lots of doubters who are still sitting outside and not participating in the rally. By that time, most of the easy money would have been made and what better way to convince the sheeples about the new dawn, than breaking the closing price of July 21st.
Remember folks, it is a game played at different levels and with the collective mind of the investors as well. I urge my readers to take a print out of the above picture, keep it posted in front of the trading desk and ask yourselves every day, where are you in terms of the market sentiment. If you are feeling comfortable with your sentiment and they are in line with the general market expectation, possible you are next in line for sheering.
Have a wonderful Christmas weekend with your loved ones. Thank you for following me in Twitter.(@BBFinanceblog) I know lots of you have great following, so please retweet to your friends and followers. You could be giving them the best Christmas present, for all you know. Visit http://bbfinance.blogspot.com/ regularly and profit from the World of Finance.
Auto Pilot On Friday Before Christmas.
Wanted to show you the update of the Analog of Eric Swarts which he posted last night after close;
I am expecting correction either today or on December 27, but given the seasonality factor, any correction will be minor.
SPX needs to close well above the down sloping trend line;
Thursday, December 22, 2011
What Next For Gold?
The stock markets are on auto pilot. They are grinding higher despite all the doubts and walls of worry. But that is the plan for the next nine days. There may be a small correction in between just to shake out the weak hands and correct the overbought conditions but the ship is on course. So lets talk today about something else. ”Gold”.
There was a time when we could say for sure that USD is on one side and everything else on the other. That means when USD would be up, all commodities, which includes oil, precious metal and equities, would go down and vice versa. Which also mean that if Equities would go up, it would be somewhat reasonable to expect that gold would also go up. Of course the degree of up or down would vary. But of late that correlation is breaking down.
Spot gold prices had a freefall on December 12. But it is still within the long term rising trend line as you can see from the GLD chart.
However, it is now showing some signs of weakness. The following chart shows the futures for various months in CME. This is when the SPX is on fire and dollar is not doing much.
There is red everywhere as far as eyes can see.
Let us look at the daily chart of the gold futures for the month of February 2012.
After the massive correction it reached an oversold condition and had a dead cat bounce for few days. And now that momentum has gone out. We can see that loss of momentum in the GLD chart as well where the stochastic RSI is turning down.
Before the correction, I had discussed about the negative gold rate and I did short “gold”. Made some money shorting it and then closed the short position. You can see it here; http://bbfinance.blogspot.com/p/portfolio-update.html . When the Santa rally started, I went long precious metal again. Instead of gold I purchased call option on its more emotional and temperamentally unstable cousin, silver, SLV. Then I repositioned on December 20th and December 21st. During the repositioning I went out of precious metal altogether. And my reasoning, logic and indicators are proving to be correct so far.
While physical demand was encouraging in some markets, India, one of the biggest markets for spot gold is not showing much enthusiasm. For one, Indian currency is depreciating quickly vis-à-vis US dollar, making gold more expensive for average consumers in India. Next to India, people are trying to guess the demand out of China. But with home prices down and stock market not doing well, affluent consumers in China may not be feeling very flush either.
I think it is time to be cautious on precious metal sector. If GLD breaks down below $153 in the coming week, I would be very worried. Or maybe I would short gold and silver again. The following paragraph is from Jon Nadler of Kitco. Please do not send me hate mails. The opinions are his, not mine. I just keep an open mind. So do not shoot the messenger.
”Investment Protection Solutions’ Dominick Paoloni, who had held 10% of his clients’ funds in gold, sold 90% of those positions off last week. Albeit in the bigger scheme of things the $8.5 million liquidation by IPS is but a drop in the proverbial gold market bucket, the possible developing trend ought to keep some up at night wondering what it is that such money managers see out there.
Perhaps they are becoming convinced that gold is less appealing amid developing deflationary conditions, perhaps they are tying its performance to the beleaguered euro, perhaps they have come to realize that gold’s inability to overcome $2K amid perfect ‘storm’ conditions this fall means that something has changed in the market’s psychology.
Indeed, consider the fact that the euro has come under an existential threat, and that certain governments are running up debt tabs faster than you can say “bailout!” Gold has not responded ‘properly’ to such alarming news or to the fact that there has been a trend by a few central banks to buy the metal despite record or near-record values. If the situation appears puzzling to some, then they ought to look no further than the US dollar and its supposedly impossible ‘revival’ lately. This is because if there is one asset that the European crisis has indeed bolstered (and then some) then that would be the supposedly moribund greenback. Given the divergent paths that gold and the dollar have been on since the Fed pushed rates to near zero, the current state of affairs should not surprise too many (yet, it does, and to a degree that is astounding).
Veteran market observer and publisher of the Value View Gold Report, Ned Schmidt notes in his latest missive to subscribers that “denial has been rampant in the markets for some time.” He points to silver as an example of a metal which “has been in a bear market since April, though some continue to deny that reality.” Mr. Schmidt diagnoses the current market paradigm as the “withdrawal of inflated expectations” (the double-entendre of ‘inflated’ should be noted here). He calls the previous forecasts for 2.5, 5, and 10K gold just as “irresponsible” as those that had promised is $100 per ounce silver to be a concrete reality by now.
According to one market forecasting tool that Mr. Schmidt includes in his latest analysis, there is additional pain to come in the precious metals’ space. However, noting that “markets do not go down forever” either, Mr. Schmidt goes along with the projection that gold might yet make a run to new highs, perhaps in late 2014/ early 2015. However, “that high may not be significantly above the highs already achieved” concludes Mr. Schmidt. As for the current or near-term bottom in gold, the author of the VVGR does not expect that to be put into place until about April of 2012 and the figure could be as low as $1,110 “if no events positive for the price occur.”
I am not sure whether we will see gold go down that far but if it does, at $ 1100/ounce, it sure will be a super value buy. I think long term Gold will reach $ 2000 or even cross it. But I do not want to be invested in gold now and see the price go down 30% from here. That would be such a terrible waste of the opportunity value of money. Remember those poor souls who went long gold in 1980. They had to wait for over 20 years to see their money back.
Did I hear someone just said;” This time is different”? Ya, yes, of-course!
Do you find the article thought provoking? If so, please retweet to your friends who may benefit from such discussion. Once again, thank you for following me in Twitter.(@BBFinanceblog). Visit http://bbfinance.blogspot.com/ regularly and profit from the World of Finance.
Another "Rip Van Winkle Year"
In 1987, the Dow Jones Industrial Average began and ended the year in the neighborhood of 2200. In July it topped out above 2700 and hit a low of 1700 in October. A lot of sound and fury to end unchanged!
It looks like we have a repeat performance this year. After the big rally in the first half of the year and the huge slump at the end of the summer, the Dow and the S&P are within a day's rally of being unchanged on the year. Not bad given all the bad news and disappointments.
Look for a big rally in 2012. 2011 isn't over yet, but it certainly seems to be about to finish about where it began, if not better.
Europe is a mess. US government policy is a mess. But, business is getting better and profits are improving. If you're looking for a job and you are in the bottom half of the nation's skill set, you're still in trouble and things aren't going to improve much for you in 2012. But, for the highly paid and for government employees, next year looks pretty good. Stocks will do well, bonds won't. Europe will adopt something akin to a monetization of the sovereign debt of the Eurozone countries -- a big mistake, but one that will give them a few years' breathing space until disastrous inflation overtakes them.
So, the long run future is pretty bleak, but the next couple of years will be good for stocks, good for rich people and good for protected government employees. For everyone else, let them enjoy the liberal rhetoric, because the liberal policies have undermined their future.
It looks like we have a repeat performance this year. After the big rally in the first half of the year and the huge slump at the end of the summer, the Dow and the S&P are within a day's rally of being unchanged on the year. Not bad given all the bad news and disappointments.
Look for a big rally in 2012. 2011 isn't over yet, but it certainly seems to be about to finish about where it began, if not better.
Europe is a mess. US government policy is a mess. But, business is getting better and profits are improving. If you're looking for a job and you are in the bottom half of the nation's skill set, you're still in trouble and things aren't going to improve much for you in 2012. But, for the highly paid and for government employees, next year looks pretty good. Stocks will do well, bonds won't. Europe will adopt something akin to a monetization of the sovereign debt of the Eurozone countries -- a big mistake, but one that will give them a few years' breathing space until disastrous inflation overtakes them.
So, the long run future is pretty bleak, but the next couple of years will be good for stocks, good for rich people and good for protected government employees. For everyone else, let them enjoy the liberal rhetoric, because the liberal policies have undermined their future.
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