Oh, what a world, what a world! While media chatterheads go on about Libor and other financial chicanery, this sneakily one of the most depressing financial news stories in some time:
Firms Pass Up Tax Breaks, Citing Hassles, Complexity – John D. McKinnon
But executives, particularly at small and medium-size companies, complain that many of the tax deductions are either too cumbersome or too confusing. In some cases, the cost of obtaining the tax benefit is greater than the benefit itself—a wrinkle that has helped spawn a cottage industry of tax-credit consultants. Also problematic is the threat of pushback from the Internal Revenue Service.
The result: many companies are saying “no, thanks” and are likely paying more taxes than legally required. And corporate breaks that Washington hopes will boost the economy often prove ineffective.
You’re thinking, well, of course they’re talking about Greece. No! The US ! A world where the tax code is so convoluted that small businesses pass up tax breaks in the world’s breadbasket of capitalism is a miserable world indeed. It also starkly displays how, 10 years hence from Sarbanes-Oxley, big firms with big accounting and audit budgets have an advantage over smaller firms… all due to a bloated tax code.
Goodness knows technocrats are not among my favorite folks, but Mario Monti, Italy ’s current PM, has been an unlikely voice of reason lately—proclaiming a pro-growth policy featuring lower spending, lower taxes, and even easing of labor laws.
Wow! There’s hope for Italy yet.
This story is a microcosm of a growing chorus of boos and hisses about this rule globally. Whatever you think of the morality or potential buttressing of the financial system the Volker Rule would provide, the simple reality is that we live in a global world and a rule like this needs near universal uptake. Without it, all you do is create a competitive disadvantage for the country with the new, onerous, rules.
Interest payments will cost the government 3.1 percent of gross domestic product this year, according to Office of Management and Budget and International Monetary Fund data compiled by Bloomberg. That’s down from 4.8 percent in 1991, the highest in the past 50 years, during George H.W. Bush’s presidency. Since 1980, the only incumbent with a lower ratio than Barack Obama was George W. Bush in 2004.
I’m as for fiscal restraint as anyone, but as this blog has maintained for awhile, the notion the US is headed for imminent ruin tied to the deficit/debt simply isn’t true. With interest payments heading down, and near lows, insolvency isn’t on the table—heck, it’s not even the campaign issue it once was.
For a cogent synopsis on the current market environment, check out Fisher Investments’ newest Stock Market Outlook. Click here.
Around my office the last few weeks we’ve joked that—once this debt ceiling drama is finally resolved—politicians would take credit for “saving the world”. Well, it turned out not to be a joke:
Forget about the ideology and bombastics of these types of statements (which, by the way, come from both sides of the aisle). What this really demonstrates is the wanton and venal quality of the beltway: that this is in fact mostly a drama being played out on the public stage to use as a fundraising and general election issue.
To get the real skinny on the US debt, deficit, and debt ceiling situation, head to Marketminder.com and read these:
Back in April, I highlighted a phenomenon scrambling investors’ minds by the score: people were seeing so-called “black swans” everywhere:
Sorry, but Japan’s earthquake (devastating as it was in human terms), or the problems of the Middle East are not only NOT Black Swans, they’re not all that uncommon. I challenge someone—anyone—to find a year where some major geopolitical, geological, financial, or otherwise big scary event didn’t happen. The world is full of them through history—now is no different than any other, though folks always feel the present moment is “different this time”. Goodness gracious, 1998—a fabulous year for stocks—was also the year of Long Term Capital Management, among other things like the Russian Ruble problems and Asian banking issues.
As I said on Fisher Investments’ MarketMinder months ago, the whole point of a real black swan (if they exist at all) is that they’re hugely rare. Note that recent events did not crater the markets—they were grey pigeons.
To my mind, the issue of the US debt ceiling is archetypal Grey Pigeon drama—one that’s played itself out scores of times in US history, has never sunk global markets, yet folks fret about it often. Now we’re getting theories about Swans hopped up on some kind of hallucinogen to make them glow: Forget About Black Swans, the One Floating Ahead is Neon.
Scary as it might feel, today’s US debt ceiling drama is a classic, not a new thing. Grey Pigeons are flying again.
From the immortal George Costanza:
Why did it all turn out like this for me? I had so much promise. I was personable, I was bright. Oh, maybe not academically speaking, but … I was perceptive. I always know when someone’s uncomfortable at a party. It became very clear to me sitting out there today, that every decision I’ve ever made, in my entire life, has been wrong. My life is the opposite of everything I want it to be. Every instinct I have, in every aspect of life, be it something to wear, something to eat … It’s all been wrong.
At this point, we can more or less officially say California is the George Costanza of states. Here is a state ailing, with fiscal problems far into the foreseeable future, basically openly hostile to business, and with corporations and citizens fleeing for places with more stable property rights and lesser taxes. You’d think that—at a minimum—the state wouldn’t deliberately squeeze out California-based affiliates of Amazon and other internet-commerce businesses, but it is:
The net effect of such a law is not to raise tax revenue to but to push commerce further outside CA.
Yes. And listen to this, listen to this; her uncle works for the Yankees and he’s gonna get me a job interview. A front office kind of thing. Assistant to the travelling secretary. A job with the New York Yankees! This has been the dream of my life ever since I was a child, and it’s all happening because I’m completely ignoring every urge towards common sense and good judgment I’ve ever had. This is no longer just some crazy notion. Jerry, this is my religion.
If every instinct the state has is wrong, maybe California should do the opposite.
Another tremendous, sterling, must-read analysis from John Tamny today over at Real Clear Markets:
Maybe the most amazing thing about S&P’s announcement on the US fiscal situation is that anyone got riled up about it. Here is a good primer on the report, if you haven’t seen it firsthand. We’ve seen many similar declarations—and years ago—from 60 Minutes to The Wall Street Journal.
That I can see, the report didn’t include any new information other than S&P’s own opinion on the matter. S&P cites a relatively large deficit, rising debt, political gridlock—these have been known to bond investors for a long time, yet yields remain tame and government bond auctions are far oversubscribed. Notably, Treasury yields were down yesterday (4/18/2011), and the dollar was stronger (an ironic twist on the whole “risk on/risk off” situation I’ve before noted on this blog as nonsense).
S&P highlights entitlement programs (Social Security, Medicare, and Medicaid) as “the main source of long-term fiscal pressure.” But entitlements are not the equivalent of debt and can be changed by Congress. Government debt could reach troublesome levels at some point, no doubt, but not in a timeframe that matters to stocks near term. This, and eventual similar reports from other ratings agencies (they tend to move together), could even hasten the political response by enabling politicians to use the AAA rating as a rallying cry to push through unpopular measures like entitlement and other spending cuts…and possibly higher taxes (gulp).
Either way, stay cool: this report’s gusto shouldn’t sink stocks longer-term.