Friday, January 30, 2009

Stocks and profits

From Bloomberg: "The S&P 500 is down 7.8 percent this month, eclipsing the 7.6 percent drop at the start of 1970 and adding to last year’s 38 percent plunge. Profits decreased 38 percent for the 208 companies in the S&P 500 that released fourth-quarter results since Jan. 12. Last quarter is projected to mark the sixth- straight period of decreasing profits, the longest streak on record."

The market was down 38% last year and profits reported so far have declined 38%. Coincidence?

Thursday, January 29, 2009

Legalizing Tax Evasion

I already wrote how Geithner's tax evasion may encourage others to do the same.

Press release about Rep. John Carter's, a Texas Republican, new bill:

"Rangel Rule"

All U.S. taxpayers would enjoy the same immunity from IRS penalties and interest as House Ways and Means Chairman Charles Rangel (D-NY) and Obama Administration Treasury Secretary Timothy Geithner, if a bill introduced today by Congressman John Carter (R-TX) becomes law.

Carter, a former longtime Texas judge, today introduced the Rangel Rule Act of 2009, HR 735, which would prohibit the Internal Revenue Service from charging penalties and interest on back taxes against U.S. citizens. Under the proposed law, any taxpayer who wrote “Rangel Rule” on their return when paying back taxes would be immune from penalties and interest.

Wednesday, January 28, 2009

Socialist business cycle

One of the goals of socialism is to eliminate the business cycle:
"The unfettered competition of capitalists is replaced by cooperation and the business cycle by planned stability."

I agree that socialism would indeed eliminate the business cycle. But instead of "planned stability," you get perpetual recession. As occurred in Cuba, the Soviet Union, and Maoist China, the economy declines year after year. I prefer instability to their kind of stability.

US government buying bonds from the US government

From today's FOMC meeting:
"Specifically, the Fed said it is "prepared" to buy longer-term Treasury securities if the circumstances warrant such action."

The Fed and Treasury of course are both part of the US government. One federal agency buying debts from another federal agency? They are simply taking money out of one pocket and putting it into another.

Tuesday, January 27, 2009

Up on the news, but also down on the news 12:08 pm EST
Dollar rises after low consumer confidence report

AP 11:47 am EST
Dollar lower as consumer confidence hits new low

So which one is it?

FDIC: No extra return for extra risk

FDIC proposes rate caps for troubled banks

"Struggling banks would be banned from hiking interest rates above a national average under new government regulations proposed Tuesday that aim to halt such risky behavior. The Federal Deposit Insurance Corp. wants to change the way it calculates limits on deposit interest rates for banks that are having financial problems. Banks that are trying to stay afloat often raise their interest rates far above national levels in an attempt to attract new money."

If these banks don't compensate depositors for the higher risk, they will quickly go out of business. Yes, these deposits are FDIC insured so the risk is supposed to be the same as more stable banks. However, depositors still have the risk of loss of access to funds while the bank is taken over, the inconvenience of the closest bank branch being farther away, and having to redo any automatic deposits or withdrawals.

Previously, I might have opened an account with the riskier bank to collect the higher interest rate. As a result of the new law, I would definitely choose the safer bank since there is no advantage in using the riskier bank. The riskier bank is now guaranteed to go out of business as it is unable to get new deposits.

My stimulus idea

While the President and Congress bicker over how much to spend and which taxes should be cut to stimulate the economy, here is one idea they are totally ignoring:


A cut in the capital gains tax automatically increases the value of any future corporate earnings and, therefore, will increase the stock price of any company expected to make profits in the future. This country has lost at least $20 trillion of paper wealth and this will help recover some of it. Spending money and going into debt isn't going to make us wealthier. But cutting the capital gains tax will.

But what about all that lost revenue to the government? First, I love it when the government collects less revenue. But more important, with the huge losses in the stock market, I am sure the government will be collecting little to nothing from the capital gains tax. So the cost to the government is very low.

Will this single handedly solve the economic problem? Definitely not. Will it help? Probably. But very important, even it has no economic benefit, the cost of eliminating the capital gains tax is very low.

A side benefit, taxpayers save millions of hours no longer having to fill out Schedule D.

Oil prices are the symptom

I watched Larry Kudlow and Peter Schiff go at it on CNBC. Larry Kudlow asked about the huge "tax cut" as a result of lower oil prices. Mr. Schiff replied that low oil prices are only temporary and will go higher.

I'm not sure if Mr. Schiff is correct in his prediction, but I know that, while we are benefiting from low oil prices, it is wrong to count our blessings. Low oil prices are the symptom, not the cause.

As the world economy enters a deep recession, demand has fallen sharply and oil prices have crashed. As long as the economy remains weak, oil will stay low. And when the economy recovers, so will oil prices.

So let's not hope for continued low oil prices caused by weak demand. Let us instead hope for higher oil prices caused by an economic recover. Or better yet, low oil prices caused by increased supply and alternatives, coinciding with an economic recovery.

Monday, January 26, 2009

Chief Tax Evader

Timothy Geithner is expected to be confirmed today as Secretary of Tax Evasion… I mean Secretary of the Treasury. I wonder how much tax evasion will increase in the near future. With Americans struggling to make ends meet and losing their jobs and taxes sure to increase, the benefit of evading taxes go up. Many people must be asking themselves, "If the Treasury Secretary can evade his taxes, why can't I?"

UPDATE: Timothy Geithner was confirmed as Treasury Secretary. There really was little doubt he would be confirmed, despite his tax evasion. But did we really expect Senators like Charlie Rangel, who is also being investigated for tax evasion, to vote against Geithner for that reason?

Bank lending down, but not enough

The front page of today's Wall Street Journal reports "Lending drops at big U.S. banks." The opening line reads "Lending at many of the nation's largest banks fell in recent months, even after they received $148 billion in taxpayer capital that was intended to help the economy by making loans more readily available. Ten of the 13 big beneficiaries of the Treasury Department's Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008, according to a Wall Street Journal analysis of banks that recently announced their quarterly results."

I too am shocked, but for the exact opposite reason. The banks are starving for capital, profits are non-existent, revenue has dropped dramatically, and they are going bankrupt, getting taken over, or being nationalized. They should be dramatically cutting back their lending, preserving capital, and reducing risk. And considering the riskiness of lending in this economy, where the corporations they lend to are also going bankrupt left and right, a 1.4% decline in lending is not nearly enough.

Friday, January 23, 2009

Efficient Market Austrian Investment Advice

Most Austrians argue that because of the US's huge budget and trade deficits and low savings rate, the US dollar will decline against foreign currencies and the US stock market will underperform. But most Americans, investing through their 401(k)s or IRAs, buy equities through a generic mutual fund which invests zero or ten percent in international stocks. Those few who have read the research know that 70% US and 30% international is the "optimum" reward versus risk allocation. But even that allocation invests too little in international.

According to Vanguard, the US accounts for 44% of the world's market capitalization with 56% being international. This 44-56 allocation should be the "optimum" allocation. Efficient market theory claims you cannot beat the market. This allocation does not attempt to beat the market. In fact, the standard 70-30 allocation tries to beat the market by speculating that the US market and dollar will outperform foreign markets. This allocation should also satisfy Austrians, like myself, who believe that foreign markets offer better investment opportunities and that most Americans need to increase their international investments.

Speculators can deviate from this baseline, but the average investor does not want to have to do research, place trades, or monitor their investments too closely. This 44-56 allocation is a good allocation for investors and a good baseline to start from for speculators.

Vanguard Total World Stock Index Fund Investor Shares (VTWSX) has this exact allocation, but has a 0.25% up front fee and a 0.45% expense ratio. It is actually cheaper to do it yourself with Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) which has no up front fee and a low 0.15% expense ratio and Vanguard FTSE All-World ex-US Index Fund Investor Shares (VFWIX) which also has no up front fee and a 0.40% expense ratio. In total, you'll have worldwide exposure at a cost of just 0.29% per year. You can also trade the ETFs which are VT for the world, VTI for the US, and VEU for the world excluding the US.

Incentivize Jury Duty

Sixty of my fellow citizens and I were called in for jury duty to Phoenix Municipal Court at eight in the morning. There were seven cases on the docket, all misdemeanors. Misdemeanor cases require only 6 jurors and 1 alternate, so 49 jurists were required if they all went to trial. Fortunately, there is a monitor that shows the number of cases remaining. All morning long, as we sat there reading books and watching a movie they put on, we watched the number tick down. By lunch time, there were just two cases remaining. The other five cases must have been settled, dropped, or delayed. So they let half the people go. The other thirty of us stayed until 3:30 pm, by which time there was just one case remaining and would be doing jury selection the next day. We were all happy to get out of there, but disappointed the government had wasted our time.

This would never have occurred in a private legal system. In a private system, jurists would demand payment for their time. Sixty people times eight hours is four hundred eighty hours. The average hourly wage in Arizona is about $18/hour, not including benefits. The government wasted $8,640 of our time, which a private system would have to reimburse.

In our current system, a set number of people are called in for jury duty each day. The evening before, you call in and check if you are excused or have to appear. The number of people told to appear is based on the number of cases on the docket. When a case is scheduled, the judge, lawyers, and defendant meet in the morning and go through motions. Oftentimes, a settlement is reached that morning. A case scheduled for Monday morning will rarely go to trial before the afternoon. Why can't the lawyers meet Monday morning or even afternoon and then jury selection can begin Tuesday morning if needed? Only call in jurists based on the number of cases going to trial, not just on the docket.

Lawyers and judges will not like this solution. If the lawyers decide to go to trial right away, they want to be able to choose jurors immediately. If they finish settlement talks on Monday but have to wait until the next day for the trial to begin, they will have nothing to do the rest of the day. For them, time is money. And as long as jurists' time is not worth anything, the government has no incentive to stop wasting its citizens' time.