Category Archives: Finance

India’s new tax code?

Posted on by
Reply

This video reminds me of one of my college classes relating to Asia.  We discussed how China was leading the way with its foreign direct investments, and creating capitalistic free zones.  Unfortunately, we are seeing how that played out, but it was a good run and if they can figure out their water and pollution issues they will probably be quite successful.  Half of the quarter was dedicated to India.  Our professor was Indian and seemed so frustrated with India and the amount of bureaucracy and red tape.  To have anything done required stamps, signatures, and more stamps and signatures before a final approval.  It kind of reminds me of Obama’s health care proposal, and what it will do to free enterprise.

The first time I visited India we drove from Agra to Jaipur.  Now the road is four lanes, and paved.  However, when I went in 2005 it was a two lane road filled with scooters, camels, donkeys, cows, buses, cars, and I’m sure I’m missing a few things (many of these are still on the road in 2009).  At that time the road was under construction, which made the drive even more precarious not to mention we almost slammed head on into a bus going 60 Mph  (I was luckily asleep, and found out afterwords).

For the dividers and to have traffic change lanes they were using bricks.  At first I just couldn’t belief it, and then I sort of nodded my head and thought well it is India after all.  All along the journey there are small cones sticking up into the sky spouting smoke, and all around were bricks.  So, from a semi-practical standpoint I can understand, but imagine trying to move all these bricks when the time came.  No barricades to hopefully prevent being run over, but a small series of bricks.

I was just there in 2009 and some things have changed, but much is the same.  A lovely country in many respects, but very 3rd world at the same time.  Getting horrendously sick in Agra didn’t help matter nor did being at the hottest place on the planet.  However, what struck me was the construction of the underground.  They already have one, but it is being expanded at a rapid pace for the upcoming Commonwealth Games Delhi 2010.  All around the ground is being ripped open, but there  are dividers, there are areas you can’t go so it seems like a step up.  For the rest of the country I can’t speak.

Now we get to the big news.  I think it is big new because simplification of the tax code is no small feat.  Watch the following video.  Instead of raising taxes, India is proposing to drastically simplify its code.  No tax up to a certain point (in the video), a 10% tax on incomes above said level.

Without knowing all the details… what does this potentially mean?

Let’s start with a few basics about the government and taxes:

1) Governments don’t have an income  — I know someone will try to refute this, but the majority and I mean majority of income comes from two places.  Its tax base meaning you and me, and through inflation.  You know that thing that Ben Bernake is so fond of doing these days.  Right we aren’t experiencing drastic price inflation at the moment, but he is monetizing debt like crazy, which means printing money out of thin air and buying crap with it.

2) As a government provides more services it needs more cash.  How do they get that?   See #1

3) Government doesn’t like to reduce its tax income because that means it has to provide fewer “services”, subsidies, welfare programs, etc…  This makes getting elected more difficult, because people want to be provided for.

4) With a smaller government due to a reduced “income” there is less of a foothold on controlling its society.

5) Less control over its society means more free will to the people.

You may or may not agree with me about points 1-5, which is fine as I won’t take it personally.  What it does mean is that people will have more money in their pockets to utilize as they see fit.  Who wouldn’t want more of their hard earned cash to spend as they wish.

I imagine if India passes this reform, and it is what they say it is there will be a boom in India.  Business will flourish, people will come out of their shacks, and start producing on a grander scale.  For clarification when I say shacks I mean it literally.  There is a staggering amount of poor people in India, crippled, sick, and desperate.

As businesses grow due to increased retained earnings, which will be used as productive capital there will be an increased demand for employees.  Greater demand for work, wealth increases all around, and everyone’s living standard rises.

For the sake of the people of India if this proposal is what it might be I hope it passes.

So, take a couple minutes and watch this!

Socialized Heathcare… Do we want this?

Posted on by
Reply

First Step: Watch this video on Canadian Healthcare

Did you watch the video?  I would embed it so you can watch it here, but it seems that due to technological limitations (or decisions) that isn’t going to happen.  And no I’ve decided against figuring out how to circumvent such actions.  So, click the link already.  It is only 20 minutes out of your life to watch a humorous yet somewhat painful video on the realization of socialized health care.  Don’t believe me then click the link.

Obama Plan: How do we pay for it?

You may be wondering what my take on the Obama plan is.  Well, firstly I want to know how we are going to pay for it.  Really, Social Security is going in the red, and so is Medicare.  Last I check in the red means that it isn’t profitable, and also means that there is no money to fund it.  Tax reciepts are down significantly, not to mention State Tax receipts.

So, the “income” that the Federal Governement receives is down.  Remember that the government doesn’t actually make or produce anything and is soley funded by us the taxpayer.  So, to pay for this we are going to go further in the red.  We already have a trillion plus deficit for 2009, which means borrowing or printing substantial sums of money.

While Univeral Health Care sounds wonderful, but again to pay for it we have to get the money from somewhere.  That somewhere is from the “rich”.  Maybe you feel entitled to health care, maybe not.  Essentially what is going to happen is that money will be siphoned from those with high incomes to subsidize the plans.  This is a blatant transfer of wealth, which is what the government does.

At what point do high income earners decide that enough is enough and decide to earn less?  If I were taxed at say 60%, which means I get to keep 40% of my income my incentive to earn more declines.

Rationing: Supply and Demand

Here is where socialized health care gets interesting.  Let’s say there is $100 billion dollars allocated to public health care per year.  For the moment don’t worry about the exact sums of money as this is an example.

With that $100b services can be provided up to that point.  Once that point is reached or even if we start to near that point where if anything else is spent then the program is in the red.  How might the administrators prevent that from happening?

1) You have to wait in line for your turn… these lines could get really long

2) Deny you service… bummer looks like you don’t get that MRI

3) Rationing, where there is a limited number of services available

So, in a perfect world we would all be healthy, and have 100% health care.  As much as I’d like that to be a reality we have to be realistic.  The only thing we get for free is the air we breath.  Anything else requires work, which then can be exchanged for a good or service.  I’m not saying our present system is perfect, by no means, but I don’t think this is the way.

The End of the Dollar?

Posted on by
Reply

While perusing various blogs I stumbled up something a bit unsettling. As I’ve been chomping on what the IMF bonds issues mean talks about moving away from the dollar as the reserve currency continue…

There are meetings being held Monday and Tuesday in Yekaterinburg, Russia, (formerly Sverdlovsk) among Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation Shanghai Cooperation Organization. The United States, which asked to attend, was denied admittance. Watch what happens there carefully. The gathering is, in the words of economist Michael Hudson, “the most important meeting of the 21st century so far.”

It is the first formal step by our major trading partners to replace the dollar as the world’s reserve currency. If they succeed, the dollar will dramatically plummet in value, the cost of imports, including oil, will skyrocket, interest rates will climb and jobs will hemorrhage at a rate that will make the last few months look like boom times. State and federal services will be reduced or shut down for lack of funds. The United States will begin to resemble the Weimar Republic or Zimbabwe. Obama, endowed by many with the qualities of a savior, will suddenly look pitiful, inept and weak. And the rage that has kindled a handful of shootings and hate crimes in the past few weeks will engulf vast segments of a disenfranchised and bewildered working and middle class. The people of this class will demand vengeance, radical change, order and moral renewal, which an array of proto-fascists, from the Christian right to the goons who disseminate hate talk on Fox News, will assure the country they will impose.

Read the full article.

IMF issuing bonds…?

Posted on by
Reply

Foreigners buying US Dollars?

I’m attempting to put a couple puzzle pieces together so here goes…

1) China has tons of US dollar and dollar denominated debt.  Additionally I heard suspictions that China may be purchasing land, companies, etc… with the debt.  Considering that we have no real access to their books, and they can really tell us anything they want I find this easy to believe.  If they had long-term dollar denominated deals they could exchange their dollars for tangible assets, which protects them from a declining dollar.  The US government will probably default on their debt via inflation so China goes and buyes an asset and says we will pay you in US dollars.  China’s holdings of US debt pays interest, and has a principle payement at expiration.  So, it seems plausible that they could use all their US holdings to buy up tangible assets.

2) BRICs (Brazil, Russia, India and China) are purchasing our debt.  Why?  What if they were willing to purchase dollars to placate the US only to use them to purchase raw materials, or IMF bonds (see #3).  We know China has been stockpiling commodities.  Oil has to be transacted in dollars. Are they paying for all the commodities with Yuan or dollars?

3) IMF Bonds… http://online.wsj.com/article/SB12441969…

China is thinking about purchasing $50b in IMF bonds.  Since when has the IMF sold bonds?  I didn’t see anything (see further down in my post) about which currencies would be used to purchase these bonds, but why can’t we make a leap and say that perhaps they would use US dollars.  The IMF holds a multitude of currencies so they buy dollars to keep the dollar stable for a bit and then use the dollars to purchase assets, which may be partially valued in dollars, but not a 100% exposure. The dollars are then held at the IMF, which issues bonds based on a basket of currencies.  This pulls dollars out of circulation (for now), helping to strengthen the dollar at least in the short term.

I don’t know if a scheme like this is even viable or makes sense, but it jumped into my head and I wondered if I’m completely off or there may be a bit of truth in it all.

Yet IMF is issuing bonds?

I’m pondering

a) the move by the IMF to issue bonds, and

b) that nations are cashing in their US obligations / cash for these newly created bonds.

So, I did a bit of digging…

http://blogs.wsj.com/economics/2009/06/01/imf-bonds-are-coming-soon-but-you-cant-buy-any/

The International Monetary Fund is putting final touches on its plans to issue its first bonds. Russia has already said it would buy $10 billion of the bonds, which would be priced in the IMF’s quasi-currency, “special drawing rights.” SDRs are a basket of currencies consisting of the euro, yen, pound sterling and U.S. dollar. As of Friday, 1 SDR equals $1.55.

So these are the major players when it comes to currencies, but excludes the Yuan.  All of these nations are in trouble.  The UK is in worse shape than the US and Europe is fracturing.  Perhaps this is an attempt to shore up some of the weaker currencies so they don’t collapse.  If hard currencies were to skyrocket (as many predict) this is a nail in the coffin to fiat currencies.

and

http://www.imf.org/external/np/sec/pr/2009/pr09207.htm

Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), issued the following statement today welcoming Brazil’s intention to invest up to US$10 billion in notes to be issued by the IMF:

http://www.imf.org/external/np/sec/pr/2009/pr09204.htm

Same thing as with Brazil, but notice my bolded parts…

“This decision will be beneficial to all,” Mr. Strauss-Kahn added. On one hand, IMF members’ investment in Fund securities will boost the Fund’s capacity to help member countries—particularly developing and emerging market countries—cope with the crisis and thus benefit all members by facilitating an early recovery of the global economy. At the same time, the new notes will offer members a safe investment instrument with reasonable return.

Reading a bit into this I’d say that there is a huge and continued growing concern that the previously risk-free and safe investments are no longer considered so.  IE: US treasuries.  This is nothing new, but perhaps to prevent an all out run on our debt, by consolidating these first world countries many believe that it will shore up confidence in our debt.

More ideas:

http://blogs.reuters.com/felix-salmon/2009/06/10/switching-from-treasuries-to-imf-bonds/

Perhaps by backing these instruments by a basket of currencies priced in dollars foreign holders will feel better about holding dollar denominated assets backed by a multitude of nations.

What might be the effects of such actions?

Is this to shore up confidence with developing nations?  They have the oil, the raw materials, and everything we need to produce the stuff that we buy.  For now they need us as consumers, but that gig is about up if not over.

Unless I’m mistaken this look like a move away from the dollar as the reserve currency.  As this unfolds I wonder how much transparency there will be as far as IMF holdings with regards to the backing of these bonds.  I don’t know enough about the IMF to make any solid presumptions or predictions, except is this slowly a move to a global currency?

What I really want to know is if countries are buying US debt, yet are in serious talks about purchasing IMF bonds… something isn’t adding up here.  Say they purchase the bonds in US dollars then the IMF will have a bunch of dollars.  Unless the Fed reigns in the money supply somebody has to hold our dollars unless they dump them on the market causing a crash in the dollar, which doesn’t make sense unless they have found a way around this.

I know this is a lot of fragmented thoughts, but something is going on… Will someone please help fill in the missing pieces.

Some See China’s Buying Spree on Commodities as Short-Lived – NYTimes.com

Posted on by
Reply

Some See China’s Buying Spree on Commodities as Short-Lived – NYTimes.com.

With the advent of Central Banks printing their way out of this mess the probabilities continue to point toward inflation.  While the rate of expansion of the money supply has lessened it is no less continuing to rise.  Should the Fed decide to sell some of its assets I can only imagine a depression ensuing.  As some have said they are threading the needle between inflation and depression, but at some point I think the hole will close and we will be stuck on the side of inflation.

The rebound in commodity prices is staggering.  Many factors influence commodities, among them currency valuations, supply and demand, forecasted demands, hedges against currency devaluations, and inflation.  China plays a major role in the demand factor.  In a recent NY Times article, referenced above, they state that while China is stockpiling commodities production lags.

At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak.

“There has been enormous stockpiling of all commodities” by China, and this cannot continue indefinitely, said Tim Huxley, the chief executive of Wah Kwong Maritime Transport Holdings, a big shipping line based here.

China is getting ahead of it future needs, which makes sense, but how long can it continue?  I have no doubt in my mind that we will see higher prices for everything, while wages stagnate and job losses continue.  The question however is if commodity prices will continue to rise without a correction?  If I had a crystal ball I would say yes primarily due to our fiat money system, record low levels of food supplies, and energy stocks being depleted while further exploration and extraction projects are being put on hold.  Until we see higher energy prices they won’t be put into full swing, which take years to develop. Nothing goes in a straight line however, so a mild correction would be encouraging for buying on the dip.

Back to the demand situation…

Richard S. Elman, the chief executive of the Noble Group, Asia’s largest diversified commodities trading company, bounced up from the conference table in his office here when asked about freight rates during an interview on Tuesday morning. He walked over to his desk, dominated by three computer screens that partly obscure a perfect view of Hong Kong’s harbor, and quickly punched up on one screen a list of daily charter rates for large bulk carrier freighters.

The list showed ship owners charging $58,000 a day now but just $24,000 a day for charters next year or in 2011 — an indication that there will be more ships than cargoes in the years ahead, particularly with shipyards still finishing vessels ordered during the recent boom.

Pointing to the rates for the next two years, Mr. Elman said, “That’s the real market” for ships.

As demand drops so do shipping rates.  There just isn’t as much stuff being moved around the globe.  Thanks to our inflated demand for goods we have excess capacity.  How many more ships can sit idle while China continues to stockpile?  If China slows it stockpiling, and demand for goods continues to drop and the recession continues and joblessness rises then what will be the impetus for prices to rise.  Again we have to go back to the fiat money system, and increasing debt to GDP all around the world.  How will our debt be paid off?  Inflation.
Even with a drop in demand for raw goods and materials if central banks continue on their present path we are headed for higher prices.  So, I’d like to see a correction in the price of goods due to a demand drop and then hold on for a wild ride as prices increase.
While I say I’d like to see this for profit potential, unfortunately there is a consequence on the human level.  If prices rise, while wages stagnate people will protest in anger.  It is a catch-22.

Congressional Budget Outlook :: CBO

Posted on by
Reply

Hold your hats folks as here are some of the forecasts for 2009 (link):

  • GDP falling by 2.2%
  • Slow recovery in 2010
  • > 9% unemployment by 2010
  • Decline in inflation (hmmmm… if monetary policy says anything this will reverse or at least eventually destroy the dollar)
  • Continued decline in housing prices
  • Decline in real consumption of more than 1%
  • Indeterminate on the financial system

And the best of all

$1.2 trillion dollar budget deficit for 2009*

*That doesn’t include the proposed stimulus package
*That amounts to 8.3% of GDP

So, we have an economy in decline, and digging a deeper and deeper hole to climb out of.  What I really want to know is how are we going to pay for 1) a 1.2T dollar deficit, and 2) a large fiscal stimulus package of a indeterminate size.

Let’s see our foreign friends have been purchasing our debt, which enabled us to essentially live off of their productive labor.  China for example is seeing a marjor reduction in exports, its economy is contracting, and eventually it is going to have to decide if it is worth supporting the American lifestyle at their own expense.  Presently, everyone is so intertwined I think there is a fear that if one jumps the house of cards falls down and we all lose.  However, is it possible for say China to pull out of the house of cards with minimal damage?  Is there a way they can reduce their exposure to US debt, and not have their savings collapse?  This is something I’d really like to know.

Seems to me that if they slowly shift some of their dollar reserves into commodities and other currencies SLOWLY, especially when there is increased demand they will be able to lessen their exposure.  The US import market is tanking, and has been tanking.  With unemployment increasing Bloomberg people are going to have a smaller income and will be forces to save thus hurting exporting countries.  This isn’t a US phenomena alone as Europe and frankly the rest of the world is contracting simultaneously, while being fed a mouthful of credit from central banks to re-inflate the bubble.  Last I checked it is very difficult to inflate a popped bubble.

Let’s take the latest number from Taiwan Bloomberg.  Their exports dropped by a record 41.9%.  We all know that Taiwan exports electronics, which have been a major boon ever since the technological revolution, which also saw a major hiccuup in 2000-2003.  So, this is confirmation of a major exporting taking a major hit.  There will be ramifications for the Taiwanese economy.

I can’t imagine that after the dust settles the world’s economies will look the same.  The sea of money will shift to where is sees the most opportunity and in its movement will tear apart the economies of many.

Here are a few more headlines on Bloomberg alone that tell a um telling story:

Fed Revives Discussion of Inflation Target to Counter Risk of Price Slide

ECB Expanded Balance Sheet by 36 Percent Last Year to Revive Bank Lending

Apartment Rents Fall, Vacancies Rise to Four-Year High on U.S. Job Losses

Shopping Center Vacancies in U.S. Approach 10-Year High as Stores Fail

Procter & Gamble Fights to Refinance as U.S. Borrowings Reach $2 Trillion

U.S. Banks Will Need to Raise More Cash in 2009, Meredith Whitney Writes

I’ll leave it at that, but what I’m seeing is RECESSION coupled with the Fed trying to stave it off through any means necessary, which is now including outright purchases of securities on the open markets.  Again we have no savings and are either monetizing debt or borrowing it from somewhere.  To do this will be disastrous to the dollar and our reputation as a solid financial center of the world.  Sure there are plenty of other economies in dire situations, but in the end who will come out with the heads up high and who will come out still in the sand?

Taxes oh My

Posted on by
Reply

Taxes:

The ubiquitous “necessity” that engulfs us continually. That sentence reminds me of just how complex and absurd the tax code is to follow and comply with every year and every day. On another board there was recently a discussion about the Auto companies with respect to their inefficiencies. Simply looking at all the rules and regulations they must follow in addition to the UAW well no wonder they need a bailout. Henry Ford was on the cutting edge and now Ford is close to falling off a cliff.  If I had to pay a worker $70.00 an hour for a repetitive task how could I be competitive?

So, back to the issue of taxes. I’d love to say they we don’t legally have to pay them, but you go right ahead and give that a try and see where you end up. The IRS will find you or your money and take it. Remember they have the backing of the US Government, which has plenty of people who will enforce the IRS rules if you decide to not comply.

Today is December 31, 2008 and in a few hours 2008 will be put in the history book. There will be plenty to say and perhaps in five years it might be considered the beginning of the end. Who knows…

I obviously have plenty to say about 2008, but at the end of each year investors have to decide if they are going to take any unrealized gains or losses to offset their other gains and losses to minimize tax consequences. You then have to wait 30 days before interacting (buying/selling short) with that particular equity if you want to take the loss.

Something about this just doesn’t sit right with me. So, 2008 draws to a close and I have to close out positions just for tax reasons, but I can’t buy them back for 30 days. Heaven forbid if I entered the market at the wrong time and want to reenter prior to 30 days. I’m sure someone gave a great reason when instituting this law, but really it punishes even a swing trader unless they are designated as a trader (which there are plenty of stipulations for). Once designated a trader you can elect mark to market status, which eliminates the wash rule as well as eliminates the limitation on carry forward losses.

Ultimately, I just don’t see how these laws benefit anyone except by “decreasing volatility”. If you trade more often than an “investor” you may be penalized. What happens if a trade is accidentally executed that then puts you in the wash rule category and you can’t take the loss? Bummer.

All in all these rules are supposed to “help” the taxpayer and average citizen, but really I’m missing something here. For all you commenters out there I’m sure someone will have something to say as to why it is needed. Go right ahead and show me.

Don’t we pay enough in taxes from inflation?

History in the Making

Posted on by
Reply

This is going to be short and sweet… We’ve broken the lows from 2003. It is very possible that we go much lower from here. We may get a bounce, but there seems to be a major lack of buyers. I wouldn’t be surprised to see a gap down tomorrow as all the people who weren’t watching the market today realize what happened and decide to sell first thing.

Frankly, we are now in uncharted territory. It seems as though we’ve corrected (in the US equity markets) the excesses from 2003 – Present, but that leave the bubble up to 2000 that was never allowed to correct due to the cheap money thrown around.

My fear is that we are only part way there. Remember in the movie Titanic when the ship started sinking. At first everything was calm and orderly. Eventually panic broke out as it started to go down and eventually broke in half. Have you seen panic yet? I sure haven’t. If this isn’t panic then imagine what is.

More soon.

The case for inflation

Posted on by
3

The following are responses that Richard Maybury gave in an interview with Investor Insight.

He makes a case for the coming of a great inflation. We haven’t seen the beginning yet as we are still going through a process of de-leveraging.

–Article–

Obama is a boomer, and I think an understanding of the boomers is a valuable tool for seeing what is coming. Boomers were raised in government-controlled schools and colleges where they were taught Keynesian and socialist economics. Neither Keynesianism nor socialism contains the concept of malinvestment, meaning the distortions caused by the government injecting massive money into the economy. These two forces, the injection effect and malinvestment, are the foundation of the economic crisis, and I’ve never heard Mr. Obama or his advisors say anything about them.

Money responds to the law of supply and demand just as everything else does. When the supply of dollars goes up, the value of each individual dollar falls, and prices rise to compensate. That’s inflation. Inflation isn’t rising prices. Inflating the money supply causes rising prices.

As prices rise, people become poorer and they demand relief. The politicians stop injecting money, people have less to spend, and business slows down, often causing a recession. The shakeout can be very painful, depending on how long the inflation has lasted and how many new dollars have been injected into the economy.

The government has only two ways to finance its spending — taxes, and printing money. Seven years ago the White House and Congress decided to finance the war by printing dollars instead of raising taxes. According to the St. Louis Federal Reserve’s MZM measure of money supply, the number of dollars circulating in the US on 9-11 was $5.3 trillion, and now it’s $8.7 trillion.

What is generally overlooked is the fact that the Federal Reserve has been inflating the money supply almost without pause ever since the Fed was created 94 years ago. So, underpinning the most recent seven years of injections and malinvestment, we have the residual from the previous 87 years.

Remember that I said events will control Obama much more than Obama will control events. Ever since the Great Depression, the way the federal government has dealt with shakeouts has been by re-inflating. They halt recessions by expanding the money supply further, which stops the shakeout. But that leaves a lot of bad investments in place, and it also creates a lot more. Of course, the so-called rescue pushes the day of reckoning into the future.

The interview continues and he mentions that eventually as the reserve currency the United States will have to do something to regain support of the dollar. He proposes this will be done through a return to the dollar being backed by some basket of currencies. Something will have to be done if the dollar isn’t to be completely destroyed. The entire interview is worth the read. Here it is: Interview.