Déjà vu all over again?… This was one of Yogi Berra’s famous sayings and it applies to European contagion. The GDP numbers from Europe verify that recession is underway and Spain has started to implode a bit. Funding costs are rising and austerity in Europe is starting to have a destabilizing effect on things, including the regime change in Holland and increased uncertainty around the re-election prospects of France’s Sarkozy — a chief architect in the bailout in Europe.
The difference this time around is that the markets are ignoring it all and “cherry picking” the bits of good news on earnings while ignoring the news from Europe and the below-par GDP news back here in the USA. Stocks have come a long way very fast, and earnings do not feel like they will keep pace. The Fed is in a bit of a box currently — GDP is sluggish, but not enough to make the case for QE 3. Meanwhile, inflation has been sneaking up, mainly driven by oil and food prices.
How long this bullish sentiment will last is anyone’s guess. While stocks do not look expensive by historical measures, the headwinds are growing..
Buyers of last resort…The news is out on who is buying all of those US Treasury bonds. It is not the Chinese. No — it is the same government who issued the bonds that is buying them back (in the form of the Federal Reserve). In 2011, the Fed reported buying back 61% all of all US Treasury issuance. It is also reportedly bought back 90% of all US Treasury long bonds! Say WHAT?? Yes, you heard that right, 90% of all long US Treasury bonds.
If this is not debt monetization on a large scale, what is? The U.S. is not the only one playing this shell game. The ECU will be forced to buy Spanish debt and any other country sovereign debt to maintain the semblance of an orderly market for sovereign debt. It Sounds to me like the case for gold, silver and hard assets is better than ever.
Real Tax Rates on the Rich..Never let the facts get in the way of a good story. The Obama spin-meisters would have us believe that runaway spending is not the real problem (after all, if the government can issue debt to pay for that and then effectively issue the currency to pay for it…Who really cares?) It’s the fact that the wealthy simply have not paid their fair share of taxes, hence it is a revenue problem.
In other words, if we can only get the hard working, successful taxpayers (those terrible 1% people) to pay their “fair share” we would not have this problem. The American tax code was designed to be a progressive tax code. The popular press has convinced us that the tax is regressive because people like Mitt Romney (and now Scott Brown and others) are not paying the maximum tax rates.
Recent data from the IRS prove this is not the case. There is a tiny sliver of taxpayers, those earning over $10 million a year (roughly 8,000 of the total tax paying domestic base) that pay lower rates than otherwise indicated by the maximum tax rates. In fact, the majority of the wealthiest are paying a higher tax rate now than was the case in 2008.
New IRS data shows that the top one percent pays a higher tax rate than any other group. This now includes all tax payers earning over $1.0 million (not including the 8,000 uber rich as noted above).
So the uber rich (Forbes 400 guys) get a break, but they still pay a higher rate than any other group. Most of the top earners earn their W-2 as salaries. Of course the Obama camp can still argue that the top rate is not high enough, but the system is progressive. In any case, clearly the problem is not one of revenue but rather one of runaway spending.
All attempts to divert voters’ attention from this fact by waging class warfare will come to no avail whatsoever until government spending is reigned in. So far the tea leaves do not look good for this problem to be recognized and dealt with effectively…