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Commentary by James Shott

Senate Majority Leader Harry Reid (D-NV) gave a speech on the Senate floor last week where he said this about the disastrous implementation of the Affordable Care Act: "Despite all that good news, there’s plenty of horror stories being told. All of them are untrue."

This abjectly stupid remark ignores the problems millions of the people Harry Reid serves as Majority Leader have encountered at the hands of this Democrat-created nightmare, some of them with life-threatening consequences.

Some say he really was alluding to claims made in ads paid for by the Koch brothers, about which he specifically commented shortly after that major gaffe, claiming the Kochs are trying to “buy America” through Americans for Prosperity, a 501(c)(4) started by David Koch and Richard Fink.

He believes that the Koch brothers are the single greatest threat to liberty, “spending hundreds of millions of dollars telling Americans that Obamacare is bad for them.”

However, Koch Industries donated less than $3 million in the 2012 election cycle, earning 77th place on the Top Donor List of OpenSecrets.org. Americans for Prosperity is reported to have spent $40 million, but does not appear on the Top Donor List.

Top Donor organizations ahead of Koch Industries include: the National Education Association, #5 at $14.7 million; the United Auto Workers, #8 at $13.3 million; the American Federation of State/County/Municipal Employees, #10 at $11.4 million; the AFL-CIO, #14 at $9 million; and the Service Employees International Union, #18 at $6.6 million. Ten more labor unions beat Koch Industries in spending. Organized labor is “buying America” to a much larger extent than Koch Industries and Americans for Prosperity combined.

Harry Reid misleads us on political spending, and lied to us during the 2012 campaign about Mitt Romney having paid no taxes for 10 years. He epitomizes the sordid aspects of partisan politics, and simply cannot be believed.

*****

On May 5, 2010 Latino students at Live Oak High School in Morgan Hill, California turned out to celebrate their Mexican heritage on Cinco de Mayo.

When some American students showed up at school wearing American-flag shirts, school officials ordered the American students to turn their shirts inside-out or go home, to avoid a repeat of the unrest that had occurred during past observances of this date.

The 9th U.S. Circuit Court of Appeals last week upheld the action of school officials.

So, when students from Mexico attending American schools want to flaunt their Mexican-ness in the face of the American students by waving Mexican flags on a Mexican holiday, and some American students decide to show their patriotism by wearing American flag shirts, the school authorities believe that the American students are wrong, and the Mexican students are right, and a federal court agrees with them.

Disgusting!

Whacky, radical rulings like this one have earned the Court the nickname, “The 9th Circus.” The Mexican students should not be allowed to stir up sentiments by waving a foreign flag around to celebrate Cinco de Mayo. If they prefer Mexico to the U.S., perhaps they should just go back.


*****

Congressman Dave Camp (R-Mich.), Chair of the House Ways and Means Committee, has produced a tax reform plan based upon three years of hearings and discussions with bi-partisan groups.

Hardly anyone who pays taxes will argue against reforming this overly complex system. The last round was in 1986, and at that time the tax code was more than 26,000 pages. Thirty years later, the tax system is a incoherent mess that negatively affects prosperity, job creation and investment, and is regulated by a tax code that has nearly tripled in size to roughly 75,000 pages.

Each year the tax code gets further complicated with more special interest loopholes, credits, and carve-outs.

Rep. Camp would make several changes to the code, like eliminating loopholes, reducing tax rates, whittling down the current seven tax brackets to three, and lowering the corporate tax rate from 35 percent, the highest in the industrialized world, to 25 percent.

In those 75,000 pages are goodies for numerous interests, and they will scream bloody murder if their special goody is on the chopping block. The Heritage Foundation’s Stephen Moore notes that we can “expect the White House to lambast this plan as a ‘tax cut for the rich,’ but the evidence from history shows that lower tax rates are usually associated with higher overall tax receipts and more taxes paid by the rich. In the 1980s after two rounds of Reagan tax rate reductions, income tax receipts doubled, and the share of taxes paid by the top 1 percent, 5 percent, and 10 percent rose as the economy expanded.”

This plan simplifies the tax code by allowing millions of tax filers a larger standard deduction, meaning they don’t need to itemize and can use the EZ form. For those who do itemize, the mortgage and charity deductions remain.

While the Camp plan isn’t perfect, and produced quite a few knee-jerk criticisms, it has many advantages, and is certainly a good start toward finally transforming the current tax code into something that is sensible and easy to understand. Let’s hope Congress has the courage to follow through.

Cross-posted from Observations

The following chart shows personal current transfer receipts divided by government current receipts.


Click to enlarge.

On Basilisk Station (David Weber, Copyright © 1994)


No worries! That quote comes from a book of science fiction. All governments appearing in this work are fictitious. I'm sure that any resemblance to real governments is purely coincidental.

Check out the last three data points at the trough of the long-term channel.

2000:Q1: Good times!
2007:Q2: Better times!
2013:Q2: Best times!

Other than 2000 and 2007, perhaps there has never been a better time to swing for the fences? The stock market only goes up again! What could possibly go wrong? It is possible that the 2013:Q2 data point isn't the actual bottom. I can say this though. First, we bounced off of it. Second, if I exclude the 2013:Q2 data point (which I have tested) then the channel changes insignificantly. Put another way, that's where the channel seems to want to go anyway.

This is not investment advice. It's a chart, some possibly meaningless trend lines, and a potential warning. No crystal ball here. I'm just trying to point out a risk that you won't hear on CNBC. That said, it is a risk that I'm not willing to embrace. I've been "risk off" since 2004 and intend to stay that way permanently. In hindsight, I have no complaints so far.

On Basilisk Station is a favorite book of mine. It is free to download on the Kindle. The second book, Honor of the Queen, is also free to download. I received a Kindle for Christmas. I have no idea how I ever lived without it (especially now that my comfortable reading distance isn't what it once was). The Kindle is one reason I have been posting a bit less lately. (Another reason is that I'm also working very diligently on my New Year's resolution.)

I know what you must be thinking. Free is fine and dandy but how much is it going to cost to download a complete collection of H.P. Lovecraft (my favorite author)? 99 cents. Infinitely more expensive! Right? Just keep telling yourself that the cost per word isn't all that hyperinflationary. That's how I'm planning to do it once I get over the sticker shock anyway. Don't forget to factor in the savings from not driving to the mall to pick it up. That helps too (perhaps not so much for mall employees, but that's a story for a different post).

What an odd economy we have. I've often said that the best things in life are free or nearly free (once basic necessities are covered anyway). Free and/or 99 cents certainly qualifies.

Source Data:
St. Louis Fed: Custom Chart

December 20, 2013
7 things you should have learned in 2013 -- but didn't


If there is one thing I have learned from this article it is that forecasting doesn't work. Got it.


This is a bond market forecast intended to entice us into gambling ("you can bet"). If we can safely bet that rates will rise again at some point in 2014, then shorting bond funds is a sure thing. Free money! They are practically giving it away!

This is a stock market forecast that uses uppercase ("NOW") inside a rhetorical question as an emotional debate tactic. Since the S&P 500 has risen dramatically, it is implied that it must continue to rise. Gambling on the S&P 500 is therefore a sure thing. Free money! They are practically giving it away!

"I always say, buy high and sell higher." - Suze Orman, April 2000

In a world where "forecasting doesn't work", I sure hope hindsight is kind to his sure thing bond market forecast and his sure thing stock market forecast.

I'm also a bit surprised that he didn't give us a sure thing climate change forecast for 2014 as well to round out the list. Perhaps weather is not his area of prophecy expertise? Perhaps the all-knowing mainstream Nostradamus sees an ice age coming and he's too afraid to share it with us lest we panic? Perhaps there's just no free money in amazingly accurate climate predictions? The world may never know!

In any event, I sure love the hypocrisy here. There is no way we could have learned all 7 things in 2013. We'd be fools to believe that forecasting doesn't work while simultaneously gambling on two of his forecasts.


Uppercase inside a rhetorical question as an emotional debate tactic for the win! Yes!

This is not investment advice. Seriously. I'd be the last person to suggest I knew for sure where bond yields and stock prices are headed in 2014. As a bond investor, I'm actually hoping he's right and that real rates rise in 2014 (and stay elevated). I could then reinvest at higher rates as my bonds mature. I'm not exactly holding my breath over the long run though. This is one long-term trend that has not been kind to procrastinators. And he, with his omniscient wisdom, has decided to bet against it. Good luck!

I'm not quite done yet. Here's a bonus heckle.


Anyone buying TIPS for hyperinflation defense doesn't understand the first thing about TIPS. TIPS would be a horrible investment during hyperinflation.

1. When held outside a retirement account, you'd have to pay massive taxes on the hyperinflationary gains each and every year. Those taxes could easily ruin you financially over time. Keep in mind that you might very well be forced to sell TIPS bonds just to pay the taxes on them. Ouch.

2. There is a lag. TIPS don't respond instantly to rising inflation. Inflation numbers only come out once a month. Hyperinflation could easily mean that you'd wish they came out hourly. Seriously. Think this through. During extreme hyperinflation, are you really going to be happy getting compensated for what milk prices were a month ago? I think not.

I certainly do not buy long-term TIPS as a hyperinflation defense. That's just being silly. I like TIPS as a real yield defense. I believed and continue to believe that it will be harder and harder to make money off of money in the future. That implies real yields fall. It is actually one of my better calls since starting this blog, cherry-picked 2013 notwithstanding. There were no negative yield TIPS when I was doing most of my buying (before the Great Recession). There certainly are now! It's almost like we're stuck in ZIRP. Go figure.

Once again, this is not investment advice. I do not claim to know the future with any certainty. I can say this though. As of 2004, I am risk averse over the long-term and no longer ever wish to swing for the fences. As a retiree, I have no job to fall back on if my "risk on" bets go against me.

Commentary by James H. Shott

Running for reelection in 2012, President Barack Obama claimed, “The rich are not paying their fair share of income taxes.” Playing to the baser instincts of voters is a tried and true technique, and if Mr. Obama does nothing else very well, he is a master at dividing people from one another and creating class discord.

The following chart shows real federal government current receipts per capita (June 2013 dollars).


Click to enlarge.

Worry not about the steepness of the climb. This bad boy's totally sustainable. I can feel it in my bones.

Yow 10,000! Put on the party hats! Just look at all that momentum! This economy is unstoppable again! Now that one of the last bears has finally capitulated, what could possibly go wrong?

October 20, 2013
Top Bear's Bullish Tilt Has Followers Growling


Gotta love his timing. I guess he just needed confirmation that the stock market was a sure thing. It's climbed 160% over the last 4 years or so. Sure thing it is! Can't lose! What more proof do you need? The government will soon be rolling in too much revenue. We'll be too prosperous! That's right. You heard me. I'm capitulating too!


No more economic downturns! No unintended consequences! Just genius move after genius move by the very same Fed who could not spot a housing bubble as it was peaking. Hurray! I'm talking directly to you Ben "There Is No Housing Bubble to Go Bust" Bernanke. Well played, sir. Well played.

There's gravy and biscuits in it for you, and by that I mean gobs of money. - Claptrap, Borderlands

Disclosure: I'm not really capitulating. I trust this economy long-term about as far as I can throw up. (Over Fed pun intended.)

Source Data:
St. Louis Fed: Custom Chart

August 13, 2013
Rise in retail sales signals stronger growth


Gasoline station nominal sales were unhampered by an increase in fuel prices? Shocking!

Retail Sales for July 2013 (Musical Tribute)

Click to enlarge.

Here's the best part.

July 1, 2013
California 3.5-cent gas tax hike kicks in for drivers


That's like a seventh of our country! Just look at all that unhampered growth in July! Amazing!

Aug 9, 2013
Restaurant sales, traffic sink in July

Who said anything about protracted downturns? Why are we bringing that up at all? Resilient! Strong! These are the words I wish to hear! Unhampered growth I tell you!


Thursday! Yes! Because nobody would ever think to take Friday off too! I certainly never did! Why burn a vacation day on that? Makes no sense! And nobody ever eats out on the 4th when it is a weekday. That's just nuts! No, sir. It's best to just go to bed early and sleep. That's what I love about the 4th: peace and quiet. You could hear a pin drop at 8pm around here. I swear!

Poor weather everywhere in the country! Simultaneously! For the entire month! And let's not forget all that higher spending on big-ticket items such as homes and autos and food and gasoline too!

This concludes the sarcasm report. Not much sarcasm this time let me tell you!

Click to enlarge.

Real estate tops the list at #1. I'm sure we'll bounce back someday. Just need to keep pushing this asset higher and higher so that people can finally sell the darned things again (the mortgage liability is not included in the asset chart for somewhat obvious reasons). And as an added bonus, the higher we can push this asset price the higher we can get those property taxes. Everybody wins!

Pension fund reserves come in at #2. Other than record pension underfunding even as the stock market has risen 160% from the bottom in 2009, what could possibly go wrong with that asset class?

Corporate equities come in at #3. It's nice to see them doing so well lately. It does make me wonder though. The people who warn me about the treasury bond bubble also tend to be the ones who tell me that the retail investor hasn't gotten back into the stock market yet. It's very confusing to me because it looks like about 60% of the stock market value is sitting right there in the hands of the retail investor. Very odd.

Deposits come in at #4. Don't forget to load up on the 0.5% 5-year CDs. They might not yield nearly as much as their treasury equivalents, but they are still a bargain at any price. Has anyone ever warned of a certificate of deposit bubble? I think not. Perhaps it is because CDs are held to maturity by default but it takes maturity to hold a treasury to maturity. Just a theory. Of course, if you aren't much of a risk taker then you can pick something with a shorter maturity. You'll have to sacrifice some of that juicy yield though! Mwuhahaha! Sorry, there I go being immature again.

Equity in noncorporate business comes in at #5. I've got to tell you. That takes guts. It's a tough world out there. Could strike it rich. Could be stomped by big business. At least the Great Recession II can't happen. The Fed has permanently put a stop to recessions. I can't personally prove it, but if everyone believes it then it must be true. Only rising rates can cause a recession. Therefore, ZIRP makes recessions impossible. Just because we're very deep into uncharted territory, doesn't mean that investors don't understand exactly how the future will play out. It's self-evident, especially when CNBC repeatedly tells us just how self-evident it is.

Mutual funds come in at #6. There are some bonds in there, but my guess is that the majority is stocks. That would be even more exposure to the equity markets for the retail investor (who I am continually told is missing out on the rally). Mutual funds are the safer way to go of course, because nobody wants to risk a 20% loss all at once when that same 20% loss can be locked in and guaranteed over 20 years (assuming 1% per year in fees). Whatever you do, do not underestimate the power of a "professional" active fund manager to add value just because 76% fail miserably when trying to outperform the market index.

Durable goods come in at #7. That's my favorite! As I've mentioned in the comments recently, the United States dominates the self-storage industry with "almost 90% of the global market". Don't let that deter you from buying even more durable goods to protect your wealth though. One place near me only charges $696 per year for a 5'x5' unit. That's a screaming bargain for someone with too many plastic coat hangars. Paying someone to store them for you is money well spent. Somebody needs to fund the CEO's $3.23 million salary. Do you have any idea how hard it is to manage other people's money stuff? Not just anyone can point a person towards their stuff without actually wanting to do inappropriate things with that stuff when they aren't around. It takes serious discipline. If only the banking system could do the same!

At #8 we've got corporate bonds. They can't ever seem to offer enough to satiate our appetites. I'm especially interested in chasing the yields of the non-investment grade bonds. What's the worst that could happen again?

We're to #9. Finally some safety! Yes, sir. As long as each municipality has its own working monetary printing press (in sharp contrast to Detroit's broken one) and we can work through the serious injuries of the dotcom and housing bubbles, then you'll no doubt sleep very well holding tax-free municipal bonds to maturity and/or racing towards the sell button on your trading platform of choice someday.

And lastly, we've reached #10. It's funny that so much time is spent warning us about a treasury bubble when individually purchased treasury bonds make up such a tiny amount of our personal assets (less than 2%). In my experience, very few people even know how to buy them directly from the government. I'm not judging. I've seen many hours of financial TV in my life and I've never seen anyone offer advice on how to buy a treasury bond. I don't recall the term I-Bond ever coming up either. It's almost like there's no money in it for them if bonds are purchased directly from the government.

This is not investment advice!

Source Data:
FRB: Z.1 Release

Stolen From Stop The ACLU

This goes under the Whiskey Tango Foxtrot category.

Remember how you were taught in school how to add a series of numbers? Remember how you were told to write each set of numbers on top of each other, to stack them so you could then add them together to get a total?

Kids aren’t taught that any more. In fact, the system of “cubes, sheets, sticks and dots” they are taught now is so convoluted, involved and confusing that it often results in wrong answers. But correct answers isn’t the goal for today’s fetid school systems. “The process” is all that is cared about.
If you aren’t infuriated by this video…


Click here if the video fails to load.

These are unionized teachers perpetrating this crime on our kids, folks.

Remember that.

I don't know about you, but after the first 30 seconds I wanted to find the teacher and punch him or her out.  And we are suppose to train these children to be the engineers, doctors and scientists of the future.  Really?