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Monday, December 31, 2012

Cliff Deal – Winners and Losers

 

Note: I wrote the following after watching the Prez on TV. His smiling demeanor and tough guy talk led me to believe that a “patch” on the cliff might happen. Four hours later, and that is not the case. The House will not vote on anything today.

There is a chance that the House could vote tomorrow. This would bring results along the lines I describe below. But if the House does not vote, then it means there will be a long fight. A fight that could go on until the debt limit shuts the government. 

These people are desperately trying to fail.

 

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My read of the President’s speech is that there is a deal that will avoid the cliff. So go enjoy New Year’s Eve. Give it another 30 days, and we’ll be right back into the soup. My scorecard on the deal.

 

-If you’re unemployed, you’re a winner. You get another extension of benefits.

 

-If you’re employed, you’re a loser. Fully 155m workers are going to pay 2% more on income starting tomorrow. The increase in FICA taxes will come to a lumpy $120B. This will rank as one of the largest YoY tax increases in history. This is a very regressive tax increase. There is a $108K cap on what is subject to FICA taxes, so high incomes do not feel the bite. But those who earn an average income will see a meaningful reduction in disposable income ($2,000 per household).

 

This is a decidedly un-Democratic outcome. The rich avoid taxes, lower incomes pays a disproportionate share. Who insisted that this unfair outcome was part of the deal? Answer: Harry Reid, Nancy Pelosi and Barack Obama. Don’t blame the Republicans when your next check has an extra bite out of it. “Go figure?”, on this outcome.

 

-If you make between $250 and $400k, you are a very big winner, congratulations. Half of the top 2% just got a free pass.

 

-If you make over $450k, the cliff deal says you may have to pay more taxes. I wouldn’t worry too much about the top 1% – that group has 18% of all income. The move from 35 to 39.6% for America’s richest will not matter a bit. None of them paid the old rate, they won’t pay the new higher rate either.

 

-If you’re one of the 33 million taxpayers who avoided falling prey to the Alternative Minimum Tax (AMT) by the last minute patch, you dodged a bullet. This would have taken an average of $4k out of your pocket. I’m happy for you.

 

-If you’re one of the 4 million hopeless losers who have been stuck with AMT in prior years, you’re going to get stuck again. I’m one of those poor souls who is mired in this tax trap. It’s a very unfair outcome for me. I make a fraction of the top 1%, but because of AMT, I pay a minimum federal tax of 28% while the top 1% pays an average of only 15%. Where’s the damn cyanide?

 

-The defense industry will have the bubbly out tonight, no sequestration for them for the time being. Phew! I was really sweating this one!

 

-Investors will also have the Champagne out. They dodged a bullet – at least for the next 60 days…..Keeping the 15% Cap Gains rate for most incomes is a plus, the new 20% rate for the top filers is a gift.

 

-The American people are very big losers. The cliff deal just sets up another crises before the snow melts. Nothing has been accomplished that addresses the uncertainty factor. The deal insures a big deficit for 2013. It will not increase tax revenue from the top 1%. It will result in a big increase in payroll taxes that will hurt the bottom 40%.

 

-Washington is the biggest loser of all. Democrats, Republicans, Senate, House and Obama all come off looking like chumps. They didn’t deliver anything but a Band Aid. I give the cliff deal a D-.

 

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Comments

  1. Washington DC just tore up their own DNR order (Do Not Resuscitate). Who cares? The patient is still in critical care and not expected to survive long term even if advanced cardiac care is administered.

    Either taxes get raised dramatically for the entire country (middle class and rich alike) — which will destroy the economy … which means the government will go bankrupt alongside its tax base

    -or-

    Washington DC must shrink in both size and scope to something the broad economy can afford.

    Those were the only two options, no matter what you think the meaning of “is” is or who’s lips you want to read. Washington DC is circling the drain, and they are too cowardly to admit it.

    Want to know how this movie ends? Look at General Motors in 1960s (globally dominant, big unions, producing low quality wood panel gas guzzlers, contempt for customer’s needs) and look at GM in 1980s (closed rusty plants, shrunk payroll, disenfranchised dealer network, already on its second bailout — looking enviously at Honda / Toyota sales). GM’s CEO was busy building a bullet proof board room to further isolate management from customers, while the UAW complained that 15 workers should be paid even if only 5 were actually working. Unnecessary and ineffective assembly plants were kept open, producing crap cars that eventually had to be dumped on Hertz and Avis and so forth. While Honda and Toyota were delivering better value, GM was debating how much to raise prices. It was GM’s game to lose, and they blew it.

    Uncle Sam is in the same boat. Globally dominant, massive public unions, low quality product/service, and utter contempt for the public. Uncle Sam won’t collapse overnight any more than GM — but they have passed the point of no return. The bureaucrats in Washington are all upset about the possibility of shutting down ineffective bureaucracies or cutting their lifetime benefits. No mention of addressing product quality problems, no mention of controlling costs, no mention of delivering better value that customer surveys say is desperately needed. “CEO Obama” is such a clueless ass that he just gave all the executives a pay raise; he hides behind a massive security apparatus that isolates him from his customers. Upper management recently built a visitor center (and more office space) to keep ordinary people out of their own capital building. Unnecessary, redundant and ineffective bureaucracies are kept open. And public unions complain endlessly about how they aren’t getting pay and benefits increases that they want — while their customers lost benefits and pay long ago.

    The government lacks credibility. Taxing the rich won’t fix the “corporate culture” of washington — not the lazy unions and not the inept management. The one and only way to fix Washington DC is to fix the corporate culture, and that would require leadership and sacrifice by bureaucrats (not customers). In other words, don’t hold your breath waiting for a turn around.

    The “Cliff Deal”, if there is one, is just a distraction. Washington DC is the next Detroit. It is not an overnight event … it will take 15-20 years to fall apart. The media will try to distract as many people as they are able, but the “Smart Money” will just accept this and adapt.

    The end of GM (or Bethlehem Steel or Kodak) was not the end of the world — plenty of people saw those companies collapsing and prepared for it. The end of a giant face sucking vampire squid in Washington DC isn’t the end of the world either. Take a deep breath, then adapt. The “founding fathers” of the USA, the ones who wrote the Constitution in the first place, warned of the dangers of big government. The bureuacrats will scream, but we are going to return to a “normal” sized government (much much smaller) and no vote is going to change that.

    Like everything else, the size and scope of government reverts to a historical mean. Fighting that is like fighting the tide from coming in. Ask any of the empires throughout history that thought this time will be different.

    Happy New Years to dinosaurs and mammals alike — some of you will adapt, some of you will become history museum exhibits. Choose wisely.

  2. They will never cut anything and the only way it will change is if the market forces the whole thing to change. That won’t happen for a while. But it will happen. And when i say force, i of course don’t mean a little increase in short term interest rates. That will not get their attention in DC. The whole thing will implode and then it will all change. Not until then.

    Oh, and one more thing. Krugman will write non stop columns about how it’s all republican’s fault.

    And Henry Blodgett will quote him endlessly and Joe Weisenfool will try his best to write columns like his hero Krugman deflecting all blame from democrats.

    Doesn’t everyone here understand that a ginormous bloated gov’t that can’t be funded is all republican fault?

    • A very wise man once said: “A house divided against itself cannot stand”

      As long as the political class has the stupid people discussing democrats vs republicans — they think we will be too busy fighting each other to stop Washington’s theft

      They might be right about that part, but their strategy is incomplete. A house divided against itself won’t stand, and so there won’t be anything left to steal.

      I would expect the mainstream media to continue arguing democrats vs republicans until their ratings improve. Turn them all off, cook your wife a nice dinner and maybe she will make desert (literally or figuratively, smirk). Kiss her a Happy New Years at midnight either way.

  3. Maybe by some chance The Masters of The Money are up to something big. If they are the next few weeks might tell us something. Odd’s are we are being governed by totally clueless people and there is little hope things will improve, more likely just keep getting worse.

    • John1959: “Odd’s are we are being governed by totally clueless people”

      Odds are 100% that “We the people” are clueless. We expect to spend more than we have; we elect criminals to run the place; we forget the basic principals the country was founded on; we insist that those principals are so last century… and then we act surprised when it doesn’t work

      My town saw all the flooding caused by Irene a year ago, so we voted to build a softball field instead of fixing the sea dunes. We all acted surprised when Sandy flooded our homes.

      Totally fucking clueless people

      • We live in The Amusement Park of America. It’s all about having fun, entertainment comes first. Ball parks, malls, concerts, movies.

        odd’s aren’t good, so every man for himself. I do my best not to be a target. Lots of people are sitting ducks so goody for them.

  4. Two months ago, Ron Paul predicted there wouldn’t be a deal. I still don’t understand how he knew, or why. You’d think it would be in the interests of both sides to reach some sort of deal, even if it’s just cosmetic.

  5. Obama bin Biden says:

    All I know is that last year on New Year’s Eve, these pikers passed the NDAA. Nobody was watching and a lot of scummy policy went into law.

    The fiscal cliff likely needs to happen, so we may as well get underway with it. Kicking the can further down the road will only make things worse for America’s youth.

  6. Mark B. Spiegel says:
  7. Liberals support Child Abuse says:

    If you saw someone abusing their children, who on this blog would not speak up and intervene?

    Answer: Every fucking person who supports Congress taking out more debt on our children’s credit line.

    Liberals are child abusers who hate their children — they are selling children into debt slavery

    Speak up against this hideous crime or else

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  9. Your facts are not facts at all, but political rhetoric. You are stating as fact that the ‘rich’ who make 250K – 400K will get a pass on the 2% FICA increase. You darn well know the tax is on ALL wages including the people in that category. Secondly, oh the richest 1% only pay 15% in taxes. That is not true. Yes, a person who’s income was ONLY CAPITAL gains and dividends would pay that rate last year. That is not all of the 1%.

    I am a tax advisor. I know that the tax code is so complex that it allows people to say whatever untrue statement they want about it and people will believe it because they will never read the code. Well I read the code, and I read the bill the senate passed yesterday morning.

    BTW, I am not in the 1%.

  10. Bruce: Do you think this is USD positive? The market tends to price in expectations early … the past QE’s have all been USD negative once they were announced (for the following weeks/months) … this last QE was not that USD negative compared to the past ones. With the Fed ending the bond buying program earlier than expected, I would think this would be USD positive and the market would begin to price this in.

    If so, I think EURUSD 1.33 is a good top (maybe for this year???) At least for the next few weeks/months at least.

    Technically 1.33 is the 200 EMA on the weekly chart, and EURUSD just broke a TL support on the daily chart from mid Nov lows, and also finished 3 waves up from mid Nov lows. Personally I think 1.33 is the top, and a new trend will start down. Weekly COT analysis also points to commercials are positions short the Euro,which hints at an upcoming downtrend..

    Regards,
    DR FX