Traderbill's Financial Markets Weblog

(Note: TB had planned to discuss the subprime impact on government revenues at all levels but due to the ‘unexpected’ (?) Fed action, postponed that discussion until tomorrow. Also at end of commentary see the discussion of the impact of the Alternative Minimum Tax which is crucial.)

…at the risk of sounding like the bald guy with mustache on the tube who hawks his computer learning DVD’s, TB received a comment from a reader yesterday:

“Great continuing columns.  You and Alan Abelson temper any bullish tendencies I might otherwise have.  And that is of real value to me. All the best.”

First, it wasn’t a relative. Second, he is of the opposite political persuasion of TB. Third, it made TB do some soul-searching. But the most important thing was it, along with similar ones received over the last five years, was a wake-up call to keep doing what he started out to do:  make people think, but not make them think he has all the answers. Leave that to the Larry Kudlow’s, Brian Wesbury’s and Jim Cramer’s of the world…odd they are all on CNBC isn’t it? There are far too many ‘eggspurts’ out there, all with their own agenda. TB’s problem was that he found himself raising his voice to get his point across over frustration with the bulls…he did this not only in this column but in conversations with friends. This solves nothing as you have already told them all they wish to hear and more and they close their minds. So back to saying what he believes and letting you decide…hopefully he can prevent you from being whipsawed with the market like yesterday.

Yesterday, TB got it right and that was encouraging after three big rally days…but, on LOW volume, in fact three of the lowest of the year! Always question a low volume rally as it is more an indicator of an absence of sellers rather than a preponderance of buyers. But the problem with being a contrarian in a market others see as bullish, is you get depressed when you are wrong and you can never gloat when you are right because of the pain inflicted on investors, not speculators.

TB firmly believes the Fed did what it did to retain its credibility through independence. TB has seen this in politics, corporate boards, and anyone who does not like the appearance of being told what to do…and that is exactly what the stock market was trying to do…force them to do their bidding.

“This is a reluctant committee, they didn’t want to ease.” Vincent Reinhart, former director of the Fed’s Division of Monetary Affairs and now resident scholar at American Enterprise Institute (Conservative).

“I can’t remember a time when the Fed’s credibility with the markets has been lower than it is today.”, Stephen Stanley, chief economist at RBS Greenwich Capital.

“The Fed’s tendency to be more reactionary, combined with a market braced for a greater, more pronounced slowdown, amounts to a self-fulfilling prophecy.” Taylor Burroughs, derivatives analyst at Regions Financial Corp.

Is doing what the market wants them to do the measure of a competent Fed? Do a hundred ‘eggspurts’ trotted out over the course of a few days with their opinion of what the Fed must do, mean squat? Consider that the consensus was for a 25 basis point cut in the Fed Funds rate and 25-50 on the Discount Rate, but the range was from “no need to do anything,” from inflation hawks to a “shock and awe” (his term), 100 basis point cut by CNBC’s “right on America,” Larry Kudlow, means the only difference was in the statement they released. The market was upset that the Fed is still concerned with inflation with little knowledge of the true damage to the economy. This is interesting as it implies ’stagflation’ which has come to the fore of late. Bernanke is no fool and knows what is on the line…see overnight section for explanation…a coordinated move like this does not happen overnight! It takes planning!

Now ask yourself this: how did the bulls go from zero chance of a recession, to a mid-cycle slowdown with a small risk of recession, to OMG if the Fed doesn’t do something we are going into the worst recession you have ever seen…all in the space of three short weeks? Is it because their wallets are being squeezed so now it is a crisis. Get this: last night Kudlow said the Fed did the right thing!!! What? From calling for a full 1% cut to saying a quarter was the right thing to do? This is the kind of Fed Chairman Kudlow would make…I have all the ideas and know what to do…just listen to me as I never change. He still believes Goldilocks is alive, this is “the greatest story never told” although he tells it every day, and the GOP and capitalism hold the keys to a great America…so long as it is the neo-con wing of the party. Of course he believes the subprime crisis is trumped up as it is merely 6% of all mortgages.

Then Cramer came on…obviously overdosed with Valium as they played the tape of the last time the Fed met and he went ballistic…they know nothing…fools…idiots that will brink us to the brink of financial ruin. But no yesterday he calmly said they were wrong but did the wrong thing but it doesn’t really matter. Would the world be a better place with Cramer as Fed Chairman? How about Brian Wesbury who measures everything in terms of the mean averages, not median, of personal income and it’s variants, disregarding the skewing effect of billionaires being created in a low tax environment…by the way he, Kudlow and the rest of the neo-cons see no taxes as the right rate. This is what happens when everyone you know makes $250,000 or more!

Ben Bernanke knows exactly what the Fed did wrong beginning in 1932 that brought on the Depression. Essentially they did nothing but in reality they did worse: in an economic crisis they raised reserve requirements of banks three times which tightened the availability of credit, converting it into a credit and financial crisis. The difference this time is that we have a financial crisis brought on by complacent Fed and other regulatory bodies accompanied by Wall Street Greed.

TB believes that Alan Greenspan is the most overrated Fed Chairman in history. While he mitigated the fallout from the ‘87 crash and the Asian/Russian crisis of ‘98 which wiped out LTCM, he along with Treasury Secretary Robert Rubin introduced moral hazard into the equation and once the markets were fed that pabulum, they never want to go back to true risk-taking. Greenspan allowed a stock market bubble which he identified early on to develop, then tried to solve that problem by flooding the market with easy money which produced the real estate bubble which was magnified thru leverage and derivatives. The markets, prior to the August subprime problems emerged are best described as free of risk. That is because anyone who wanted to hedge any form of risk could do so in the derivatives market…except for counterparty risk…and that is what we are now faced with…with yearend fast approaching. There are only ten real trading days left in the year which makes next week which culminates in Friday’s options expiry…a quadruple witching…all the more important so expect loads of volatility next week in light of recent moves…then an eerie calm.

Yesterday, TB reported from the 2005 IRS Adjusted Gross Income table that if you earned $103,000 you are in the top 10% of all taxpayers…the top 10% generates 50% of the tax revenue, while the top 1% pays 39%. The average tax rate for the 1%’ers in 1981 was 33.4%, in 2005 it fell to 23.1% while for the top 10% it fell from 23.5% to 18.8%. Now consider the impact if the Alternative Minimum Tax. In 1981 the minimum AGI to make the top 1% was $80,500 and is now $364,657 while for the top 10% it rose from $35,070 to $103,912.  This is some penalty to pay for the 155 taxpayers earning over $200,000 who paid no taxes in 1967. The AMT was never indexed for inflation and by 2010 will take in fully 20% of taxpayers without reform….so the longer we wait the more revenues that will have to be made up elsewhere. If you earn $103,000 in NY or California…do you feel rich?…will do ya? Huh? Without legislation, a couple earning more than $62,550 or a single person earning $42,500 will be caught up this year. This will amount to an average $6,813 more taxes to be paid. This is a national problem and don’t believe in the rhetoric…both parties are responsible and Bush’s tax commission’s hands were tied by the mandate of no tax increases and cuts must be revenue neutral…Houdini couldn’t have gotten out of that one. So when someone calls the other party demagogues…totally disregard it. They are both equally responsible. By the way, try buying even a qualifying $417,000 home in California with that $100,000 income…and good luck! “We have met the enemy and they are us.” Pogo

So the question is, should the wealthy who are not impacted by the AMT as the rates are higher, have their tax cuts continued indefinitely past 2010 while the middle class is slaughtered? Follow up: is this in the interest of a capitalist society? Then: can technical innovation create its own demand (creative destruction of Schumpeter), IF the worker doesn’t see wage increases that match or exceed inflation? Think long and hard before you answer this especially if you are in the top 1% or a CEO (sorry, forgot they only worry about the next year). Doesn’t anyone see a parallel to France before the revolution? 

Please remove your focus from the stock market, economy, and Fed Funds rate. We are facing a liquidity crisis of epic proportions…the last time we saw this was after 9/11…only this one is over yearend and involves LIBOR…one to three months. All the central banks are working on this problem. They are not there to protect your investment portfolio in the short run but to protect the global economy, without which, the stock market and your portfolio is meaningless.

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC December 12, 2007