Five of a kind

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Tax them China style

As a nation we are killing ourselves over the budget and the debt ceiling. Did you see Obama on TV? He looks worn down. He does not have the power to craft a solution.

That the USA has a consensual process of creating laws is one of the things that make the country great. It is also one of those things that just kills us from time to time. Today it is killing “us”, it may well kill Obama’s chance to get re-elected.

I wonder if we should do this “China Style”. They do it differently. There is not much debate or discussion. They just print an announcement in the newspaper. They did just that the other day. So what are income taxes in China? The answer is they are very high:

The highest bracket of 45% is for anyone earning above $145,000. Of interest to me is that anyone with an annual income over $64K pays 35% tax.

This chart looks at US tax liabilities by income group. The highest earners pay an average of about 25%.

If the Chinese marginal rates were applied in the USA it would generate about $1.5 trillion of additional revenue. The budget would be balanced overnight. Of course if the US did something like that it would trigger a massive depression. Why is that?

On underwater housing and unemployment

Reuters has a story out suggesting that there is a shortage of workers:

There is ample evidence that unemployment is the critical problem today. With that in mind I found this story to be interesting. Some thoughts:

A) I wonder how much this is a function of the underwater housing market. I hear this all the time:

“I would move to where I could get a better job, but the house is underwater so I’m stuck”

B) Should this trend continue there will have to be some wage increases in the manufacturing sector. That would be welcome, but also inflationary.

Put A and B together and what do you get? Stagflation. That would be Ben Bernanke’s worst nightmare.

On FX Algos

This web site produced some interesting charts. Some of this I knew from reading Zero Hedge. Some of it I was not aware of (the extent of this). I find this very troubling.

This shows that 56% of all NYSE trading is now a result of Algo activity.

$ volume on the NYSE is all over the lot. I find estimates of about $200 billion a day. So $100 billion each day is being traded by the robots. That’s not new news.

The FX market is going through the same transition as the equities market. This chart suggest that over 50% of daily turnover is now computer generated.

But the FX market is a giant compared to stocks. The estimates are that the FX market volume is more than $4 Trillion each day. (I’m not sure I trust all these numbers {I think FX turnover is closer to $8T a day}).

Cut this up as you like. This look at the numbers suggest that as much as $2 trillion of algo trading is happening in the FX markets every day! Ten times more in $ terms than all of the NYSE.

Look again at the chart and note that way way back in 2004 Algos represented only 2% of volume. This is exploding.

I’ve noticed that FX markets have been “spikey” all year. I thought it was just the backdrop of news that was causing the very rapid price adjustments. Looking closer at what role the robots have in this makes me re-think that.

I’m not sure when it will happen, but I think the dominance of robots in FX is going to cause a “flash crash” one day. I just remind everyone who plays in this sandbox that there will be no “regulator” who will DK the millions of trades (trillions of dollars) when (not if) this happens. The losses will be staggering. If you think you can sleep easy with a stop loss; you're wrong.

Dumb tax breaks

Don’t worry about the railroads. They’re doing just fine. All the numbers have been moving higher for this group. Trains now move about 45% of all goods. The industry is looking at 100b in revenues and has a fat (mid teens) profit margin. Ask Warren Buffet. He owns BNSF. He bought it in 2009, he’s making a fortune.

So why do I bring this up? I saw this and it pissed me off.

So our ‘friends’ who own railroads and are making a fortune are also getting a tax break from the Feds for new ties that they lay. The tie business seems to booming as a result.

My point here: We have the absolutely worst tax code that could exist. We ought to throw the whole thing out the window and start anew. I doubt that big shots like Warren B would like that very much, so it won’t happen.

Let them drink water

OJ trading at a record high today. Who cares? Not the Fed.

I’m not blaming the Fed for the high price of orange juice. But I do think it’s a crime that both food and energy prices are exclude from Ben B’s definition of inflation.

I keep expecting the American people to wake up to the realities. They haven’t, yet. I have confidence that they will at some point. It will take more record prices for the things we consume for there to be a significant collective reaction. It’s likely to be ‘noisy’ when it does happen.

The Fed is perpetrating the greatest theft in the history of man. This will not go un-noticed for much longer. The pendulum is going to swing the other way for the Fed. Today they have unlimited power and answer to no one. When the pendulum does swing it will lop off some heads in the process. I wouldn’t bet on Bernanke’s position in the history books. He (and the Fed) could end up taking the brunt of the fallout for what is surely going to come.