The sequester started on midnight Friday. It seems we're still here - but who can say, perhaps we're all dead men walking. Italy had their elections with the result seeming to be a hung and ineffective government - Europe is having a crisis of democracy. Seriously, if you're still in this market, get out now.
The sequestration cuts kicked in on Friday. $85 billion. 2% of the federal budget. ½% of GDP. The headlines I've been reading are screeching that hundreds of thousands will lose their homes, further hundreds of thousands will be thrown off food stamps and go hungry, thousands of schools will close. . . my personal favorite is that little sink-hole in the IQ landscape of our Congress, Maxine Waters (D-Los Angeles), who said the sequestration would cost America 170 million jobs. Since America has only 150 million workers, apparently 20 million Chinese will also be laid off, in addition to you, your wife, and all your friends, neighbors and relatives. Good luck and God bless.
Next up: the continuing resolution, a bill required to keep the government running, as we haven't passed an actual federal budget for three years. Due on March 27th. If one doesn't pass, the government could be shut down. What would we do without the Departments of Energy and Commerce? I'd love to find out. I don't expect terror in the streets from this - I expect some sort of continuing resolution to pass, more or less on time, as the republicans have already learned that failure to do so hurts them more than the democrats.
Italy's election has resulted in a hung government, not unlike our own. Election rules give the center-left a solid majority in the lower house, but the right wing party won the Senate. The #3 party is run by a comedian, think Italy's Steven Colbert, who has vowed to not align with anyone - his party is vehemently anti-Euro. Outside observers are terrified that this result could destabilize not just Italy but Europe as a whole. Disreputable politicians are on the rise all across Southern Europe - the policies imposed by the EU on debtor nations have been a disastrous failure. The Italian election may be just a foretaste of the dangerous radicalization to come. As things stand right now, expect new elections in Italy in the next few months. Typical Italian politicians are in their 70s and have been in government for decades; The #3 party is seating a bunch of 20- and 30-somethings who rail against corrupt politicians and think there should be term limits and a referendum on the Euro.
About ten years ago, Wall Street started bundling up mortgages into mortgage backed bonds, getting them rated AAA, and selling them off. The resulting bubble in both housing prices and mortgage derivatives almost brought down western civilization (no, sorry, I don't think that's an exaggeration). Well they're at it again. On Monday, SecondMarket Holdings will "roll out a platform allowing lenders to issue securities backed by student loans." This crisis isn't over, not by a long shot.
This week the Supreme Court hears arguments on Voter ID laws. The Justice Department has been using the 1965 Voting Rights Act to strike down ID laws in southern states; meanwhile Wisconsin, Pennsylvania and Indiana have ID laws. It appears the SC is leaning towards approving ID laws; said Chief Justice Roberts, "Voter turnout and registration rates [between blacks and whites] now approach parity, Blatantly discriminatory evasions of federal decrees are rare. And minority candidates hold office at unprecedented levels."
Los Angeles will have Proposition A on the ballot next week, raising their sales tax to 9.5%. They say they need the extra money to pay police, fire, basic services. A poll by USC shows that 67% of Latinos support the measure, while 51% of whites are opposed. Some say the money is mostly needed to fund a new union contract that gives city employees a total raise of 25% over the next seven years. Money to support the measure is largely from SEIU and other city employee unions; and from various real estate ventures like Anschutz who is getting city concessions worth over $270 million to build a new NFL stadium.
Michigan Governor Rick Snyder is getting ready to take over Detroit, appointing a city manager who will decide if Detroit should declare bankruptcy. Detroit has a budget of $100 million this year and carries $14 billion in debt. To put this into context, a typical family will carry perhaps five years of income as debt when you include their mortgage; Detroit is carrying 140 years of income as debt. 83% of the residents of Detroit are black, and resent a white republican governor taking over their city. Michigan Democratic Party Chairman Lon Johnson sharply criticized Snyder's decision, calling it a "hostile take-over. This overthrow of the democratic process is a deeply disappointing moment in our state's history." Al Garrett, president of Detroit's biggest union representing municipal employees, said efforts are underway to challenge the decision in court. But he said the case would have to be filed in federal court rather than state court because the Michigan Supreme Court has a Republican majority.
The California city of Fontana has a "school police force," a group of officers stationed at their schools with their own police chief. Those police officers have just been armed with AR-15 assault rifles, in all ways comparable to the gun used at Newtown CT. Although the NRA has advocated for this, I disapprove: Who are these officers? What is their background, training, psychological makeup? And the bar for bringing a gun to school has just been raised to military standards.
Democratic congressman Mike Thompson from California said on Wednesday there should be a discussion of paying states to take guns away from criminals and the dangerously mentally ill who are prohibited from owning them. His Armed Prohibited Persons Act of 2013 would create a program within the Justice Department to give money to states that track down people who are barred from having firearms but own them anyway. Personally, I'd be ok with violent convictions involving guns to come with a search warrant. I also like the LAPD gun amnesty / buy back program, where you turn in any gun, legal or not, and you get a couple hundred dollars of food vouchers, no questions asked. It's time to talk seriously about getting the Saturday night specials off our streets. The single largest killer of young black men is being shot by other young black men. Young men are not going to turn in their guns, but their mothers and grandmothers will do it for them under the right circumstances.
India appears to be heading into the Asian version of a recession: growth just under 5%, instead of the 9% they're more accustomed to. The new Indian budget raises import duties on "luxuries" like cars and motorcycles, and has a "temporary" tax increase on the wealthy, everyone making over $186,000 per year. We're assured India will return to 9% growth in 2015.
A year ago JC Penney's hired Ron Johnson, Apple's director of Marketing, to be their new CEO and lead them into the 21st century. Some say in the 21st century big box stores will disappear, replaced by internet sales. Johnson has been trying valiantly to change Penney's into the Apple of retailers. Unfortunately, Apple's creativity seems to have stalled out reflected by their stock's drop from $700 to $440; and Penney's sales have dropped by 30% under the new regime, the worst sales decline in the history of US major retailers, leading many to speculate that we're watching the implosion of a 110 year old American icon. JCP stock is down from last year's high of $42 to about $17. Border's Books fell to Amazon; now it appears JCPenney's will fall to Amazon, Target, Walmart, LL Bean. Curiously, JCPenney's online store is ranked #20; perhaps they'll survive as an online presence.
On January 18th, Richard Cordray, acting head of the Consumer Financial Protection Bureau, said "The U.S. Consumer Financial Protection Bureau is weighing whether it should take on a role in helping Americans manage the $19.4 trillion they have put into retirement savings, a move that would be the agency’s first foray into consumer investments." The Consumer Financial Protection Bureau (CFPB) created by the 2,319 page Dodd-Frank legislation is a new and little known bureau with wide-ranging powers. Placed within the Federal Reserve, a corporation privately owned by member banks, the CFPB is insulated from oversight by either the President or Congress, its budget not subject to legislative control.
California has been broke for several years, and is now raising taxes like mad to fix it. How did this happen? One way is California became very progressive, depending on the top 5% of taxpayers for a highly disproportional portion of tax receipts. When those people did poorly after the 2008 crash and started moving out of California in the last couple of years, California then had a disproportional setback in both income taxes and property taxes. Some might claim the lesson to be learned here is that the tax base must be very broad. How's the US doing?
|Income Level||Average Income||Average Tax Bill||Tax Rate||Share of Taxes|
|Top 1%||$1.4 million.||$514,144.||35.5%||30.2%|
And on a related topic, how about income? Paychecks for the bottom third of our country are continuing to fall; however, that's being well covered by an increase in transfer payments (welfare, food stamps, disability, unemployment) so that actually total income for the bottom third has been relatively constant. In the first graph below, we see wages as a fraction of GDP, which has been falling fairly consistently for 60 years from 52% to 44%. The second graph is wages plus government transfer payments as a fraction of GDP; this has remained more or less constant for the same period at about 58%. You already know anecdotally that the lower classes are doing ok - poverty in this country includes a Civic or Corolla and a 50" flat screen. Now you can see it graphically. These graphs do beg the question: as decent paying jobs get more and more rare, robots continue to take over more and more repetitive jobs, illegals continue to enter the country, and a plurality of our children are born into a culture that doesn't value work or education, how long can we keep this up? Panem et circenses. Rome kept it up for about 400 years, perhaps we can do as well. . .