WSJ Shills For IRS

"Congress wouldn't tax Roth IRAs, would it? ... But dozens of less-convinced readers have asked Tax Report about Congress's intentions, and well-known IRA expert Ed Slott says he hears it from consumers and advisers every time he makes a speech: '"If I pay tax to convert my IRA",' they ask, "how do I know Congress won't turn around and take away the benefits?"' ... Without a crystal ball, it is impossible to answer the question definitively. But the short answer appears to be: 'No Congress won't tax Roth conversions, at least not soon.' And the prospects of longer-term changes isn't deterring experts who are converting their own accounts. ... This particular tax was so hated that it is hard to imagine its return. Michael Graetz of Columbia University, a former top tax official at the Treasury Department, also thinks it is unlikely that lawmakers would enact a wholesale levy on Roth assets. 'That would be like taxing salary twice,' he says. ... They could try to tinker with income definitions for Medicare or Social Security, or perhaps require distributions for Roth owners. They might even tax an account's earnings if either the earnings or the account is above a certain threshold--although these would be such big changes in retirement policy that they don't seem likely, Prof. Graetz says", (LS) Laura Saunders at the WSJ, 19 June 2010, link:

http://online.wsj.com/article/SB10001424052748703280004575308953569367286.html.

"The thinking was that the rush to grab tax-free income down the road would raise a $6.4 billion windfall. ... Government mistrust is another factor. A TD Ameritrade survey found that 36% of ideal candidates for conversion suspect that Washington will somehow change the rules later to help reduce the national debt, partially at Roth IRA holders' expense", JR Brandstrader at Barron's, 18 January 2010, link: http://online.barrons.com/article/SB126360927771630223.html.

What fools these experts are. I expect, one way or another, Roth IRAs to be taxed. LS apparently selected IRS shills as her "experts" in this piece. Having read a few of his articles, I think Slott a clown. Taxing salary twice? We tax: estates and social security. You pay sales taxes on items bought with after-tax income. Why not Roths? We may get increased taxes on the rich, i.e., those making over say $250,000 a year. Why not tax Roth accounts over say $1 million by "imputing "distributions to their holders? See my 2 January 2009 and 5 May 2010 posts: http://skepticaltexascpa.blogspot.com/2009/01/hogan-v-mcquarrie-on-roths.html and http://skepticaltexascpa.blogspot.com/2010/04/vampire-squidking-canute-of.html.

The Roth IRA conversion law was changed to increase taxes.

Yves Smith and Junior on TARP

Yves Smith (YS) has a 23 June 2010 post at her Naked Capitalism blasting "Timmy Boy" Geithner's recent comments about TARP's "success". YS's got this knocked. Here's a link: http://www.nakedcapitalism.com/2010/06/geithner-yet-again-misrepresents-tarp-performance.html. YS notes that to make TARP look successful the Fed and Treasury sanctioned accounting fraud. What else is new? Remember, the SEC, part of the Treasury, controls the PCAOB. Doesn't that give you the "warm and fuzzies"? The supposed "police force" of the CPA profession must ignore banks' accounting fraud. Think about it.

Junior at Junior Deputy Accountant delivers a Sonny Liston-like left hook on 23 June 2010 to Timmy Boy, here:

http://www.jrdeputyaccountant.com/2010/06/tim-geithner-has-completely-forgotten.html. Go Junior!

Robin Hood In Australia

"Australia's biggest mining companies Monday raised the stakes in the heated battle with the government over a planned new tax, warning that the proposal had already damaged the nation's reputation and accusing the government of misrepresentations. ... Fellow miner BHP Billiton Ltd. attacked the government for what it said were misrepresentations about the tax rate it pays on its Australian operations. ... Mr. [Tom] Albanese reiterated that Rio Tinto is carrying out reviews of all of its planned capital investments in Australia in light of the planned tax, and said the proposal had damaged Australia's reputation as a place to invest. ... The proposed levy would see companies taxed at a rate of 40% on profits above a rate of return in line with the long-term government bond rate of about 6%. ... If the tax had been enacted a decade ago, Mr. Albanese said companies such as Rio Tinto wouldn't have made the heavy capital investment in businesses like its iron ore operation in the Pilbara region of Western Australia state and the nation would have been poorer as a result", my emphasis, Alex Wilson at the WSJ, 25 May 2010, link:

http://online.wsj.com/article/SB10001424052748704226004575263203385448426.html.

"Wayne ... Swan said miners are effectively 'arguing that a government cannot change its pricing arrangements. It is the equivalent of the steel mills saying to the companies that they can't put up the price of iron ore. It has to stay the same for 40 years. That is nonsense. ... Swan rejected media reports that a visit to China later this week is intended to reassure Chinese steel makers that the proposed tax won't lead to higher commodities prices", Rachel Pannett at the WSJ, June 2010, link: http://online.wsj.com/article/SB10001424052748704875604575280444005329232.html.

"Swiss mining company Xstrata PLC on Thursday said it would stop development of two major projects in Australia, saying neither will be viable under the government's proposed resources tax. ... In its announcement Thursday, Xstrata said it will stop development of its A$6 biillion Wandoan thermal coal project and its A$600 million Ernest Henry underground copper project. The move follows Xstrata's decision in early May to also suspend a A$30 million three-year copper exploration program. ... Prime Minister Kevin Rudd cast doubts on Xstrata's move, saying it was strange that the company should stop spending on Wandoan when the legislation covering the new tax won't be drafted for 12 months and it won't come into effect for two years. ... The tax targets profits, not production. ... 'The resoruce super-profits tax has created significant uncertainty for the future of mining insvetment into Australia and would impair the value of previosuly approved projects and exploration to the point that continued investment can no longer be justified,' Xstrata Chief Executive Mick Davis said", my emphasis, Ray Brindal at the WSJ, 4 June 2010, link: http://online.wsj.com/article/SB10001424052748703561604575283461667881540.html.

"'The Australian people own those resources, and they deserve a fairer share of those resources,' said Kevin Rudd, prime minister, in a television interview", William MacNamara at the FT, 4 June 2010.

"'The impact of the tax eliminates the net present value of the Wandoan coal project almost entirely and substantially reduces the value of the Ernest Henry underground shaft project,' Mr. Davis said", Peter Smith at the FT, 4 June 2010.

Will Australia return 40% of a company's deficiency if an investment yields less than 6%? We note Australia wants to change taxes on existing investments. Does Australia's government believe mining ventures, 95% of which fail to find an economic orebody, are government bonds? Or are Australian government bonds as risky as mining ventures? Of course the investments wouldn't have been made. When Rio did its IRR calculations ten years ago, it assumed existing tax rates. If Rio had assumed a higher tax rate, its projected after-tax cash flows would have been smaller. What's not to understand? A substantial amount of ore in Australia will become "extra-marginal" if this tax goes through. In addition, the hurdle rate for all investments in Australia will increase as a result of "tax uncertainty". But "the ore belongs to the people". It did until Australia leased the land. See my 28 March 2008 post: http://skepticaltexascpa.blogspot.com/2008/03/stripper-well-economics.html. This proposed tax reminds me of 1980's "Windfall Profits Tax" which failed to produce the revenues Jimmy Carter & Co. projected, link:http://en.wikipedia.org/wiki/Windfall_profits_tax.

I reject Swan's argument. If one has a long-term supply contract at a fixed price, that's it. The price is fixed. If one forms a partnership, he also agrees to a profit division. Over the long run as mining investments decrease, the new tax will cause some increase in commodities prices.

Is Rudd really this stupid? Suppose Xstrata did an IRR calculation on a project which its expects to have cash flows for the next 25 years. If the new tax comes into effect in two years, it will reduce the project's cash flows in years 3-25. What's strange Rudd? The change in projections is made now. Henry, raise your own army. See my 21 March 2010 post:

http://skepticaltexascpa.blogspot.com/2010//03/whose-reserves.html.

Rudd ignores Australia's agreeing to its cut when the resource projects started. Australia and the miners made a deal. Stick with it. See my 12 June 2010 post:

http://skepticaltexascpa.blogspot.com/2010/06/magic-words.html.

Net present value? Have you ever heard of the term Rudd?

LA End Game

"Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy. Yet Mayor Antonio Villaraigosa [AV] and the City Council have been either unable or unwilling to face this fact. ... Even if [AV] were to enact drastic pension reform today--which he shows no sign of doing--the city would only save a few hundred million per year. ... Five thousand is the number of employees added to the city's payroll during [AV's] first term as mayor. According to California's Economic Development Department, when [AV] took office there were 4.73 million jobs in Los Angeles and 252,000 unemployed people. Today, there are just 4.19 million jobs in [LA] and over 632,000 unemployed people. ... How have city leaders responded to this crisis? Pension officials have played accounting games, like smoothing the investment return over seven years rather than five years. ... And most egregiously, rather than laying off employees, city officials have shifted certain workers to agencies like the Department of Water and Power and the airport, which have their own funding. ... He continues to insist that bankruptcy is not an option for [LA] even as anyone who can count understands there is no other option", Richard Riordan & Alexander Rubalcava (R&R) at the WSJ, 5 May 2010, link:

http://online.wsj.com/article/SB10001424052748704608104575218392603082622.html.

Riordan is a former LA mayor. Rubalcava is an investment advisor. Yes, R&R, LA's bankruptcy looks inevitable. Got muni bonds? Sell!

Three-Card Monte Central Bankers

"After all the massive bailouts, the federal debt is exploding. ... The US now has a heavier debt burden than several of the overleveraged countries that have been branded with the scornful nickname 'the PIIGS.' ... Yes, in recent months, there's been a lot of bullish talk about how the American balance sheet has been cleaned up. ... And banks and other financial institutions owe $1.4 trillion less than they did in late 2008. Those debts haven't disappeared. They have merely been shifted onto the books of the federal government--in what may be the highest-stakes shell game ever. ... There's no sign of a slowdown in debt growth. 'These processes are not linear,' warns [Carmen] Reinhart. 'You can increase debt for a while and nothing happens. Then you hit the wall, and--bang!--what seem to be minor shocks that the markets would shrug off in other circumstances suddenly become big.' ... 'If you flood the markets with more and more debt, its value is going to go down. We are silly to fool ourselves into believing otherwise.' ... In 1989, the great investor Sir John Templeton told me something that has rung in my ears ever since, this week more than ever: Those who spend too much will eventually be owned by those who are thrify.' ... But in my view, the obvious tools--gold and other commodities, emerging-markets stocks, inflation-protected bonds--are already so popular that they are likely overpriced", my emphasis, Jason Zweig at the WSJ, 8 May 2010, link: http://online.wsj.com/article/SB10001424052748704292004575230601932486166.html.

I disagree with Templeton, remembering something Brazil's finance minster said about 25 years ago, "If I owe the bank a million dollars and I can't pay, I'm in trouble. If I owe the bank a billion dollars and I can't pay, the bank is in trouble". Who is in trouble if Uncle Sam owes trillions? I think $1,225 gold is cheap.

Ode to Obama

"First came a stimulus bill that, while aimed mainly at ending a deep recession, also set out to remake the nation's education system and vastly expanded scientific research. Then President Obama signed a health care bill that was the biggest expansion of the safety net in 40 years. And now Congress is in the final stages of a bill that would tighten Wall Street's rules and probably shrink its profit margins. If there is a theme to all of this, it has been to try to lift economic growth while also reducing income inequality. ... By focusing on long-term problems, Mr. Obama and the Democrats have given less than their full attention to the economy's current weakness and turned off a good number of voters. ... Still, the turnabout since Jan. 20--the first anniversary of Mr. Obama's inauguration and the day after Scott Brown, a Republican, won a Senate seat in liberal Massachusetts--has been remarkable. ... Today, he looks more like a liberal answer to Ronald Reagan. ... Every major piece of the Obama agenda is meant, in part, to push back against inequality. ... The financial regulation bill, meanwhile, would take several steps likely to reduce Wall Street's profits--and Wall Street has created more multimillionaires in recent decades than any other industry. ... Most striking, the administration is trying to improve public education by introducing more market competition. ... These education changes--combined with increased spending on science research--are meant to lift economic growth. ... Economists have long considered education and technology to be main ingredients in growth", my emphasis, David Leonhardt (DL) at the NYT, 22 May 2010, link:

http://www.nytimes.com/2010/05/22/business/economy/22leonhardt.html.

What can I say? Yves Smith of Naked Capitalism wanted this pieced shredded, so here goes. "In the [1930s], [FDR] created the [SEC] and [FDIC]. Now [America] was formless and empty, darkness was over the surface of the [American continent], and the Spirit of [Obama] was hovering over the waters. And [Obama] said let there be [a stimulus bill], and there was a [stimulus bill]. [Obama] saw the [stimulus bill] was good, and he separated the [United States] from the [recession]. [Obama] called the [stimulus bill] '[American Recovery and Reinvestment Act]' and the darkness he called 'recession'. And there was evening and, and there was morning--the first [few months]. And [Obama] said, 'Let there be [no] expanse between the [ethnic groups educational attainments] to separate [group] from [group]. So [Obama and Duncan] made the expanse [shrink] and [no longer] separated the [group] under the expanse from the [group] above it. And it was so. [Obama] called the [ended] expanse [academic achievement]. And there was evening and morning--the next few months", Genesis, 1:1-10 (NIV) with apologies to the original.

DL's piece is so bad. It isn't even good pro-Obama propaganda. It's almost a parody. The current "Wall Street reform bill" looks like a show piece to mollify the peasants with pitchforks. Expand scientific research while reducing NASA spending? Sure. What big expansion of the "safety net"? It's a rearrangement: kill old white women and expand medical care for illegal aliens and their children. Focusing on "long-term problems"? The "never let a crisis go to waste crowd"? What about the combined social security and medicare actuarial deficits variously estimated at $60-115 trillion? His education bill is just another teachers' unions payoff. It will not improve education in the US, which is a big waste of money. We need more, not fewer dropouts. Voxeu had an interesting 18 May 2010 piece on education, link: http://voxeu.org/index.php?q=node/5058. One author, Robert Barro is a Harvard economics professor. The other, Jong-Wha Lee, got his PhD at Havard. "The estimates for the group of advanced countries, East Asia and the Pacific, and South Asia are the highest at 13.3%. In contrast, the estimated rates of return are only 6.6% in Sub-Saharan Africa and 6.5% in Latin America". Hmm. Hey Barro and Lee, have you read IQ and the Wealth of Nations? I think I can explain what you found! For that matter, have you read Vance Packard's The Status Seekers, 1959, about degrees and "signalling"? The bloom is falling off the educational rose.

Whose History?

"The State Board of Education's proposed revisions for K-12 social studies curricula have come under fire from the radical left. ... Studies have revealed how unbalanced America's humanities departments are. Democrats outnumber Republicans by a large margin. In the history department at the University of Texas at Austin, out of 50 registered voters, only one is a Republican. Moderate and conservative Democrats are also rare. This political slant is reinforced by the economics of scholarship: Academic historians have been trained and have invested their careers in a profession that counts as legitimate only those subfields that support the leftist orthodoxy. Military history, for example, has almost entirely died off; not a single professor of history at UT-Austin lists military history as a primary speciality, while dozens list sexuality, ethnicity and anti-colonialism. ... Thus, robber barrons, the New Deal and the civil rights movement are in, but the contributuions of inventors and entrepreneurism, the decline of the family and the failures of welfare programs and public education are out. The new standards represent real progress. They don't go far enough in challenging orthodoxy, but they are a step in the right direction. ... This artificallly inflated controversy points to a larger issue: The people must not develp the habit of blind deference to so-called academic experts. ... The fundamental question is this: Shall we continue to have a government ruled by the people, or shall we instead, yield to a self-perpetuating caste of quasi-official experts", Robert Koons (RK) at the Houston Chronicle, 14 May 2010, link:

http://www.chron.com/disp/story.mpl/editorial/outlook/7004327.html.

Henry Ford said "History is bunk". Amen. RK is a UT philosphy professor.

Henny Youngman, Central Banker

"The principle of central-bank independence, a mainstay of economic orthodoxy for two decades, has taken a battering over the past week. Investors should be on their guard. ... Allowing central banks freedom to set interest rates without political interference is the best way to anchor inflation expectations, reducing borrowing costs and deliver faster growth. ... But independence also allows central banks huge power with limited accountabilty. ... The ECB's decision to start buying goverment debt is even more troubling. it says it is responding to dysfunctional' bond markets. How does it know high goverment borrowing costs reflect liquidity problems rather than legitimate solvency fears that will expose the central bank to losses? ... Might its decision to buy bonds increase moral hazard, removing the incentive for governments to tackle their deficits?," my emphasis, Simon Nixon at the WSJ, 14 May 2010, link:

http://online.wsj.com/article/SB10001424052748704635204575242400983963766.html.

Of course that's the intent: to enable deficit spending! What principle? Independent of who? I have another way to "anchor inflation expectations": gold. My more basic question: "high borrowing costs", as Henny Youngman would ask, "compared to who"?

New Texas Taxes?

"From car washes to tattoos to bottled water, the list of items and services exempt from the sales tax totals $30 billion in forgone revenue--a tempting target for some lawmakers as the state faces a budget gap as big as $18 billion. ... [Rene] Oliveira's plowing ahead with his work, which has included determining the policy reason for each exemption and whether that reason remains vaild. Other lawmakers have joined in seriously discussing the idea of removing some exemptions. ... 'Certainly a sales tax on food, medicine and providers of medical services would probably not receive any serious consideration,' [Olivera said]. ... The state sales tax is 6.25 percent, and local taxing jurisdictions may impose additional sales taxes of up to 2 percent. ... Senate Finance Committee Chairman Steve Ogden R-Bryan, said any change in exemptions should be part of an overall tax reform effort and should be revenue-neutral, meaning any additional money raised would be used for something such as lowering the tax rate", my emphasis, Peggy Fikac at the Houston Chronicle, 31 May 2010, link:

http://www.chron.com/disp/story.mpl/headline/biz/7029819.html.

Texas budgets for two years, so the $18 billion is $9 billion a year. I have seen Texas become more aggressive in collecting sales taxes. Why go through this effort for a "revenue-neutral" result? Who are these guys kidding?

Left and Right vs. The Center

"Sen. Bernie Sanders can seem like a character from another era with his rumpled suits and oratory about economic justice. But his anger at bankers and Wall Street runs high, Congress's only self-declared socialist is moving to center stage. ... Mr. Sander's amendment, which is likely to be voted on within days, is worrying White House officials, who say it would violate the central bank's independence and cripple its ability to protect the economy. ... The amendment has drawn an unusally broad alliance of backers. Mr. Sanders's 19 co-sponsors include such liberals as Sen. Patrick Leahy (D., Vt.) and conservatives like Sen. Jim DeMint (R., SC). The measure is supported with equal fervor by the AFL-CIO labor union and the conservative lobby group Americans for Tax Reform. ... 'Nobody in America, or very few people, think that makes any sense at all,' he said. 'Putting trillions of dollars at risk, and you don't know who got it, who made the decisions, the possible conflicts of interests, what they did with it?' ... Critics say the auditors would be able to interview Fed policy makers and staffers and monetary-policy decisions, a scenario they say would weaken investors' confidence that decisions are free from politicial influence. ... 'One of the great strengths of our financial structure is that we keep monetary policy separate from the political winds of the day,' Sen. Judd Gregg (R., NH) said in an interview. 'That was the whole idea in setting up the Fed'," my emphasis, Naftali Bendavid at the WSJ, 5 May 2010, link: http://online.wsj.com/article/SB10001424052748704866204575224591171078912.html.

Amazing. I agree with Sanders. Kill this monster. Is Gregg crazy? I now have 2012's winning ticket: Putin-Sanders!

Eisenhower's Warning

"Whatever your views on financial reform--whether you want the government to crack down on bankers or to disentangle itself from financial markets--you should fear Sen. Chris Dodd's financial reform bill. In 1,300-some pages, all it really does is legislate power to the government for fixes to be named later. ... But it sweeps aside more than two centuries of accumulated wisdom: that checks and balances are essential to markets, and that rules must be known in advance. ... We challenge lawmakers to think of any contract or transaction that doesn't meet that definition--from buying detergent with a money-back guarantee to getting a rain-check at the car wash. ... 'Substantial' and 'significant' are never defined. The bill does not say whether they are to be measured relative to the golbal economy, or the financial positions of you and your counterparty, or for that matter to the average humidity of a mid-summer afternoon in Cleveland. All of this is to be named later. ... Regulators will likely start off reasonably. ... And because they have unlimited power to set rules they will be able to outlaw practices as they see fit. This will encourage anyone who loses money for any reason to use political pressure to get redress. ... Regulated institutions will get fat on government-legislated profit, and regulators will look good by getting private firms to throw money at any problem that bothers Congress. People will move back and forth between the private and regulatory sectors. The Dodd bill is perfectly designed to create the largest and most powerful crony system in history. It's not that the people, regulator or regulated, are personally corrupt. It's that the system will select itself for, reward and enforce corruption. ... No regulator can afford to antagonize a potential future employer", my emphasis, Clifford Asness & Aaron Brown (A&B) at the WSJ, 13 May 2010, link:

http://online.wsj.com/article/SB10001424052748704250104575238841836433282.html.

As Yves Smith says, "feature or bug"? The Dodd Bill is just more of the same. A&B are with AQR Capital Management. "Rules must be known in advance"? Look at: Roth IRAs or Australia's recent proposed new mining tax. Governments have no rules. Disagreeing with A&B, I believe the "system" attracts the personally corrupt. The most corrupt: our (In)Justice Department. Phew! We are drowning in "complexes", military-industrial, teacher-educationalist-social worker, etc.

EU in Wonderland

"The bailout package for eurozone governments facing debt troubles has created another urgent challenge for European policy makers: how to keep free spending governments in line. ... Because there was no currency risk, banks, insurance companies and pension funds in every euro-zone economy became the biggest investors in the bonds issued by governments of other countries using the euro. .... Although the budget policies of euro-zone members were tied together in this way, without people really noticing, there were no mechanisms to prevent governments from overspending. ... But, in practice, the pact had no bite. ... These packages circumvented rules that many had assumed prohibited bailouts within the euro zone. They also weakened market incentives for governments to get their houses in order. ... 'Profligate countries now can count on the ECB to alleviate market pressure that could provide the only disciplining device before a crisis situation is reached,' Mr. [Marco] Annuziata says. ... As a step toward improving it, Olli Rehn, the EU economic commissioner, is set Wednesday to propose rules, with clear enforcement mechanisms, both to prevent excessive government debts and deficits, and to act more decisively in a debt crisis", my emphasis, Stephen Fidler at the WSJ, 11 May 2010, link: http://online.wsj.com/article/SB10001424052748704879704575236572824559304.html.

This is laughable. There no "rules" for governments, unless you have your own army to enforce them. Unless the EU has its own army and will use it to "enslave" millions of Greeks, Greece's debt will be repudiated. One way or another. What part of this don't you understand? Sovereign debts are usually repudiated. Openly. Or by inflation. Government bonds are a sell. Treasuries, Bunds, Gilts, etc. They all stink. You want to restrain government spending? Have your government go back to the gold standard. "[T]here were no mechanisms to prevent governments from overspending". Of course. As Yves Smith asks, "feature or bug"? What "circumvented rules"? What "clear enforcement mechanisms" short of an army? Will the EU hire the Crips or Bloods to collect from Greece? For a small "emolument", they could likely be enticed into collecting. How small? Say 10% of whatever they collect. Hell, for 10% of say $150 billion, you might be able to get the Zetas to collect for you.

ObamaCare Accounting

"Earlier this week, House Democrats concluded that the deluge of corporate writedowns--amounting to $3.4 billion so far--were in fact the result of ObamaCare, not the nefarious conspiracy that the White House repeatedly cited when it was embarrased soon after the bill's passage. ... 'The companies acted properly and in accordance with accounting stndards in submitting filings to the SEC in March and April,' [staffers] write. ... The larger question is what motivated the White House to unleash the assault. Democrats were amply warned about the destructive consequences of these tax changes, and if they really thought these companies were acting out of political motives, then they didn't understand what was in their own bill. Or at least that's one possibility. More likely is that they did know and were simply trying to mislead the public in the early days of what was supposed to be the raptuous response to ObamaCare's passage", WSJ Editorial, 29 April 2010, link:

http://online.wsj.com/article/SB10001424052748704423504575212422971814134.html.

If the Democrats were serious, they should had the SEC look into these disclsoures. The Democrats were grandstanding.

Even Bill Gross!

"'Bonds have seen their best days,' [Bill] Gross told Bloomberg Radio in a Mar. 25 interview. Real [inflation-adjusted] interest rates are moving higher.' ... When rates go up, bond prices go down, and that means a bearish market for bondholders. ... Pimco, which announced in December, it would offer stock funds for the first time, is advising investors to buy the debt of countries such as Germany and Canda that have low deficits and higher-yielding corporate securities. ... Gross's global forces extends beyond bonds. The No 1. thing Americans should do to try to make back wealth is to 'move outside of the [US] ' in choosing stocks, he says. ... Whatever approach investors take with their bonds, Gross suggests a wise motto to adopt in his latest investor commentary: When evaluating sovereign debt, 'Don't trust any government and verify before you invest'," my emphasis, Tom Keene & Susanne Walker at Businessweek, 12 April 2010, link:

http://www.businessweek.com/magazine/content/10_15/b4173072286105.htm.

I should reconsider my position. I agree with Gross. In part. Did Gross discuss this with Zimbabwe Ben (ZB)? If so, what did ZB say? As long as you don't buy financials, I don't see what's wrong with US stocks. Now Gross tells us not to trust governments.

Arms and Obama

"President Barack Obama [said on] ... March 26, ... 'Since taking office, one of my highest priorities has been addressing the threat posed by nuclear weapons to the American people. And that's why, last April in Prague, I stated America's intention to pursue the peace and security of a world without nuclear weapons.' ... But a bilateral agreement will not move towards a nuclear free world if other powers not party to the negotiations are expanding their arsenals. Case in point, China. Beijing was not impressed by the US-Russian agreement. ... Yet, China is moving ahead with its own nuclear weapons programs, unimpaired by any international agreements. ... 'Beijing is now deploying or developing up to five intercontinental nuclear-armed ballistic missiles in what amounts to China's most ambitious increase in intercontinental ballistic missile (ICBM) capability since the late 1980s.'... And then there is the continued diplomatic support China provides to Iran and North Korea to block or weaken any counteraction against their nuclear weapons programs. Beijing confirmed April 1 that President Hu Jintao will participaite in the Nuclear Security Summit on nonproliferation to be held April 12-13 in Washington", William Hawkins at the American Thinker, 2 April 2010, link:

http://www.americanthinker.com/blog/2010/04/china_wants_us_and_russia_to_d.html.

I can't see India's, Israel's or England's nukes threatening us. I would be surprised if Russia does anything consistent with Obama's expressed wishes. Book suggestion: Modern Arms and Free Men, Vannevar Bush, 1949. Obama, speak for yourself.

Obama's Brain?

"Why has President Barack Obama decided to foment a crisis in US relations with Israel? ... It is not credible to argue that Jerusalem's local planning board's decision to approve the construction of 1,600 housing units in Ramat Shlomo drove cool Obama into a fit of wild rage at Prime Minister Binyamin Netenyahu. Obama himself claims that he launched a political war against Israel in the interest of promoting peace. But this claim, too, does not stand up to scrutiny. ... First, Obama's assault on Israel is likely related to the failure of his Iran policy. ... By this line of thinking, if Israel simply returned to the indefensible 1949 armistice lines, Iran's centrifuges would stop spinning, and Syria al-Qaida, the Taliban, Hizbullah, Hamas and the Iranian Revolutionary Guards would all beat their swords into plowshares. Second, even more important that its usefulness as a tool to divert the public's attention away from his failure of Iran policy, Obama's assault on Israel may well be aimed at mantaining that failed policy. ... That is, the anti-Israel campaign may be a means to force Israel to stand by as Obama allows Iran to build a nuclear arsenal", Caroline Glick at Frontpage Mgazine, 22 March 2010, link: http://frontpagemag.com/2010/03/22/obamas-war-on-Israel/

Obama's letting Iran build nukes jeopardizes US interests in the Middle East. Does he not know this? Bad? Or does he know it? Worse. What Iran policy?

The Trend Is Not Your Friend

"In the 2010 tax year, for the first time, there is no $100,000 limitation on the ability to convert IRAs and other tax-deferred retirement accounts into Roth IRAs. ... To convert to a Roth entails paying any deferred taxes now, in exchange for freedom from taxes forever after on principal, income and gains, whether for one's self of one's heirs. ... When the conversions are reported next year in tax-year 2010 filings, that's going to drive hundreds of billions of dollars in unexpected revenue. ... If just 10% of it is converted, then taxes would be paid on $540 billion at a 35% rate-generating a $189 billion revenue surprise for the US Treasury. ... They'll benefit most from paying taxes today while the low Bush-era rates are still in effect, and by avoiding them in the future when soak-the-rich Obama-era rates come in. The USAA poll found that 61% of the highest-earning households planning to convert are thinking along those lines. ... Moreover, critics might point out that the bigger the miracle in the short run, the worse for revenues in the long run", my emphasis, Donald Luskin (DL) at the WSJ, 15 April 2010, link:

http://online.wsj.com/article/SB10001424052702304222504575173790279735972.html.

"Should anyone be so naive to think that this adminstration won't later change the rules and begin to tax all gains on Roth IRAs for those families making above $250,000 per year?," Dan Agan letter to the WSJ, 20 April 2010, link:

http://online.wsj.com/article/SB10001424052702303491304575188324189001944.html.

Unlike Lloyd Antoinette Blankfein, who does "God's work", DL does the IRS's. What a fool. Imagine, DL is the chief investment officer of Trend Microlytics (TM). Unexpected revenue, DL? Are you serious?

Agan's an optimist.

Multistate Debt Crisis

"California, New York and other states are showing many of the same signs of the debt overload that recently took Greece to the brink--budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay. And states are responding in sometimes desperate ways, raising concerns that they, too, could face a debt crisis. ... Connecticut has tried to issue its own accounting rules. Hawaii has inaugurated a four-day school week. California accelerated its corporate income tax this year, making companies pay 70 percent of their 2010 taxes by June 15. And many states have balanced their budgets with federal health care dollars that Congress has not yet appropriated. Some economists fear the states have a potentially bigger problem with their recession-induced budget woes. If investors become reluctant to buy the states' debt, the result could be a credit squeeze, not entirely different from the financial strains in Europe, where markets were reluctant to refinance billions in Greek debt. ... California's stated debt--the value of all of its bonds outstanding--looks manageable, at just 8 percent of its total economy, But California has big unstated debts, too. If the fair value of the shortfall in California's big pension fund in counted, for instance, the state's debt burden more than quadruples, to 37 percent of its economic output, according to one calculation. ... Unstated debts pose a bigger problem to states with smaller economies. ... State officials say a Greece-style financial crisis is a complete nonissue for them, and the bond markets so far seem to agree. All 50 states have investment-grade ratings, with California the lowest, and even California is still considered 'average,' according to Moody's Investors Service. The last state that defaulted on its bonds, Arkansas, did so during the Great Depression. ... Some states have taken even more forceful measures to build creditor confidence. New York State has a trustee that intercepts tax revenues and makes some bond payments before the state can get to the money. California has a 'continuous appropriation' for debt payments, so bondholders know they will get their interest even when the budget is hamstrung. ... In fact, New Jersey and other states have used a whole bagful of tricks and gimmicks to make their budgets look balanced and to push debts into the future. ... Some economists think the last straw for states and cities will be debt hidden in their pension obligations", my emphasis, Mary Walsh at the NYT, 30 March 2010: http://www.nytimes.com/2010/03/30/business/economy/30states.html.

Why shouldn't Connecticut have its own accounting rules? Doesn't Zimbabwe Ben? Who cares what state officals or the rating agencies say? NY's trustee does nothing for me. His existence is purely cosmetic. Do you still want to own muni bonds?

Vampire Squid in the Briar Patch

"Goldman Sachs Group Inc. [GSG]--one of the few Wall Street titans to to thrive during the financial crisis--was charged with deceiving clients by selling them mortgage securities secretly designed by a hedge-fund firm run by John Paulson, who made a killing betting on the housing market's collapse. ... 'The SEC's charges are completely unfounded in law and fact,' said Goldman in a statement, promising to 'contest them and defend the firm and its reputation.' ... Goldman's shares fell 13%, one of the steepest slides since the firm went public in 1999, erasing some $12 billion of market capitalization. ... Regulators say Goldman allowed Mr. Paulson's firm, Paulson & Co., to help design a financial investment known as a CDO, or collateralized debt obligation, built out of a specific set of risky mortgage assets--essentially setting up the CDO for failure. ... 'The product was new and complex, but the deception and conflicts are old and simple,' said Robert Khuzami, the SEC's enforcement chief. ... The SEC said Mr. Tourre was 'principally responsible' for piecing together the bonds and touting them to investors. ... But he was hardly alone, the SEC alleges: The deals, were signed off by senior Goldman executives, though the SEC didn't specify how high up it believes the knowledge extended. ... Goldman has vehemently denied putting its own interests ahead of its clients.'," Gregory Zuckerman, Susanne Craig and Serena NG at the WSJ, 17 April 2010, link: http://online.wsj.com/article/SB10001424052702303491304575187920845670844.html.

I put no stock in this suit, concluding the SEC and Vampire Squid (VS) needed some headlines to make it appear "the cop is back on the beat" and help pass Dodd's toothless "reform" bill. So the SEC brought this suit with VS playing Brer Rabbit not wanting to be thrown in the briar patch.

Frightening! On 30 April 2010, while editing I came across a post by Junior at Junior Deputy Accountant:

http://www.jrdeputyaccountant.com/2010/04/goldman-sachs-gets-thrown-in-briar.html. Go Junior! Your father is proud.

Kill the PCAOB

The PCAOB "inspected" the CPA firm I work with in November. The "inspectors" were two "former" Big 87654 operatives. My opinion: they are functionally Big 87654 seniors. Neither understood discounted cash flow analysis. I had to tell them if you have a series of cash flows, you can specify the interest rate or the present value (PV), not both. As the PV increases, future interest income decreases. Where did this "issue" arise? In sales-type lease accounting under "old" SFAS 13. These two didn't understand "incremental borrowing rate", a lessee SFAS 13 concept, paragraph, 5l. Don't raise the substance over form concept to these two. They only me-chan-i-cal-ly follow "the rules". Imagine what would happen if we were under IFRS. Rules are a GAAP problem. If you only follow the rules, you can't figure out when they lead to absurdities or when a transaction was concocted to evade the rules. I say shut the PCAOB. In the alternative, have it sign opinions and be liable to suit. It also should be liable for suit for passing a CPA firm which has clients with "cooked books" like: KPMG at Citigroup and GE, or PWC at AIG or Goldman, or D&T at GM, etc., etc. What do the PCAOB people think bank "structured finance" departments do if not design transactions with differing form and substance?

Let "saw off", also called "reductio ad absurdum". Suppose a company issues a $1 million note paid in a year for $2 million. What's this note's interest rate? I say 100%. What say you? If the note is paid in six months, I say 300%. Why? It doubled in six months and I assume would double six months later. 2 x 2 = 4; 4 -1 = 3; hence 300%. If it doubles in three months, we get 2 x 2 x 2 x 2 = 16, 16 - 1 = 15; hence 1,500%. If it doubles in a month, we get 2*12 = 4,196; 4,196 - 1 = 4,195; hence 419,500%. Now a week, we get 2*52 = 4.5036 x 10*15, or 4.5036 quadrillion. A big number. Now if you have a $1 million note which the buyer can immediately sell for $2 million, I say the interest rate is infinite because it has no time dimension. I explained this to the Big 87654 partner who hired the PhD consultant I mentioned in my 16 August 2009 post:

http://skepticaltexascpa.blogspot.com/2009/08/economathematicians.html. The PCAOB "inspectors" believe the consultants cost of capital (COC) study has significance and should be used to value a lessor's sales-type lease. Doesn't this give you "warm and cuddlies" with respect to Big 87654 partners, PCAOB apparachiks and PhD consultant's skills? The PhD consultant thought my client's COC was 13%. The Big 87654 partner had no idea how the consultant derived 13% but he knew: the consultant had an MIT PhD. The PCAOB people don't know anything except a Big 87654 firm accepted the consultant's report so it must be right. I add, the consultant is also an audit client of the Big 87654 firm in question. Did a Big 87654 firm bring him in to "further client relations" with its auditee? Never.

Absurdities? Like me-chan-i-cal-ly applying paragraphs 55-57 of SFAS 123(R). You can get stock option expense for an employee who leaves a company then returns, exceeding that if he was continuously employed. Dealing with PCAOB "inspectors" reminded me of Supreme Court case Graffam v. Burgess, my 24 October 2007 post: http://skepticaltexascpa.blogspot.com/2007/10/call-out-cops.html.

Could the PCAOB help investors? Maybe? It could stop "inspecting" CPA firms and "inspect" audits. With a $15 trillion US stock market capitalization (MC), let the PCAOB inspect 500 audits a year, one per $30 billion. Thus XOM, WMT, MSFT, APPL and other "large caps" audits will be inspected annually. So? Of 500 audits inspected, 494 will be by the Big 87654, four by the "little three" and two by 1,790 other firms. Think of the time the PCAOB could spend with Vampire Squid, GS-NYSE, current $86 billion MC instead of micro caps. If the PCAOB inspects two audits for each of the 1,790 small firms, that's 3,580 audits. With total MC audited of $60 billion, that's a $17 million average auditee size, or 25% of Lloyd Antoinette Blankfein's 2007 year end $68 million bonus! What gives? The PCAOB is a scam. Kill it Supremes! Please. If every audit by the 1,790 small firms is defective, how much can that reduce investors' returns? Not much. Every hour the PCAOB spends with micro caps is one less hour it spends at: GS, C, FNM and other members of my "rogues gallery". Ladies and gentlemen of the blogosphere, why do you think the Big 87654-controlled PCAOB spends as much time as it does on the 1,790 small CPA firms in question? What say you?