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Author Archives: Lenore Hawkins, Chief Macro Strategist

About Lenore Hawkins, Chief Macro Strategist

Lenore Hawkins serves as the Chief Macro Strategist for Tematica Research. With over 20 years of experience in finance, strategic planning, risk management, asset valuation and operations optimization, her focus is primarily on macroeconomic influences and identification of those long-term themes that create investing headwinds or tailwinds.

Americans renouncing citizenship over onerous tax code

On January 25th, Lenore Hawkins joined the Freedom Fighters to talk about Americans giving up their citizenship due to the onerous tax code.

  • The current tax code is outrageous.  In 1913 the Federal Tax code was 400 pages.  It is now over 72,000 pages!
  • Americans spend over 7.6 billion hours a year preparing their taxes which equates to about 3.8 million skilled workers, making the tax compliance industry SIX TIMES the size of the U.S. auto industry.
  • 82% of Americans need help preparing their taxes
  • 60% hire a professional tax preparer.
  • According to the IRS, “If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.”  Thus you are subject to double taxation; tax for the country of residence and a second level of tax from the United States.
  • If you decided to give up your U.S. citizenship, you are taxed on all your assets using a mark-to-market regime, which generally means that all property is deemed sold for its “fair market value” on the day before the expatriation date.  You will be forced to then pay taxes on those assets as if you had sold them.

Rather than using a punitive tax code that attempts to bar people from leaving, how about building a legal code, regulations and tax code that attract wealth and high income earners from all over the world?  Their assets and innovation will help the economy grow, providing much needed jobs.

 

The New, New Normal

I’m fairly certain that when the G20 convened, many of the attendees believed that as a result of their high-minded meetings, some brilliant announcement would be given to the markets and once again the world would be deemed safe, at least for a little while.  Instead, the Cannes meeting ended with no solutions and not even a pledge to find solutions. Is this the new normal?  Papandreou is on his way out, which means the odds for passage of the latest rescue plan are improving, but at this point, that means very little for long-term Greek prospects.

Last week the ECB reversed its rate increase from earlier this year, cutting short-term lending rates by 25 basis points to 1.25%.  This should hardly come as a surprise with the Eurozone economy deteriorating at a faster pace than was expected.  Markit, a global financial information services company, reported that Eurozone GDP fell at a quarterly rate of 0.5% in October with little chance for a pick up in the near term.  Output fell and new order inflows contracted at the fastest pace since June 2009.  Eurozone PMI fell to a 28 month low of 46.5 in October, dropping from 49.1 in September.  This is the sharpest drop since November 2008.

In Germany, whose strength has been keeping Europe afloat, industrial production dropped 2.7% in September, on the heels of a 0.4% drop in August.  German factory orders dropped 4.3% in September.

One of the most concerning trends last week was the rise in Italian bond yields, with the 10 year soaring at one point to 6.64% while at the same time German bund yields dropped 2 basis points to 1.79%.  Italy is rapidly approaching the levels that pushed Greece, Ireland and Portugal into bailout mode, but this time the stakes are markedly higher.  Italy’s economy is the 8th largest in the world and its bond market is the third largest!  That’s a bigger problem that all the aforementioned nations combined and it is highly unlikely that Berlusconi’s majority government will survive.  Contagion anyone?  Over the weekend Italy rejected an offer for IMF assistance, but conceded to intensive monitoring with published quarterly fiscal results.  Talk about too little too late!

It is amazing to think that just 11 days ago, on October 27th, the market soared on promises that the EFSF would magically be expanded and levered up by some as yet still unidentified sources and all would be well in the world!  Once again, China was touted as being keen on getting involved.  Is anyone really surprised at this point that they aren’t?  Then in what can only be described as irony on a global scale, the ECB left China after being rejected and headed over to Japan, who debt to GDP is nearing a mind-boggling 228%, with hat in hand looking for support.  That’s like going to the neighborhood crack dealer in search of rehab options!

Italy is now clearly being targeted as the next bailout candidate, but there just isn’t enough firepower to handle the land of linguine.  It needs to refinance $413 billion in the coming year with market rates currently at levels that it simply cannot afford.  How much more can the ECB take on?  They’ve already bought over $100 billion of Italian bonds since August, with very little impact on yields.

Greece’s default appears more likely and more imminent that ever before and there are entirely too many under-capitalized European banks, which means, systemic risk.  This coming at a time when Italy, (remember that this is the 8th largest economy in the world) will need to refinance $413 billion!  Ah fusilli!

For anyone who thinks that Europe’s woes won’t creep across the pond, keep in mind that between 15% and 20% of S&P500 sales and exports are derived from Europe.  Europe is also China’s largest export market, so this has significant global implications outside of the danger to credit markets.

Bottom line – there is no end in sight to the Eurozone debt crisis and the U.S. will not go unscathed.  To make it even more exciting, countries responsible for half of global GDP will be holding elections in the next year, and we all know how candidates love to take advantage of a crisis and stir the pot!  Volatility and fear will be the norm.  Invest accordingly.

Bernanke is watching you

On September 27th, Freedom Fighters Chris Cotter, Nancy Skinner, and Lenore Hawkins discussed the Fed’s plans to monitor the Internet, and why Coca-Cola is choosing China.

What is the proper role for government?

Only July 21st, Lenore Hawkins joined the Freedom Fighters, (Charles Payne, Ellis Henican and Kmele Foster) and on Freedom Watch to discuss the economics of electric cars, Florida selling info on citizens obtained by the DMV, the federal government’s restriction of potatoes in school lunches and the impending FAA shut down.

We've Hit The Tipping Point with Over 50% Not Paying Taxes

My friend Dan Mitchell, senior fellow at the Cato Institute, had a frightening blog post today.  According to the Ways and Means Committee, 51% of households paid no income tax in 2009.  Click here for his piece.

This is a dangerous tipping point as with over half of households paying no taxes, the incentives to increase government spending are horribly skewed in the voting population.  Why not vote for increased spending when it costs you nothing…. at least not immediately?   As we’ve seen across the world, the entire economy suffers when the government consumes too much of the economy, but that doesn’t always sink in when an individual is at the polling booth, looking for the easiest way to protect their own short-term interests.

Aside from the obvious moral hazard of this type of code, skewing the tax burden so heavily towards the higher income earners makes for vastly more volatile tax receipts than would result from a more broad-based system.  Higher income earners tend to have more volatile income levels, thus their annual tax payments vary more.  Government typically does not cut spending when there is a decline in tax receipts, but rather continues to increase expenditures year after year, regardless of receipts.  Simple math leads one to recognize that a system which generates volatile receipts and a government that tends to spend above the highest tax receipt level, will generate deficits more often than not thus growing national debt will be the name of the game.  This is not a sustainable system.

Debt Ceiling – what most get wrong

The Debt Ceiling is a cap set by Congress on the amount of debt the federal government can legally borrow. The cap applies to debt owed to the public, (meaning anyone who buys U.S. bonds) plus debt owed to federal government trust funds such as those for Social Security and Medicare.  The limit was first set in 1917 at $11.5 billion.  Previously, Congress had to sign off every time the federal government issued debt.

The ceiling is currently set at $14.294 trillion. The debt blew past that mark on the morning of May 16.  By taking various measures like suspending investments in federal retirement funds, Treasury Secretary Tim Geithner has been able to bring total debt down enough to allow the government to continue borrowing until Aug. 2.

If the debt ceiling is not raised, it is unlikely that the Federal government would default on bond or Social Security payments, but rather implement some other combination of spending cuts and/or tax increases.

Currently the federal government spends $1.4 trillion more than it receives in tax revenue.  Without an increase in the debt ceiling, the federal government would have to cut this much in spending which would mean that approximately 9.3% of GDP ($1.4 trillion / current GDP of about $15 trillion) would be withdrawn from the Federal government’s spending in the economy.

You’ve may have seen economists and politicians go into apoplectic fits over how this means an immediate 9.3% reduction in GDP, which would clearly be disastrous for the economy.  This is another example of Keynesian math gone wrong as the money that would have been borrowed by the government to fund this excess spending would not just disappear into thin air.  Does it really make sense that we have two options, the government borrows and then spends $1.4 trillion OR that $1.4 trillion ceases to exist?  Those funds would still exist and likely be invested or spent elsewhere – potentially generating even more than $1.4 trillion in the economy.

That being said, given the magnitude of cuts that would be required, we believe it is unlikely that Congress will not raise the limit at some point, however it could possibly do so after the August 2nd deadline.  In fact, the markets would likely prefer a delay in raising the limit that is accompanied by a credible plan to reduce the deficit and the national debt, versus an increase that is not accompanied by any credible plan.  Think of it this way, you lent money to your neighbor a few years back and now see that he is simply digging himself deeper into debt.  Would you rather have him continue getting new credit cards just to pay you the interest on your loan or would you prefer to have him miss a payment or two while he develops a reasonable way to cut his spending so that you are confident that not only will you get your interest payments, but also your principal?

Bottom Line:  Be wary of the overly simplistic math used in most of the media these days.  The slogan, “If it bleeds it leads,” is alive and well and financial Apocalypse headlines make for sensational copy and help politicians garner valuable air time.

The Debt Ceiling – What Most Get Wrong

The Debt Ceiling is a cap set by Congress on the amount of debt the federal government can legally borrow. The cap applies to debt owed to the public, (meaning anyone who buys U.S. bonds) plus debt owed to federal government trust funds such as those for Social Security and Medicare.  The limit was first set in 1917 at $11.5 billion.  Previously, Congress had to sign off every time the federal government issued debt.

The ceiling is currently set at $14.294 trillion. The debt blew past that mark on the morning of May 16.  By taking various measures like suspending investments in federal retirement funds, Treasury Secretary Tim Geithner has been able to bring total debt down enough to allow the government to continue borrowing until Aug. 2.

If the debt ceiling is not raised, it is unlikely that the Federal government would default on bond or Social Security payments, but rather implement some other combination of spending cuts and/or tax increases.

Currently the federal government spends $1.4 trillion more than it receives in tax revenue.  Without an increase in the debt ceiling, the federal government would have to cut this much in spending which would mean that approximately 9.3% of GDP ($1.4 trillion / current GDP of about $15 trillion) would be withdrawn from the Federal government’s spending in the economy.

You’ve may have seen economist and politicians go into apoplectic fits over how this means an immediate 9.3% reduction in GDP, which would clearly be disastrous for the economy.  This is another example of Keynesian math gone wrong as the money that would have been borrowed by the government to fund this excess spending would not just disappear into thin air.  Does it really make sense that we have two options, the government borrows and then spends $1.4 trillion OR that $1.4 trillion ceases to exist?  Those funds would still exist and likely be invested or spent elsewhere – potentially generating even more than $1.4 trillion in the economy.

That being said, given the magnitude of cuts that would be required, we believe it is unlikely that Congress will not raise the limit at some point, however it could possibly do so after the August 2nd deadline.  In fact, the markets would likely prefer a delay in raising the limit that is accompanied by a credible plan to reduce the deficit and the national debt, versus an increase that is not accompanied by any credible plan.  Think of it this way, you lent money to your neighbor a few years back and now see that he is simply digging himself deeper into debt.  Would you rather have him continue getting new credit cards just to pay you the interest on your loan or would you prefer to have him miss a payment or two while he develops a reasonable way to cut his spending so that you are confident that not only will you get your interest payments, but also your principle?

Bottom Line:  Be wary of the overly simplistic math used in most of the media these days.  The slogan, “If it bleeds it leads,” is alive and well and financial Apocalypse headlines make for sensational copy and help politicians garner valuable air time.

How and Why of Greek Debt

How and Why of Greek Debt

When a nation has more debt than it can manage, it has two options (1) inflate its way out by printing more money or (2) restructure the debt.

Typically the most politically feasible solution is to inflate.  Generally wages tend to keep up to some degree with inflation, so the employed feel as if they are getting a raise and don’t gripe too much.  Those in the population who have debts prefer inflation as the relative “cost” of their debt decreases over time, e.g. with 5% inflation, debt declines in real terms by 5% every year.  It is the savers who suffer most as they watch inflation eating away at what they’ve built – in a converse to inflation reducing debt, savings declines in value by 5% every year.  This is why inflation is often referred to as a hidden tax.

The Europeans cannot inflate their way out of too much debt for the PIIGS as the U.S. is way ahead of them in the race to the bottom and they have conflicting needs across countries.  A monetary union without a political, fiscal and cultural union is complicated at best.  So why the continued kick the can?  The largest banks (German Deutsche Bank, the French BNP Paribas, Société Générale and Crédit Agricole SA among many others) have not increased their reserve capital, which would dilute shareholders, and do not want to take losses on their significant holdings of PIIGS bonds.  The euphemistic “restructuring” of these bonds would by definition require some sort of write down in value for the banks.http://www.insidermonkey.com/blog/wp-content/uploads/2011/06/Who-holds-Greek-debt.jpg

Bank’s hold these bonds as assets on their balance sheets.  They are required to maintain a certain level of assets relative to the amount of loans they give.  If the value of their assets were to suddenly drop, they could find themselves in violation of the regulations concerning this ratio.  As you can imagine – that is not good for the banking sector and lending!  We saw the last time this occurred the credit markets effectively shut down, any type of borrowing was nearly impossible, and the engine of the global economy geared way down.

So how did the U.S. get out of the bog in which the Eurozone is currently mired?  In the Spring of 2009, the U.S. banks were eventually forced to raise hard common equity that was then used to absorb losses on loans.  The fixed income market did bottom out in the Fall of 2008, but when banks sought this equity, their stocks did not wither on the vine, albeit life wasn’t exactly rosy.  Rather than taking this approach, the International Monetary Fund (IMF), the European Central Bank (ECB) and the German and French banks are giving Greece just enough liquidity to roll their debt, not the permanent equity investments that were made here in the U.S.  The Euro approach is just a temporary patch on a cracking dam.  Only when the European banks raise equity, as we did here, and the PIIGS debt is restructured will there be a true resolution.