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Friday, July 25, 2014 1:09 AM


Obama Shenanigans on 'Factoryless' Exports, Taxes, Employment, Jobs


Corporate Deserters

President Obama was beating the drums on Thursday in Los Angeles regarding corporate tax deserters, companies that move headquarters or tax shields to another country in order to escape high US tax rates.

The LA Times provides the details in President Obama Hits 'Corporate Deserters' in Populist L.A. Speech.

Tearing into companies he dubbed “corporate deserters,” President Obama on Thursday launched an election-year push to make it harder for U.S. companies to avoid paying taxes.

Under a bright sun at a trade and technical college in Los Angeles, Obama issued a damning assessment of a “small but growing” group of companies taking advantage of a “loophole” in corporate tax law by reorganizing overseas, often in low-tax countries.

Obama accused the companies of “renouncing their U.S. citizenship” and “fleeing the country” while sticking U.S. taxpayers “with the tab.”

“You shouldn’t get to call yourself an American company only when you want a handout from the American taxpayer,” Obama told a crowd gathered at the Los Angeles Trade-Technical College. The speech capped a three-day West Coast trip primarily focused on raising money for Democrats ahead of the midterm elections.

Obama’s target on Thursday was so-called inversion transactions, a practice that allows U.S. companies to reincorporate overseas, either through a merger or purchase of a foreign entity, and thus avoid paying U.S. taxes on its foreign earnings.
Who Cares About Legalities?

The president acknowledged the practice is legal, but added “my attitude is, ‘I don’t care if it’s legal -- it’s wrong.’”

Well, who gives a damn about legalities anymore? Certainly not president Obama, as he has proven many times over.

Besides, as we all learned from President Nixon "When the president does it, it's not illegal".

No president has been a finer student of Nixon philosophy than Obama.

People Freaking Out

Business Insider's "eye-popping" chart of the day on Why People Are Freaking Out About 'Tax Inversions' adds a big megaphone to Obama's tune.



'Factoryless' Exports

In addition to seeking higher taxes, Obama simultaneously proposes a rule change to classify "factoryless goods producers" as domestic manufacturers, even if the manufacturing jobs associated with those producers are offshore.

The IB Times reports Obama's jobs proposal was  Slammed by Unions.
A decade ago, as the United States hemorrhaged manufacturing jobs, the federal government considered reclassifying fast food as a manufacturing industry. Sound ludicrous? Today, with the manufacturing sector still ailing, the federal government wants to take something called "factoryless goods" and categorize the firms that make them as manufacturers. As part of the plan, the government could also classify some foreign-manufactured goods as U.S. exports.

Now, as the White House seeks to portray its domestic manufacturing initiatives as successful, the administration has proposed a rule change to classify "factoryless goods producers" as domestic manufacturers, even if the manufacturing jobs associated with those producers are offshore. A 2013 Study by Dartmouth Business School researchers found that had that rule been in place, it would have officially increased U.S. manufacturing employment figures by 595,000 jobs in 2002 and 431,000 jobs in 2007.

In response, labor unions and consumer groups this week announced they organized more than 26,000 public comments against the proposed change. They charge that the reclassification could undermine the Buy America Act, which requires government purchasers to give preference to U.S.-made goods.  They also argue that such a reclassification would artificially and inaccurately inflate the number of domestic manufacturing jobs reported by the government and would hide the true economic cost of trade proposals, such as the pending Trans Pacific Partnership.

Though the proposed change could be politically useful for lawmakers and is a hot issue for labor advocates, some economists support the initiative on the grounds that it provides more precise data. As the Dartmouth researchers argue, such reclassification may be necessary because "factoryless goods" are "a new type of production function in the global economy."
Ultimate in "Factoryless Goods"

Do US dollars qualify as "factoryless" goods? If not, why not? Dollars can be manufactured at will, electronically, without a factory, and China gladly takes all of them we print.

China wants dollars and we want junk. That should make everyone happy.

The only problem is classification. All Obama has to do is count US dollars as a "new type of production" and the trade deficit magically goes away.

On a more serious note ...

I propose elimination of corporate income taxes entirely. 

I recently discussed a zero percent corporate tax rate  in response to a proposal by Barry Ritholtz regarding a "Fair Tax" structure.

For a detailed discussion, please see Reader Emails and Other Reflections On the "U.S. Corporate Tax Dodge".

The article covers numerous points. For those who want a quick synopsis, here goes:

"Ritholtz wants uniformity and fairness. I agree. Taxation at 0% would not only provide it, businesses would come to the US, instead of escape from the US. How bad would that be?"

To address the trade deficit completely and easily, also see Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Thursday, July 24, 2014 7:31 PM


The Piece Fits; Debunking Revisited


It Fits 

Reader Eric comments "It is amazing what internet, twitter, etc. has done for the pursuit of truth.  Here is an individual who shows where the piece fits on the plane."

From @ErzaBraam



The Piece



For a report on the piece, please see Photo of MH17 Wreckage Proves Missile Attack

Contrary to popular belief this does not prove MH17 was brought down by a Buk. Rather, the image is consistent with a missile explosion from outside the plane, not a crash, and not a bomb exploding inside.

The damage could be from a Buk, and is likely a Buk, but my understanding is that it could also be an air-to-air missile of a similar nature. If a military expert can state 100% otherwise, I would be happy to reconsider.

Debunking the Debunk of the Debunk

Several people sent me an email that allegedly debunks my debunk of a Reuters story regarding rebel admission of Buk possession. For background, please see Reuters Debunked: Khodakovsky Denies Interview Aspects.

The alleged debunk of my debunk is a Radio Free Europe Clip.

The audio clip is not embeddable,  so click on the preceding link to play.

Reader Ilya commented "Show this to your Russian speaking propaganda zombie." That ridiculous comment was in regards to Jacob Dreizin, a US citizen who speaks Russian and reads Ukrainian, and whose analysis I sometimes use.

I did show it to Dreizin and we both laughed out loud. This is my response ...

Believe a short clip by Radio Free Europe, a US propaganda site? When some of  the clip is barely audible,  and sounds like it was spliced together out of context?

Please be serious.

But hey, I am a fair guy. If Reuters wants to publish the entire interview, so we can hear the pauses, the context, and all other aspects, I would be happy to reconsider.

Meanwhile, let me repeat: In the original interview, Reuters author Anton Zverev posted quotes that are not consistent with the headline story. No amount of tampering, editing or innuendo can change that simple fact.

Once again, I quote - directly from Reuters  (who directly quoted Khodakovsky as follows) ... "What resources our partners have, we cannot be entirely certain. Was there (a BUK)? Wasn’t there? If there was proof that there was, then there can be no question."

In 100% certain terms, and clearly in context, Khodakovsky stated he did not know if other rebel units had Buks, while a previous quote shows his unit did not.

There is absolutely no reasonable way for the Reuters headline to read (as it did) "Exclusive: Ukraine rebel commander acknowledges fighters had BUK missile."

Blame whoever you want: Blame the editor, blame the author, or blame Reuters, but you cannot reasonably blame anyone who points out such an obvious discrepancy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

3:41 PM


Junk Bond Indigestion; Musical Chairs; Take Chips Off the Table?


The first half of 2014 sported record junk bond purchases by investors thirsty for yield, no matter how absurd the bond covenants or how risky the investment.

Things may have changed in July as the following chart shows, using JNK (the Barclays High Yield ETF) as a proxy for junk bonds.

JNK Daily



click on either chart for sharper image

On a weekly chart, however, the dip doesn't even register.

JNK Weekly



So while this could be the start of a decline, it might also be nothing.

With that backdrop, please consider Bloomberg's report Junk-Bond Indigestion Burns Buyers Gorged on Record Sales.

Junk-bond buyers are showing signs of indigestion after snapping up a record $361 billion of the debt at the lowest yields on record.

Speculative-grade bonds from the U.S. to Europe and Asia are set to post losses this month for the first time since last August after high-yield debt funds suffered the biggest weekly withdrawal of 2014. Winoa SA, the French producer of abrasives for metalworking, scrapped a bond offering in Europe yesterday amid the turmoil.

“People who were complacent before are going to have their finger on the sell button pretty quickly if some of these situations escalate,” Marc Gross, a money manager at RS Investments in New York, which oversees $5.8 billion in fixed-income assets, said in a telephone interview.

There is “a whiff of ‘flight-to-quality’ in the market, though we are far short of panic,” analysts led by Michael Contopoulos at Bank of America wrote in a report yesterday. The $2.7 billion of withdrawals from junk debt was led by U.S. funds that reported outflows of $1.8 billion, with exchange-traded funds accounting for more than 60 percent of that, according to the report.

“There has been a noticeable shift in sentiment as investors evaluate whether flows are a short-term blip or the beginning of a broader trend,” Michael Sohr, a New York-based money manager at AllianceBernstein, said in a telephone interview. “We’ve got increased geopolitical risks. Perhaps some investors believe it is a good time to take some chips off the table.” 
Take Chips Off the Table?

The preceding three paragraphs from Bloomberg are rather amusing. Specifically I am referring to these phrases:

  • Flight-to-Quality
  • Finger on the sell button
  • Good time to take some chips off the table

While it's certainly possible for an individual investor to have a "finger on the sell button" or to "take chips off the table" it is impossible for investors in aggregate to take any chips off the table.

Someone must own every bond ever sold, 100% of the time, until the bonds mature or they are called. Mathematically, 100% of the chips must be on the table 100% of the time.

Secondly, there is no such thing as a "flight-to-quality".

Rather, what happens is a major repricing event: Investors demand more yield from junk bonds as perceived risk increases. Investors demand less interest from treasuries in times of turmoil.

In a repricing event of that nature, one asset price rises, the other sinks. It's important to understand this can happen even if no shares trade!

Here's an easy-to-understand example of a no-trade repricing: Suppose the city approves a landfill at the end of your block. Without any homes being sold, the value of every home on the block would immediately decline.

Sentiment can and does change overnight (and pricing along with it) whether shares of stocks, bonds, homes, or other assets trade or not.

Every Friday the market closes for the weekend. Prices can be very different at the open on Monday, and dramatically different in a week's time. Individual issues can change even faster than indices.

Musical Chairs ThreePeat

Just like Chuck Prince, former Citigroup CEO in 2007, everyone believes they can dance while the music plays, and safely head for the door when the music stops. For an amusing recount, please see Music Stops for Chuck Prince.

Investors are fooling themselves, for the third time. It's impossible now, just as it was in 2007 and 2000, for investors to exit at the right time.

All the remains is the answer to the question: "How much more insane does it get before the junk bond bubble bursts?"  When it does burst, it's near-certain equities will go along for the ride.

And It's Gone

A reader reminded me of this South Park clip that explains everything you need to know about risky investments.



Link if video does not play: And It's Gone

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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