2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

[Polish_Silver]

But who does the capital deepening ?

. ....Now we face an even bigger problem. The effort to reflate the housing bubble only appears to be working at the higher end of the housing market. ....

The unintended consequence of the use of asset price inflation as a means of reflation of the economy is even greater wealth inequality.

I think a root problem is not enough saving and "real" investing.

High wealth people do not spend on consumer luxuries. But do they invest?

The standard argument that diverting money to poor people is stimulative because they spend all their money is a fallacy. We do not need short term stimulation, but long term capital deepening.

Giving money to what group will cause capital deepening?

Poor people spend money on food and imported consumer items. That will not increase our productive capacity unless they start buying more sustainable food grown domestically.

I am not trying to attack poor people, I am just claiming that giving them more money does not logically increase the nations productive capacity. (Neither does asset price inflation, of course)

[ProdigyofZen]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

The unintended consequence of the use of asset price inflation as a means of reflation of the economy is even greater wealth inequality.

The US economy is already in tow to looking like every other economy, one marked by great wealth disparity where the only people who own property are the wealthy and others have little chance of getting ahead.

The income of the top 5 to 10% will only continue to increase, with the lower level of that range starting out at 100k and increasing by 20% per year before topping out depending on industry.

Everyone else will make 100k or less with the most at the 45k to 65k range with virtually only a "COLA" increase each year (2%).

Consultants at McKinsey start at 120 base and 20k bonus and go up from there. They are coveted jobs in high demand and after 2 years you will be headhunted out of the firm to work at another top notch firm making more than the 140k base and 30k bonus of your second year.

These are the people who can afford those upper tier homes within 2 to 3 years of work whereas the majority even after 10 years of work cannot afford them or more like "shouldn't" try to buy those 500k homes.

Russia is this way (13% flat tax for everyone), the majority making 500 to 1500 USD a month and a very small middle class with an even smaller oligarchy at the top. The cost of buying an apartment in Moscow is exorbitant, just to buy a room in an apartment is 150k+ USD and that is outside the first circle main city center of Moscow.

If you make 1500 USD a month when would you ever be able to save enough to afford an apartment there where virtually everything is purchased in cash and not using debt?

So the few upper middle class own the apartments and rent them out for high prices and earn even more money. Then if you hold an apartment for 3 years and then sell it you dont have to pay capital gains tax which puts more money in their pocket.

I am sure we can draw parallels in the US. Just look at the exploding properties in Manhattan and Brooklyn and the new reality TV shows about high end RE brokers in NYC. "Million Dollar Brokers"

[Polish_Silver]

Government does no work?

Why should they jump for joy? They may not have 'worked' for those gains. But they took the risk with their money. The government, on the other hand, took no risk and gets a 20% cut for doing absolutely no work. I'm not rich by any stretch, but I just stroked a big check to the Feds with money that I would have loved to use to take my family on vacation this summer. This past year, I basically worked for 126 out of 365 days for Fed and CA taxes. So, I'm not exactly unsympathetic toward your client at the moment.

I wouldn't say the government does no work.

The basic functions of local government: police, fire, sanitation, traffic control are essential to our lifestyle. However, these things cost a pittance. It is the federal government that takes the lion share of the revenue, and much of what it does is counterprodutive: agricultural subsidies, over stuffed military, wars, spying on taxpayers, intrusive airport security. However, the bulk of taxes go to
entitlements of some sort. These have problems, but it is more a case of citizens voting for a free ride (or stability) than a government doing "no work."

A 20% cap gains tax is very reasonable, since hourly workers pay that much or more.

[EJ]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

from the article:



since one can only spend so much (more) once one has several multi-million$ trophy houses, a private jet, a handful/2 of $75k+ luxobox cars - and how many $300 lunches can ya stuff down before ya get too fat (and very unfashionable)



'expectations' ?
from what - increasing the min wage to 10bux?

course that will be 'inflationary' so then the punchbowl gets taken away, the markets KA-RASH and POOF
there goes the 'good news'

From 1998 to 2000 I noted here that the asset price inflation of the "Roaring '20s" created vast wealth disparities, and that the key challenge of reflation policy in the early 1930s was after the crash was how to get a few thousand wealthy families to generate enough demand for goods and services via their personal consumption to generate significant employment for millions of unemployed and their destitute families. My worry was that the crash of the NASDAQ, DJIA, and SP500 markets may present a similar challenge. After FDR was elected a more effective albeit too-little-too-late reflation was accomplished via currency depreciation and deficit spending; the economy had already shrunk by 25%.

I didn't see a repeat of that. I didn't see the Fed and Congress waiting until the economy crashed and a deflation spiral got going. But I did think that the wealth disparity left over from the boom was likely to be a factor in an uneven recovery, that in fact came to be called a "jobless recovery."

The solution to the problem as I finally caught onto in 2004 was the housing bubble, a way of spreading asset price inflation down to middle and to some extent lower income and wealth groups.

Now we face an even bigger problem. The effort to reflate the housing bubble only appears to be working at the higher end of the housing market.

Unit sales of single family homes by price range. QE (mortgage interest rate/bond price fixing), plus bank programs, etc. helped buyers of new homes >$400,000.

The unintended consequence of the use of asset price inflation as a means of reflation of the economy is even greater wealth inequality.

[touhy]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

I believe the government should collect those taxes necessary to fund their constitutionally prescribed responsibilities. Period. Full stop.

It should not collect taxes in an effort to promote social policy, exact vengeance, or redistribute income. In fact, social and economic mobility is best served by limiting the public sector share of the GNP and securing private property rights.

(I am with you on trust fund, mouthy liberal elites proclaiming their altruism (and wishes for more government spending) while paying at the relatively lower capital gains rate while I pay a much greater share secondary to my W2 status. But even though I am frustrated, even I do not want to punish them. How about everybodys' rate comes down to 17% ?

[ProdigyofZen]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

RL this is a major problem with the structure of our society. I hope that you can see how this structure creates dynastic wealth in the hands of the few while everyone else slaves away in debt perpetuity.

Sure, I understand you are not rich but the people who already have money will become much more wealthier paying little taxes on capital gains and you will continue to pay 30% plus on your income, which you work for using your time/energy/sweat that could be used on your family.

Whereas the rich people will not derive any income (therefore not paying the higher income taxes) and earn all their "profits" from capital gains.

Wouldn't it be better if anyone making 100k or less paid only 10% in income tax and it progressively moved up from there along with capital gains taxes in the 40 to 50% range?

These people are rewarded for doing nothing but putting their money in a stock that pays dividends and they have the audacity to complain about paying 20% capital gains tax.

[Slimprofits]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

You will get a kick out of this.... This morning we were discussing the sale of a stock for clients. One client had a tax liability of 110k and ALL the clients are upset that they will have to pay the 20% cap gains tax on the stock. Apparently they would prefer to not pay the tax but possibly incur a 50% decline in the price of the stock (which is why we want to sell). I asked "what is the complaint about? the client obviously made a lot of money on this one stock for doing absolutely no work for 5 years yet doesn't want to sell because they have to pay 20% in taxes?" To my mind that makes absolutely no sense. They should be jumping for joy. These rich people are adverse to paying anything in taxes.

Not only adverse to paying taxes, but adverse to all losses. More specifically, people (not just rich people) more strongly prefer avoiding losses to acquiring gains. http://loss-aversion.behaviouralfinance.net/ ---- Edit: This is Kahneman and Tversky's theory of "Loss Aversion". I strongly recommend Kahneman's book: http://en.wikipedia.org/wiki/Thinking,_Fast_and_Slow

[touhy]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

Amen brother rlskaggs.

[rlskaggs2003]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

Why should they jump for joy? They may not have 'worked' for those gains. But they took the risk with their money. The government, on the other hand, took no risk and gets a 20% cut for doing absolutely no work. I'm not rich by any stretch, but I just stroked a big check to the Feds with money that I would have loved to use to take my family on vacation this summer. This past year, I basically worked for 126 out of 365 days for Fed and CA taxes. So, I'm not exactly unsympathetic toward your client at the moment.

[lektrode]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

increasing the wealth of the already wealthiest people does not lead to increased spending.

from the article:

calculations show that since the recession ended in 2009, households have spent 1.7 cents of every extra $1 earned in wealth. That’s less than half the 3.8-cent average implied by data between 1952 and 2009, suggesting the trend for consumer spending gains over the past three years has been less than 1 percent once the wealth effect is stripped out.

One reason for the adjustment may be that those enjoying gains in wealth are already rich, so have less propensity to increase spending incrementally. Withdrawing equity from homes has also been negative for five years.

since one can only spend so much (more) once one has several multi-million$ trophy houses, a private jet, a handful/2 of $75k+ luxobox cars - and how many $300 lunches can ya stuff down before ya get too fat (and very unfashionable)

The good news is that income expectations are starting to pick up, which should encourage the spending acceleration that greater wealth failed to spark, said Feroli, a former economist at the Federal Reserve Board.

'expectations' ?
from what - increasing the min wage to 10bux?

course that will be 'inflationary' so then the punchbowl gets taken away, the markets KA-RASH and POOF
there goes the 'good news'

[ProdigyofZen]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

increasing the wealth of the already wealthiest people does not lead to increased spending.

You will get a kick out of this....

This morning we were discussing the sale of a stock for clients. One client had a tax liability of 110k and ALL the clients are upset that they will have to pay the 20% cap gains tax on the stock.

Apparently they would prefer to not pay the tax but possibly incur a 50% decline in the price of the stock (which is why we want to sell).

I asked "what is the complaint about? the client obviously made a lot of money on this one stock for doing absolutely no work for 5 years yet doesn't want to sell because they have to pay 20% in taxes?"

To my mind that makes absolutely no sense. They should be jumping for joy.

These rich people are adverse to paying anything in taxes.

[jk]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

Wealth Effect Failing (another failed model?) http://www.bloomberg.com/news/2014-0...-to-spend.html

increasing the wealth of the already wealthiest people does not lead to increased spending.

[Slimprofits]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

Wealth Effect Failing (another failed model?)

While the wealth of American households has jumped more than $25 trillion since early 2009 amid rising equity and home prices, the pass-through to consumer spending is lagging the $1 trillion fillip that would have been anticipated historically, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.

His calculations show that since the recession ended in 2009, households have spent 1.7 cents of every extra $1 earned in wealth. That’s less than half the 3.8-cent average implied by data between 1952 and 2009...

Withdrawing equity from homes has also been negative for five years.

http://www.bloomberg.com/news/2014-0...-to-spend.html

[Slimprofits]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

Wells Fargo (WFC) & Co. and JPMorgan Chase & Co., the two largest U.S. mortgage lenders, reported a first-quarter plunge in loan volumes that’s part of an industry-wide drop off. Lenders made $226 billion of mortgages in the period, the smallest quarterly amount since 1997 and less than one-third of the 2006 average, according to the Mortgage Bankers Association in Washington. -- http://www.bloomberg.com/news/2014-0...borrowing.html

[Slimprofits]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

Puerto Rico Hires Bankruptcy Lawyers http://dealbook.nytimes.com/2014/04/...seid=auto&_r=0