US Now Controls Cash Deposits in Foreign Banks

It couldn’t have happened to a nicer country.

On March 18, with very little pomp and circumstance, president Obama passed the most recent stimulus act, the $17.5 billion Hiring Incentives to Restore Employment Act (H.R. 2487), brilliantly goalseeked by the administration’s millionaire cronies to abbreviate as HIRE.

As it was merely the latest in an endless stream of acts destined to expand the government payroll to infinity, nobody cared about it, or actually read it. Because if anyone had read it, the act would have been known as the Capital Controls Act, as one of the lesser, but infinitely more important provisions on page 27, known as Offset Provisions – Subtitle A—Foreign Account Tax Compliance, institutes just that.

In brief, the Provision requires that foreign banks not only withhold 30% of all outgoing capital flows (likely remitting the collection promptly back to the US Treasury) but also disclose the full details of non-exempt account-holders to the US and the IRS. And should this provision be deemed illegal by a given foreign nation’s domestic laws (think Switzerland), well the foreign financial institution is required to close the account. It’s the law.

If you thought you could move your capital to the non-sequestration safety of non-US financial institutions, sorry you lose – the law now says so. Capital Controls in the U.S. are now here and are now fully enforced by the law.

For details of the provisions of the law, go here.

Sell Real Estate in 2010 – 69% Capital Gain Tax Increase in 2011

Congress is funding its latest entitlements with a 5.4% surtax on incomes above $500,000 for individuals and above $1 million for joint filers. The surcharge is intended to snag the greatest number of taxpayers to raise some $460.5 billion, and so the House has written it to apply to modified adjusted gross income. That means it includes both capital gains and dividends.

Capital Gain Tax Rates
U. S. Capital Gain Tax Rates

That surtax takes effect on January 1, 2011, or the day the Bush tax rates of 2001 and 2003 expire. Today’s capital gains tax rate of 15% would bounce back to 20% because of the Bush repeal and then to 25.4% with the surtax. That’s a 69% increase, overnight. The last time investors were hit with anything comparable was 1986, when the capital gains rate jumped to 28% from 20%, a 40% increase, as part of the Reagan tax reform that lowered income tax rates.

What this means for investors who are on the fence about selling real estate is plain and simple.  Sell in 2010 and pay a 15% federal tax on your gains, or sell after January 1, 2011 and you could be looking at almost 26%.

The math goes like this: The current 15% fed cap gains tax sunsets this year and will likely go back to at least the 20% rate under Clinton.  Add on the 5.4% health care surcharge and then you are at almost 26%!

The Treasury Now Has A Vested Interest In Tanking Stock Market

There is an article on the Zero Hedge Financial Analysis Web Page relating to the fact that the Treasury is running out of options.   It has to move quickly out of risky assets into risk-free bill holdings.  That will likely result in a stock market crash. This is a technical article, so I have attempted to summarize the conclusions in this space. You should read the whole article.

In other words, a stock market crash is long-overdue if the Treasury does not want to face a major spike in rates and drop in Treasury demand in the immediate future.

First, and this is no surprise to anyone, the US is on collision course with an unmitigated funding disaster. As the chart below demonstrates, the US has been issuing roughly $147 billion a month for the past 17 months, in a period in which total US Federal debt has increased from $10 trillion to $12.6 trillion. With recently passed healthcare reform, look for the red line indicating total debt to go increasingly exponential.

Like we said, nothing surprising here as we spend ourselves into bankruptcy. The only reason why this has not escalated yet has been the Fed’s ability to keep rates low on the short end, translating into modest low long-end rates as well, despite the curve being at record wides. The progression over time of average interest rates by Bills, Notes and Bonds, as presented by Treasury Direct, is shown below. This should also not come as much of a surprise, as it has been well known that the Fed’s only prerogative in the past two years has been to buy every yielding security in sight to keep rates low.

The conclusion of the article is that the Treasury needs to generate a demand for Treasury Bills or become insolvent. This can be done in one of two ways. 1) Raise interest rates on TBills, which the Fed does not want to do. 2) Cause a situation where capital will rush to Treasury Bills for safety.

The article concludes:

The reason for this: 1) rates on Bills can only go 0.2% lower before hitting zero, and 2) nobody wants Bills anymore. China certainly has been selling Bills, and US citizens, balking at money market rates, are definitely not going to lock their money into Bills which yield the same if not less. The Treasury’s natural response – bringing back the SFP 56-Day Cash Management Bills back. Today, the Treasury auctioned off the 5th $25 billion SFP chunk, on its way to filling up the $200 billion CMB tank full. Yet this is merely a stop-gap measure, and it is responsible for the slight bump higher in February Bill holdings compared to January. Alas, the Treasury will need to generate wholesale interest for Bills in some way in the near future, or else it will drown itself in the vicious cycle combination of increasing interest payments pushing rates higher, etc. And what creates a scramble for Bills better than anything?

Why a massive market crash of course.

Are we predicting one will happen? Of course not; in this market what is expected to happen is that last thing that will happen. We merely point out the logic and what the empirical evidence is demonstrating. Either the Treasury will need to expand the SFP program to far beyond the $200 billion cap, or it will need to get rates on Notes and Bills even lower at a time when the broader market is already expecting a rise in Rates. And in the meantime, it will continue issuing roughly $150-200 billion in debt each and every month to fund in increasingly bankrupt government.

What we can predict with certainty, is that the Treasury is on an inevitable collision course with insolvency, courtesy of a government run amok. And absent a major shift in capital out of risky assets into risk-free equivalents, it is going to get increasingly more difficult to control the runaway beast of rabid and uncontrollable deficit spending.

Read the whole article. We have just taken on a huge spending program through the new Obamacare health plan that will greatly exacerbate the problem. We have to understand that the people running our government have no intention of trying to keep the U.S. solvent, even as our AAA credit rating is in jeopardy. To be informed is to be prepared.

Warren Buffet has a better credit rating than the USA

By Daniel Kruger and Bryan Keogh

March 22 (Bloomberg) — The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.

Warren Buffet
Warren Buffet

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.

The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.

“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.” Continue reading “Warren Buffet has a better credit rating than the USA”

An email from a friend

I received the following email from my friend, Bryan, tonight:

And on the very same day that Obama has done his best to transition us to a European socialist state, we find out that US Treasury Debt is now less creditworthy than highly rated US Corporate Debt — could you ever have imagine that?

And the credit rating of the US will get worse as more debt is incurred and the deficits increase because of the healthcare bill.

Is The United States Headed For A Commercial Real Estate Crash Of Unprecedented Magnitude?

Will commercial real estate be the next shoe to drop in the ongoing U.S. financial crisis?  While most eyes are on the continuing residential real estate disaster, the reality is that the state of the commercial real estate market in America could soon be even worse.  Very few financial pundits are talking about this looming disaster but they should be.  The truth is that U.S. commercial property values are down approximately 40 percent since the peak in 2007 and currently approximately 18 percent of all office space in the United States is now sitting vacant.  That qualifies as a complete and total mess, but the reality is that the commercial real estate crisis is just starting.

Continue reading “Is The United States Headed For A Commercial Real Estate Crash Of Unprecedented Magnitude?”

Loan Loss Reserves Restrict Banks From Making Commercial Real Estate Loans

In addition to keeping an eye on declining property values, falling rents and rising vacancy rate numbers, the commercial real estate community is also concerned over ominous signs in banking industry numbers.

One big area of concern is the fact that banks are stowing away more money to cover problem loans. The amount being set aside is rising rapidly and is now higher than it has been for a quarter of century. Meanwhile, the amount of problem loans is rising at even more than twice that rate.

The implications of the increased loan loss coverage for the commercial real estate industry is that it will likely further limit the amount of money available for borrowings. Those numbers also signify that this will continue to encourage “extend and pretend” policy that some lenders have pursued, and it may further encourage lenders to be optimistic about their recovery rates to avoid taking further losses/writedowns. And at the same time, lenders won’t hesitate in demanding more money out of borrowers’ pockets. Continue reading “Loan Loss Reserves Restrict Banks From Making Commercial Real Estate Loans”

The Central Economic Fallacy of the Century

The late Murray N. Rothbard once published a major article titled “Ten Great Economic Myths.” Included on Rothbard’s hit list were the notions that deficits are the cause of inflation and that economists can accurately forecast the future.

One myth that he didn’t cite dominates Washington today: that the economy can be successfully “managed” from some central point. This idea underlies, directly or indirectly, all of the others Rothbard mentions.

Unfortunately, society’s intellectual, political, and economic “mainstream” still accepts what should be called the Central Economic Fallacy of the Twentieth Century. The “mainstream” just doesn’t get it. Thus, we continue to see a basic progression. First, government subsidizes x or regulates y to correct for some government-diagnosed problem z. Unwanted side effects result, and z, assuming it exists, often grows worse. Government intervenes again to fix the side effects and redouble its efforts to battle z. More undesirable side effects result. And the process continues, with government growing inexorably as interventions accumulate. More and more of the economy is micromanaged through increasing webs of subsidy, regulation, and quick fix. The logical end result, as Ludwig von Mises has shown in great detail, is socialism.

Read the whole article.  The author makes a lot of sense.

Limited Job Losses Despite Harsh Weather Encouraging Sign; Positive Territory on Horizon

According to the Marcus & Millichap blog the limited number of jobs lost in February, despite harsh weather, could signal better times ahead:

March 5, 2010

  • With multiple employment sectors recording growth in February, despite anticipated losses due to harsh weather, the economy has begun to generate limited employment traction. Employers cut an unexpectedly low 36,000 jobs during the month, suggesting hiring may turn positive in the second quarter. The professional and business services sector reiterated employers’ need for additional staff by hiring 51,000 workers in February, but, as in previous months, caution reigned, with 47,500 of the added jobs being temporary. Steady increases in temporary employment often foreshadow the creation of full-time jobs as the economy emerges from recession. With five consecutive months of additions through February, temporary employment has signaled the economy is making continued headway in its choppy recovery.
  • Among other sectors, education and health services and leisure and hospitality added an aggregate 39,000 workers last month. Manufacturers created jobs for the second month in a row, adding 1,000 positions to payrolls and marking the first time since 2006 that manufacturing employment has expanded in successive months. These positive contributions to total employment, however, were more than offset by the losses in other sectors, including the elimination of 64,000 construction jobs and 12,000 transportation and warehousing jobs that may largely be attributable to poor weather, particularly in the Northeast.
  • The addition of 342,000 people to the work force last month helped keep the unemployment rate at 9.7 percent. Though this figure could be partially related to a re-benchmarking of data in January, it may also signal increased confidence in the employment market. The household survey indicated that the number of employed rose by 308,000 individuals in February. This information suggests small businesses, which tend not to be captured in the broader BLS nonfarm employment figures, may have resumed hiring on a limited scale.
  • Impact on Commercial Real Estate

  • The unemployment rate among 20- to 34-year-olds, or the prime apartment renter cohort, remained unchanged last month at 11.7 percent but has improved from a recent high of 12.2 percent last fall. Strengthening employment opportunities and job growth should stimulate the apartment sector going forward, especially as younger individuals who delayed forming households during the recession enter the work force. Following an increase of 130 basis points in 2009, national apartment vacancy will decline 30 basis points this year to 7.7 percent as more than 89,000 units get absorbed. Rents will continue to lose traction, however, as effective rents will slip 3 percent.
  • The modest improvement in manufacturing employment and further strengthening in the ISM Manufacturing Index bode well for warehouse and distribution properties in the months ahead. Nationwide industrial vacancy surged 200 basis points last year to 12.6 percent on negative net absorption of 139 million square feet. Space demand will recover slightly this year, although vacancy will rise 20 basis points.