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2024-05-21 07:45 by Karl Denninger
in POTD , 79 references


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2024-05-21 07:00 by Karl Denninger
in Federal Government , 542 references
[Comments enabled]  

This is the issue for the United States folks.

If we don't fix it then there is no solution for inflation and the destruction of consumer capability from a standpoint of families, sustainability and prosperity.

Thermodynamics applies to all things.  The laws of thermodynamics can be learned by taking a class, but you can sum them up as three sentences if you're not interested in the finer points.  They are:

  • You can't "win"; that is, getting more out than you put in is a physical impossibility.
  • You can't break even; that is, no matter what you do you will will always have loss in your endeavors.
  • You can't avoid playing the game; that is, refusing to participate simple means everything rots around you!

Last year's MTS is being used for this and the key item is net interest expense, which as of last September was $659 billion.  This amount is rapidly accelerating and that acceleration is almost-all due to the fact that Treasury never pays down debt and as older Treasuries mature they are forced to pay higher rates than when they were last issued.  The explosion of said net interest payments is clear; this fiscal year through April said payments were $514 billion and yet we're only 7/12ths of the way through the year.  Thus far on a "run rate" basis that expense is expanding at a 34% rate compared with last year.

We obviously cannot continue to do that as the government will be unable to find anything else if they don't cut it out, and with some $27.5 trillion of that debt held by the public (persons, corporations and other entities, that is, not held by other federal government agenciesat a 5% interest rate, which is somewhat lower than the current short-term rate, the cost per year to maintain that is $1.37 trillion or 22% of all federal spending from last year which was $6.134 trillion.

In other words the Federal Government is currently running its accounting at roughly the same sort of financial damage you would take as a household if everything you bought was run through a credit card, you carried the full balance every month of your spending and you were like most people and had a 22% interest rate.

If you've ever gotten in trouble with a credit card you know how fast and how bad that gets when nearly a quarter of everything you allegedly "pay" does nothing but make a banker richer.  However, you are in that position due solely to your actions, not as a consequence of some random event of chance.

We will eventually come back to "income" (taxes, for the government) but that is clearly not where we can immediately focus because the bottom line is this: Last fiscal year the government took in $4.439 trillion but spent $6.134; in other words it spent 38% more than it taxed -- that is, $1.6 trillion more than it collected in taxes.

The entirety of personal income taxes was only $2.176 trillion.  In order to stop the inflationary impact of this you'd have to raise tax revenue by at least that amount which in personal income taxes would mean a 36% increase.  Since the top 1% of earners paid 45.8% of income taxes and the top 50% paid effectively all of them (97.7%) it is not mathematically possible to "tax the rich" (the top 1% of earners) and balance the budget; even if you raised the top marginal rate to 100% you'd be short and they'd stop working if they got to keep nothing and thus your plan would fold back and catastrophically fail.

If you wanted to do so without further taxing the bottom 50% of earners you'd have to increase income taxes by 40% on everyone who is in the top half.  This would wildly screw everyone in the middle class to the point that many would be bankrupted.  Yes, the "rich" could afford it and might continue to produce and earn as they did before but the middle class would collapse and thus your scheme would fail.

So obviously we must find $1.6 trillion or more in spending cuts and we must understand that doing so will produce at least a temporary decrease in GDP because what the government spends winds up in someone's pocket and if you stop that spending they will not have it.  The direct GDP impact would be -6.3%, more or less, but since every dollar gets circulated the short-term and immediate impact would likely be roughly double that amount and the government cannot try to compensate for it with more hand-outs or we're right back where we started.

In other words we must absorb it in the short term.

So where do we have enough funds spent to make the difference plus the impact to GDP (which will damage tax receipts in the short term)?

Again, from the MTS we have the following large outlays (enough to be material):

Defense: $776 billion
Health and Human Services: $1,708 billion
Interest (you can't not pay all of that): $879 billion (plus another $228 billion in "other" than direct interest)
Veterans Programs: $301 billion
Social Security: $1,416 billion

That's it; that is $5.3 trillion of the total and everything else is less than $800 billion.

But attacking Social Security is stupid.  It took in $1,200 billion last year in tax receipts and of course if you attack it you won't take in the taxes.  It is only responsible for $216 billion of the deficit on a cash operating basis; that isn't where the problem lies.  In fact that operating deficit of about 18% could be closed completely with a 1% increase in the FICA tax and a modest but immediate lift in the annual income cap upon which it is levied.  It is therefore utterly stupid to argue for any sort of radical change to the program as that's not where the problem is but we should make both of those changes in the FICA tax right now because that not only resolves the problem it also takes Social Security off the table as a political football since it is self-funding.

The only other program that has a direct offsetting tax is Health and Human Services, most of which is in CMS, Centers for Medicare and Medicaid.  Only $358 billion was collected last year against a spend in that department of $1,708 billion.  There is no way you could possibly increase the tax rate to compensate for this and Medicare's tax already has no income cap; you'd have to increase the rate to FIVE TIMES the current amount to close the gap and that tax, like Social Security, is from the first dollar earned and is already also assessed on investment income as well for those who have large investment income amounts.

As such there are two, and only two places you can solve the problem: Defense and Health and Human Services (CMS.)

This is not a subject for debate.  It is cold, hard mathematical fact and there is nothing you can do about it.

So how do you go after this?

  • I already formulated a way to radically cut CMS spending -- by as much as 80% -- and at the same time resolve the health cost problem for everyone in America.  Much of this requires no Congressional action as the laws in question are already on the books but deliberately not enforced.  Specifically, 15 USC Chapter 1 carries criminal penalties and forbids basically all of the price-setting structures now in use -- including cross-border differences in drug and supply cost.  They're illegal at a felony criminal level and that law has been on the books for more than a century yet the Executive refuses to enforce said laws.  So while enacting that plan would certainly require Congress stopping the price-fixing can be done instantly by throwing some people in prison.

  • We can demand that zero federal funding by provided to anyone here illegally in the United States irrespective of what program it falls under.  This would include EMTALA which directly implicates CMS spending, for example, by driving up cost as it shifts it to taxpayers.  While doing this would require Congressional action the Executive can, in a single day, cause the same effect without Congressional action and irrespective of Congressional opinion by enforcing against every single entity 8 USC §1324 that mandates felony criminal prison time (5 or 10 years as a base penalty, and more under certain circumstances) for each and every person who harbors, assists, or employs an illegal alien.  This law has been on the books for more than fifty years and yet once again the Executive refuses to enforce it.

  • We can trim defense.  The NATO target is 2% of GDP.  For us that would be about $500 billion, a reduction of $276 billion or 36%!  While that may well be unrealistic in the immediate or even intermediate term it is clear that we can demand that those alleged "allies" of the United States foot their own bills on a ratable basis and, if they refuse, withdraw our funding and support from their national defense.  I get that we believe there is a "peace dividend" both material and ephemeral from our projection of power but the fact remains that we can and should demand direct payment from the other beneficiaries of same and, if they refuse (which they obviously can) then we must undertake the public debate as to whether we wish to spend 13% of our federal budget on defending other people who are ingrates and refuse to pony up the cost of that alleged benefit themselves.  At some point the answer to that question is "no" and it is high time we have that conversation and make that decision as a body politic.

There are many other areas (such as forcing our government at all levels to analyze for and defend the parasitic elements of any legislation or regulation) that can be put into effect but that both requires time and legislation -- and at present it appears we are short on time and have an unwilling legislature in all respects.  Therefore this falls to the Executive or the people and the boundaries of existing law.

Fortunately said existing law does exist and is sufficient to resolve 80% of the problem.  No, it won't be a complete fix, but that is never reasonable to expect in any political context.  However, that 80% is both achievable and reasonable.

The economic impact of doing this will, in the short term, be quite severe.  Firing 80% of the people currently working in Health Care will disrupt a lot of people lives and asset prices, including home prices.  But doing this will also wildly improve the competitiveness of America .vs. other nations on the global stage and cause business to come here rather than overseas as said costs decrease.  In addition by reducing the parasitic loss in economic activity (of which a huge percentage is in fact in this sector -- go look at the cost of health insurance for employers!) we will place a huge amount of downward pressure on prices and release much of the funds currently paid to said firms back to the employee, both of which will wildly improve consumer purchasing power in both gross and real terms.

With the Federal Government running a surplus, not a deficit, rates will come down to a moderate degree.  That will both help the Federal Budget and consumers.  No, it won't re-ignite the real estate pricing bubble and you should expect house prices to collapse by 50% or more, which incidentally is not crazy as on a national level that only gets you back to around 2017-2019!

However, restoring the capacity for family formation among those who are productive, which this will go a long way toward resolving -- and no, its not the entire answer -- will be of great net benefit as well.

This is the way -- and, on the clear budgetary and spending data it is also the only way that we avoid a "foldback" style collapse within the next few -- single-digit -- years.

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2024-05-18 07:00 by Karl Denninger
in Market Musings , 231 references
[Comments enabled]  

.... hope you didn't.

Nice spike in GME the other day with most of it in the pre-market when you, likely, were either sleeping or not paying attention.  Someone managed to get trades off at $80; as I pen this its trading $34.  That's a 58% loss in two days.  Ouch.

AMC's even worse; it traded pre-market that same day at $13.30; sucks to be you if you're the bagholder on that one because as I write this its trading $5.30.  That is a 60% loss in two days.  Whoever thought that was a "buy" at $13.30..... well, not so much right?

That this sort of reaction still occurs tells me everything I need to know about the general tenor of the market right now.  Despite people claiming there is some sort of "balance" between Greed and Fear, and its on the "Fear" side right now, uh.... no.

The VIX is trading under 13.  That's not fearful -- at all.

Inflation is still running double the Fed's claimed target and yet the S&P tags all time highs.  Uh, no, that's not fear.

Every time I've shaken my head in the "new media" world where everything runs on social media (spamming someone's email is so yesterday) by the violent (usually upside) reactions to this rumor or that, or even worse what is likely someone going through six VPNs to try to bail themselves out of a bad position I think I've seen the "best and brightest" of such insanity and, of course, this means it can't continue.

Then it not only continues -- it accelerates.

Now tomorrow or in a few days (when this publishes) once again these stocks may spike higher.  Does this make them a buy?  No -- it makes them the equivalent of lottery tickets.  They're not being bought because of some material, single-firm change in their operating results or lines of business, that is, because the value of the underlying company has changed.  They're being bought because someone thinks someone else will pay more.

I've often heard that "Wall Street is like a casino" and in some cases that's arguably true.  But a casino has known odds that you can look up or calculate yourself.  21, dice, roulette and similar are all games of chance in that even the most-correct strategy will never result in you having a mathematical advantage.  That doesn't mean you can't win at such a game but it does mean that if you win it is by chance, not by skill.

Poker is the one exception in a casino but the house still maintains a "rake" which is a tax on every pot.  Therefore you not only need to be better than the other players you must be better by enough to overcome the tax.  If you are, however, then over time you can indeed can win in the context of the other players over time (over enough time everyone gets the same number of deuces and aces.)  Thus, assuming a game of skill is of interest to you that's the only choice in a casino.

But now consider two players at that Texas Hold'em table who are able to communicate and collude.  You're going to get destroyed because that is more than enough "tilt" to overcome virtually any skill differential you might otherwise have.  This does happen although casinos make an honest effort to prevent it (its very bad for business if it gets around that this occurs in their card room.)

That's akin to what we have now in equity markets: Not only are people playing games such as what just occurred but what's worse is that some of it may be organized in that there is an allegation out of the Senate that government data was systematically leaked early to certain players in the markets.

None of that is chance or skill -- its cheating.  And as is the case in Vegas its illegal in the markets as well.

As I've discussed for years fines do nothing in situations like this because the parties responsible are never personally forced to disgorge them in an amount that is sufficient to ruin the guilty parties.  Thus only jail is a sufficient deterrent in that prison time has serious deterrent value no matter who wealthy you are.

Don't expect any of that to happen soon though, but at current valuations do be aware that the sort of movements and losses you can easily take if you're on the wrong side of these moves are both wildly exaggerated and, if that Greed factor does turn to Fear they're far more likely to be spikes to the downside.

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2024-05-16 07:25 by Karl Denninger
in Product Reviews , 258 references
[Comments enabled]  

I don't do this very often, but once in a while I buy something online -- within a few minutes get a call from the people who run the joint, they talk with me, confirm what I want, I get it, and..... I'm actually impressed.

Not just "satisfied" -- impressed.

This is one of those:

You have to have a pressure washer and if you have gutters above the second floor an extension wand.  The problem with clearing gutters is that its a five-alarm pain in the neck -- and if they're on a second floor doing it without a bucket truck or scissor lift (and we know nobody rents one of those for that job) can be quite dangerous.  You can pay someone to do it (hope they have Workman's Comp and aren't just a "'Handyman" without it -- you don't want to know what happens if he comes off that ladder onto your concrete driveway from 20' up!) but calling them out once or twice a year gets expensive especially for folks carrying proper insurance.  Not clearing your gutters, if there's evidence they're clogged during heavy rains, is an extremely bad idea as water can back up into the fascia boards and rot them -- then your gutters detach as they're mounted to that wood, you call someone to fix it and discover you're talking about a nastily-expensive amount of work.

If you have a pressure washer and extension wand (e.g. to do the siding on the house or similar) then this job would seem simple, but it isn't.  The reason is kickback -- you need a gooseneck end on the wand to go into the gutter and when you hit the trigger the thrust has a huge moment arm against you on a 15'+ extension wand.  This is very different from the lightly-curved normal end that's on those you're used to; there you can brace against it (which is why most of those have a body harness) but that doesn't work with a gooseneck.  If you actually need the extension at anywhere near its full length I find it completely uncontrollable.

This end for your extension wand absolutely solves that problem -- not helps it -- 100%.  There is zero kickback in any direction when you hit the trigger.

Just make sure your downspout -- if its connected to an underground pipe or similar -- is unconnected and runs on the grass first because everything you sweep is going to come down it.  Yes, it will clear off the matted leaves on the top of the downspout connector and flush what it doesn't down it and out..

They have a patent applied for on this and I can certainly see why.  It's a complete game-changer even for two-story houses.  I have two sections of gutters that animals like to destroy the covers on where I can't get to them without risking my life and thus those two places are subject to trouble every spring.  I've made up a number of home-made adapters and such both for the pressure washer and hoses to resolve this -- one with success, the other not so much.

This thing cleared both in seconds and verification of the one that I usually do with my home-made hose adapter from the deck to run down it, which does work, confirmed that it was entirely-clear including the matted "stuff "from critters over the downspout connection.

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2024-05-15 08:49 by Karl Denninger
in Macro Factors , 329 references
[Comments enabled]  

Let's do the forward look first, since that's what really ought to matter -- PPI.

The index for final demand less foods, energy, and trade services moved up 0.4 percent in April after rising 0.2 percent in March. For the 12 months ended in April, prices for final demand less foods, energy, and trade services increased 3.1 percent, the largest advance since climbing 3.4 percent for the 12 months ended April 2023.

So much for the forward looking indices relaxing.  Uh, nope.  And what is especially troublesome is that both goods and services moved in unison.

Remember we are a majority-services economy.  People often disregard goods inflation in the pipeline with some level of justification because its simply a smaller piece of the basket and is subject to quite a bit of discounting as you go through the stages of production.  Neither is true for services.

Now there is one piece of the goods side that could be reasonably dismissed, particularly since a large part of it has come back out in the last couple of weeks: Gasoline prices.  Some will point to foods showing negative price changes but nearly all of that is due to fresh and dry vegetables, which are not a large component of the index in any event (nor of most people's diet.)  Natural gas was also down but this is a seasonal thing that is expected; winter is over, so residential gas demand is now nearly all for cooking and water heating, which is the usual pattern -- and leads to lower prices in the spring.

There is a "pig in the python" problem in energy materials in the intermediate table, however, and strongly suggests that the passthrough will wind up in the CPI in two to three months.  That's not good as, of course, that's right into the maw of the summer travel season.  We'll see.

Nothing else really stands out to me beyond ordinary seasonal variation.

Then we have the CPI....

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in April on a seasonally adjusted basis, after rising 0.4 percent in March, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.4 percent before seasonal adjustment.

The index for shelter rose in April, as did the index for gasoline. Combined, these two indexes contributed over seventy percent of the monthly increase in the index for all items. The energy index rose 1.1 percent over the month. The food index was unchanged in April. The food at home index declined 0.2 percent, while the food away from home index rose 0.3 percent over the month.

Ex food and energy was up 0.3%, which is down one tick from last month.  But all less food and energy is still up 3.6% over the last 12 months which remains close to double the so-called "2% target."

As in the PPI report there was a spike in gasoline which was coincident with the eclipse -- whether that was pure gouging or not I do not know, but it was definitely there and it definitely reflected back into the CPI (as it should have.)  That's a one-off and most of it has come back out already.

But -- both OER and rent were still up wildly strong -- over 5% annualized.  Of course there will be people that really like that idea but facts matter and non-discretionary purchases, with housing among them, don't just have to stop going up at close to triple the so-called target they must actually come down in gross terms.  

What's much worse is that hospital and related services, along with elderly care, are rising at a crazy rate, up at close to 8% annualized and 13.9% for elderly people.  Again I remind you these are compounding figures so for elderly people this means a double in six years.  How anyone thinks that can continue on a forward basis is beyond me -- there's just no money to do that, and its the driver of CMS cost acceleration although the latest Treasury Statement shows slight improvement over last fiscal year.  There is no way to know at present if that's a deferral of payment out of CMS (it might be) or if there's real progress.  We simply need more time to know.

Car insurance continues to wildly spike higher -- up 1.4% this month alone and 22.6% annualized.  That has not resolved, so the idea that this was a "one off" is thus far just plain wrong.

The market seems to love this number -- but I'll take the under on that one.  The IRX ticked up a couple while the 10 year is down materially, further widening the spread which just continues the run of what, on an objective basis, certainly appears to be an illogical Pavlovian response in asset markets.

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