Home > Uncategorized > 2011/09/27: QuickPost: Taxulationism Trumped? Collins Calls for Regulatory Timeout

2011/09/27: QuickPost: Taxulationism Trumped? Collins Calls for Regulatory Timeout

For any of you who haven’t run into it before, ‘Taxulationism’ is a term describing over-taxation, over-regulation and the impact of protectionism. It was one of the key topics which was included in my US midterm election-day 2010 Financial Times ‘Insight’ column on why the Fed’s QE2 liquidity infusion was likely to be ineffective. To give credit where credit is due, that term came out of a conversation I was having with my friend Jack Bouroudjian at his office early last summer.

Like many of us, Jack was astounded by the retrogressive taxation and especially regulation efforts of the Obama administration. He noted that none of them had probably ever read Arthur Laffer’s work on the regressive nature of elevated taxation and regulation, and I suggested that we should describe it as ‘taxulation’. Jack then added the ultimately prescient thought that those sorts of things always lead to protectionism as well, and completed the effort by evolving that into ‘Taxulationism’.

And there is little doubt it is the major hurdle which is crippling US job creation. That comes from everyone beginning with Alan Greenspan late last year, through Dallas Federal Reserve President Richard Fisher, others at the Fed (or sick of being asked, “What the Fed is going to do about the economy“, when the real problems are creatures of Congress), and even many in Congress itself.

And finally someone right there in the belly of the beast has suggested a pointed solution to the problem that has constrained any meaningful job creation by corporate America… AND she’s among the most moderate.

Senator Susan Collins of Maine is no Right-wing firebrand dedicated to diminishing the size of government. She’s even one of those apostates who crossed over to vote in favor of Obama’s health care reform bill. (Wonder how she feels about that now?) In both a Wall Street Journal Op-Ed piece yesterday and an interview on CNBC’s Kudlow Report  she highlighted her new bill proposing deferral of the implementation of any regulations with more than a $100 million impact on the US economy.

Naturally the dollar amount is only indicative of the number of jobs those regulations might destroy. Might such a broadly cast restriction on overbearing regulation actually slave the most pernicious part of the Taxulationism Monster? Will need to see just how much bipartisan support she gets. However, that may not be as far-fetched as it seems in a Senate where many less than left wing Democrats will be running for office next year.

Lord knows whether a rededicated Enviro-Socialist president Obama will accept anything so diametrically against his agenda, but it may be hard for at least some members of his party to stand up to what is characterized by many as“regulation run amok”.

Here are a couple of the most interesting snippets from the Kudlow interview:

Collins: The NLRB is a perfect example of an agency that is issuing rulings that are so detrimental to job creation in this country. So it would apply to regulations such as the Boeing case, but also the new ‘ambush’ elections regulation that NLRB has put out that’s an attempt to go around congress, which has refused to enact the so-called ‘card check’ bill (heavily pro-union regulations.)

Larry Kudlow: And what about the Dodd/Frank bill with what? …300 new rules and regulations and thousands of pages? Nobody knows still today what that thing is going to mean. I hear from small and community bankers, Senator Collins, that it’s absolutely strangled their business; they’re afraid to make a loan. Will this, your legislation, affect Dodd/Frank?

Collins: This regulatory time-out would affect all the rules that have an impact to the $100 million or more on our economy. And that certainly applies to a lot of the new regulations under Dodd/Frank…

Collins: …the President has ordered a review of regulations on the books, but that’s of small comfort when you know that in the pipeline are 144 rules that have an impact each of more than $100 million on the economy. And there are literally 4,000 rules in the pipeline that have a lesser impact. (our boldface and italics.)

[END of interview segments.]

None of this is news. Going back to last December, Alan Greenspan was a guest co-host on CNBC’s early-morning SquawkBox  show. He discussed how the US government borrowing crowds out corporations, and even focused on the excessive regulations in the Dodd-Frank financial reform bill (especially the section at approximately 08:40-13:00.) He noted that it would require 250 rule makings in a very short period of time, whereas in previous years the Federal Reserve considered 5-10 for an entire year being quite an accomplishment.

He then got to the key point for the typically litigious US society. As all of those rules would be made in haste (which is the nature of the beast for much else of what is occurring in other US regulatory areas at present), there will be mistakes. And that would leave them open to “adjudication.” That’s a fancy term for it will all end up in court before anyone really knows what the stabilized regulatory regime looks like.

And as opposed previous regulatory reform cycles, that’s one more reason in addition to the sheer volume of regulations that all of the advisors (accountants, attorneys, strategic planners, etc.) to corporate America are saying for the first time in history, “We have no idea what it all means.” In that context, we hope we have helped clarify the degree to which even the contentious taxation and fiscal aspects of the current problems are relatively minor.

All the more reason we hope (and that should include the rest of the world praying right along with us) that Senator Collins’ bill gets bipartisan support from any of the enlightened centrists on the Democratic side of the aisle. We shall see.

General Market Observations

So it was no surprise that the temporary outbreak of bonhomie in Europe on the need to solve the most pernicious immediate aspects of the sovereign debt crisis has brought a strong temporary rally to the equities. Equally predictable was the degree to which the US dollar and the government bond markets have reacted back downward to some degree. Especially the euro-govvies are burdened by the degree to which additional funding for the rescue efforts is a concern even as they lose some of the even if they developed during the worst figures for the equities last week.

However, neither the equities strength nor the weakness of the US dollar and govvies can be viewed as yet as a convincing trend reversal. December S&P 500 future might now be able to trade as high as just above 1,200 with the current bearish rounding pattern (Scallop) intact. Similarly, December T-note future is now sagging back below 130-20 in the wake of equities stabilization. However, as opposed to weaker sisters in Europe, it has held so far without dropping down to its interim 129-18 support. And there are far more prominent lower supports if that is broken.

While both commodities and commodity currencies have rebounded in the wake of the near-term equities recovery, that seems to still be a partial rebound. That also seems to bring the equities recovery into question.   At least that is the implication we must draw from the euro’s very modest recovery from below the low end of important EUR/USD 1.3900-1.3837 support that held back in July. The US Dollar Index has also been out above the high end of its .76-00-80 complementary resistance, and at least so far is not dropped anywhere back near it on the current equities bounce.


EQUITIES: Downside leader DAX still has some interesting resistance up into the low 5,600 area in which it has failed previous, yet is finally out on an UP Break above 5,500 today. That is important due to the degree to which it takes the DAX up out of its very weak ‘declining channel’ pattern (opposite of a firmer upward consolidation.) Even allowing for the further evolution of that potential basing pattern, there is important interim resistance into the mid-5,800 area, and even more formidable trend resistance around 6,000.

Long Dated Government Bonds: In light of the recovery in the equities, the weakness of the developed world government bond markets is no surprise. They are experiencing more of a correction than we have seen in some time in the wake of the change of sentiment on equities. In fact, it is very typical that initial rallies in equities are not very influential on strong government bonds. It is more so as equities stabilize across time that has a greater negative impact on govvies.

While stronger than the T-note of late, December Gilt future is going through a bit more of a correction by already dropping down to its mid-128.00 support. Yet there is a further significant support in the upper-mid 127.00 area and even as low as the upper 126.00s. Similarly for the December Bund future, the previous strong sister has now dropped rather more sharply. Yet, after its recent push to a new high there is even some short-term support in the mid-low 135.00 area, yet with much greater intermediate-term support back down into 134.00-133.30.

Foreign Exchange: It seems in the wake of the far more downbeat ECB forecasts for the European economy and failure of Operation Twist to impress the equity markets that classical relationships are reinstated. And as the weaker economic expectations have permeated the markets, it has not been much of a surprise that commodity currencies have capitulated as well.

At least that is the implication we must draw from the euro’s very modest recovery from below the low end of important EUR/USD 1.3900-1.3837 support that held back in July. The US Dollar Index has also been out above the high end of its .76-00-80 complementary resistance, and at least so far is not dropped anywhere back near it on the current equities bounce.

Australian dollar support in the AUD/USD 1.0300-1.0200 area was a critical bellwether for whether its overall top and intermediate-term channel were going to Break DOWN. Since the AUD/USD failure below there it has fallen below parity with the US dollar, slipping below the mid-.9750 area to near next interim .9600 area support prior to stabilizing.

All of which reinforces the US Dollar Index push above its key .7600-80 area. While it has stalled temporarily at next incremental significant resistance in the upper-.7800 area, extended coordinated weakness elsewhere reinforces the degree to which it might well be headed for its significant downward channel downward channel (equivalent of EUR/USD getting back toward the 1.3000-1.2850 range) in the .8050 area. Of note, that is on the approach to the important late 2010-early 2011 rally failure highs in the mid-.8100 area, which also just happens to be the Fibonacci 0.50 retracement of the entire swing from the .8872 2010 high to the May 2011 lows.

Energy markets and Gold: Both are now direct reflections of the trend in equities, with the significant shift of late being the yellow metal’s failure along with equities. Especially on the November Crude Oil stalling on its multiple tests of the 89.50-90.00 resistance over the past several weeks, there was some sense that any return to significant weakness in equities was not going to be good. In the event, previous holding action around the important 83.85 February low has given way to a test of the prominent interim support in the 80.00-79.50 area.

As noted repeatedly in recent analyses, it was most interesting that the lead contract Gold future had been only marginally (insofar as $30 is a reasonable slippage factor in the relatively rabid yellow metal) above its 1,886 major Runaway Gap Objective on two occasions over the past month, and immediately fallen back on each occasion.

It has turned into a full rout back below the bottom of the 1,692-82 Runaway-Gap; that turns it into an Exhaustion Gap Top (E-Gap) that will now act as resistance on any rallies. It seems a very depressed level, but that is the way these work. That said, the first test of the 1,550-40 important major channel and weekly MA-41 support seems to have held in overnight electronic trading yesterday.

Thanks for your interest.

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