Home > Uncategorized > 2013/01/16: Technicals and Taxulationism (an update)

2013/01/16: Technicals and Taxulationism (an update)

© 2013 ROHR International, Inc. All International rights reserved.

A fresh set of Technical Projections and Select Comments are already available via the link in the right hand column, current through Tuesday’s US Close. And those are now very relevant to the near term price activity in equities that are standing still for the most part and other asset classes that have had some reasonably strong swings.

More on that below. Yet the becalmed nature of the equities trade is fairly ironic in light of the degree to which equities are sometimes an indication for economic expectations. And in turn, those drive psychologies of other asset classes. Yet, right now the sometimes sharp swings in other asset classes are in sharp contrast to the equities lack of activity.

And it’s not like the tail is ‘wagging the dog’, as the dog is catatonic. Equities sitting still cannot likely last that much longer. Yet right now the standoff between positive QE, corporate earnings and upbeat chatter of ‘multiple expansion’ on renewed confidence are countered by all the global economic growth downgrades (Germany, World Bank, IMF previous, etal.), weak data (Europe in particular), and US Taxulationism1.

1Taxulationism © 2010 Alan Rohrbach & Jack Bouroudjian. All rights reserved unless explicitly waived

And that gets us right into the update on how pernicious that just might be. Yes, we know, and have been duly respectful of how those sorts of things only have an impact across time. Which is exactly why we have been so circumspect on the potential for equities develop weakness early this year; and have been very pointed about not getting too bearish in early-mid January.

However, the final piece is now in place. Taxulationism is the term Jack Bouroudjian and I coined some time ago regarding how far the US has moved away from the free market principles, and especially the insights on optimal taxation levels developed by Dr. Arthur Laffer (as in the ‘Laffer Curve’.)  

Taxation is back with a vengeance, even on the middle class (more on that shortly.) Aggressive regulation that was held in abeyance into the US election is back with a vengeance. And the protectionism which is the ‘ism’ on the back end of Taxulationism is now here as well, completing the circle. How? Exchange rate changes have reached the point where they are predatory.

But FIRST… Taxation…

Click on illustration to watch CNBC video

Click on illustration to watch CNBC video

As CNBC’s Eamon Javers points out in the video (click on the graphic to watch), after all the rhetoric about raising taxes on “millionaires and billionaires” to protect the middle class… the middle class takes the hit.


  This is an axiom of human nature. The rich may or may not get richer at any given point; but they are sure in a better position to weather any tax increases than the middles class.

Of course, the problem is that the middle class is in a position where the bulk (if not all) of their income needs to be spent. It is the classic living from paycheck to paycheck. And as such, their incomes are the driver for GDP. While the individual decreased pay packets since January 1, 2013 may seem trivial in the framework of a trillion dollar economy, the net effect is telling because it pervades the broader consumer spending and sentiment.

As we noted in our January 3rd post …ironic creeping tax view, the net effect according to JP Morgan’s economics team is an 0.60% reduction in 2013 GDP. And as it was not that robust to begin with, that’s quite a reduction. Along the same line is the disincentive to capital formation from the hike in capital gains taxation.

OK, let’s allow that a hike on those rich investors from 15% to 20% doesn’t sound that bad. Yet, that does not include the 3.8% Obamacare surtax on capital gains. So in fact that rate has gone from 15% to 23.8%. And that doesn’t begin to reflect the other Obamacare taxes (medical devices, etc.) along with state income taxes and other measures taxes to replenish their crisis-depleted coffers. So excessive taxation is back in the effort to avoid reining in runaway spending.

Regulation. Now there’s an always juicy subject, where the path to Hell is paved with good intentions.  The new Dodd-Frank-empowered US Consumer Financial Protection Bureau has published it s guidelines on mortgage initiation. And they are draconian enough to put a damper on the high end of the housing market that has been the upside leader for months.

Nicely done, especially in spite of the ability to still get a mortgage for lower balances, because they can still be financed under the umbrella of the US housing finance authorities. Plus ça change. Still have government interference/guarantees at the low end, and open up the high end to private mortgage insurance and the like under terms that will not let the market develop… sweet. Don’t take our word for it. Just take a look at the CNBC panel discussion  that includes the very well-informed Diana Olick.

Then there’s the protectionism. No, not any new tariffs here. Nor the specious agricultural contamination or GMO foods canard. Just plain old currency wars. Which by the way are so typical of this phase of classical credit deleveraging cycles. This is not the first time that various governments have become interested in a bit of a boost to exports that would be a very nice tonic for a limping economy. Think 1930’s, and the various phases in the late 1800’s.

Yet the Japanese situation is particularly interesting. That is due to the degree to which it may not be so much government intervention (which have seen to be transitory on so many other occasions.) Rather, this may be the real deal on Japanese markets finally reflecting their very poor demographics that are only exacerbated by the latest political shift. Maybe.  

The most interesting bit it the degree to which the Europeans were certainly not griping about an over-valued yen, yet are already beginning to makes noises about their discomfort with the strength of the euro.  Well, some are, and some are attempting to pretend that there cannot be any predatory currency pricing because they received assurance from the G-20(?!)

Well, we certainly wouldn’t doubt the G-20’s good intention in wanting to avoid an international confrontation of that sort. Yet, the degree to which the current psychology is underpinned by reliance on that perception is a bit startling. It would be different if it was just a bunch of politicians trying to maintain a positive position to assuage the masses.

Yet what we witnessed last week was ECB head Draghi expressing his confidence in the NGO’s ability to enforce that commitment.  As Yra Harris of Praxis Trading discussed with CNBC’s Rick Santelli earlier this week, Draghi seemed to completely ignore the sustainable runaway weakness of the Japanese yen.

So it is not only on the appreciation of the euro against the US dollar and Sterling… it is the obvious policy and political impact of the Japanese yen. And the recent strength of the euro merely makes Europe the most likely complainers in the near term. Watch for others to follow if (as we believe will happen) the yen continues to weaken quite a bit further across time.  

Keep in mind that the current imbroglio with China is significantly impacting Japanese exports. So if their car makers and other exporters were concerned before about the yen exchange rate, it will likely take that much more of a drop in the yen to offset the political dynamic weighing further on exports.

And on a technical level, this is one great example of how trend dynamics evolve along the way to foment cyclical moves that are larger and last longer than even the accurate analysts can typically predict at the outset. How about USD/JPY 124.00? That’s not a shock statement… we will have more soon on why that might be a legitimate technical Objective.

 General Market Observations and EXTENDED TREND IMPLICATIONS are much the same as Monday’s Calendar, OECD CLI, another great resource, Europe post, with its further extensive discussion of the problems still lurking in the background in Europe.

Thanks for your interest.

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