Author Archives: Lloyd

Non Surprises this year

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The latest round of investor worries have stirred the normal phrenetic reactions from the experts.  The politicians remain steadfast in their minimalist reactions to economic catastrophes and, as a result, volatility continues to plague the equity and bond markets as the European “crisis” evolves.  The  domestic economic malaise that threatens to engulf our own future is totally ignored because it has not yet reached crisis proportions.

What I am beginning to find amusing is the special interest wars.  By that I mean the division of opinions on subjects like climate change where the contrary positions of the large energy producers versus the property insurance industry are diametrically opposed.  We have reached a stage where capitalism and politics have become synonymous.  This does not bode well for a long term optimistic view.  If special interests can monopolize public opinion then we will only be successful if those interests happen to be aligned with the common good.  I cannot imagine non competitive social welfare programs being able to go toe to toe with the barons of industry.   You don’t have to carry that logic out too far before you start to realize that “Brave New World” is closer than we think.

Let’s lower the Corporate tax rate?

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This weeks humor can be found in both the Republican and Democratic proposals to stimulate the economy by lowering the Corporate tax rate.

In case anyone was not paying attention this is an election year.  That translates to whatever the Democratic President might propose which, could include motherhood and apple pie,  will not be acted upon by the Republican Congress.  Whatever the potential Republican candidates might propose will be designated as campaign rhetoric and will not be taken seriously either.  End result no changes to the tax code are possible before the end of 2013.

A brief listen to the proposals has each of the candidates jousting to a lower rate of 25-28%, with a simultaneous magical change to the tax code that would eliminate all of the embedded loopholes and subsidies..

Even though the top corporate rate is currently 35% the big question here is what is the effective rate currently being paid by Americas top companies.  The short answer dependent on the industry is between 10% and 20%.  So the truth of the matter would be that all of the proposals for a reduced rates are actually tax increases.

I am going to have to go back and reread “1984” to find out what doublespeak really means.

When is a default not a default?

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The situation surrounding the recent Greek “non default” has demonstrated how far down the rabbit hole we have traveled.

The ECB coupled with some heavy duty political allies engineered a 50% principal reduction for Greek bondholders.  For all but a few of the purchasers of Credit Default Swaps, actually the ones who utilized sophisticated counsel to amend the standard swap agreement, this was not considered a “default” that would trigger the payment required for that event.

My own viewpoint is that the notional value of swaps outstanding were probably some unknown multiple of the actual amount of Greek debt and that the payment required on the contracts would have created more of an economic catastrophe than the “non default”.

Having said that, the success of the measures over the last few weeks has been to kick the can a little further down the road.  The Greek populace is still not ready to accept the draconian level of austerity that is required and the stronger Euro nations do not want to set a bad precedent.

The bottom line is that it is too early to celebrate the end of the European debt crisis.