Suitably Flip

FoxNews.com Live 10-11

I'll be on FoxNews.com Live this morning from 10-11, discussing the run-up to tomorrow's Florida primary.  If you miss it live, you can catch the full replay at the link until Tuesday morning (scroll to 10:00:00).

Update:  Here's a clip.

 

 

GDPick'em

At 8:30 this morning, we'll get our first look at fourth quarter GDP growth.  Consensus is for something like 3.0-3.2%, up from 1.8% in the third quarter.  That would be the swiftest growth in 6 quarters and I tend to think it's a stretch, at least upon the inevitable one or two downward revisions to today's estimate that we'll see 30 and 60 days from now.

Today, we could see a number as high as 3.0%, I suppose, but probably only if noisy seasonality and inventory build up help drag it over the line.

Deutsche Bank chief U.S. economist Joseph LaVorgna said in the fourth quarter GDP report, inventories are expected to be a substantial contributor to output, meaning any slowing in the rate of inventory build would weigh on production and first quarter GDP.
...
LaVorgna said he expects inventories in the GDP report to have expanded at a $45 billion annualized pace in the fourth quarter, compared to the surprise $2 billion decline in the third quarter. This would be the largest increase since the first quarter of 2011.

Since we're here, let's reach into thin air and pull down the prediction of... 2.8%.

Update:  Bingo.

The U.S. economy grew 2.8% in the final three months of 2011, propelled by increases in consumer spending and business inventories, according to a preliminary government estimate.

The inventory build will likely rob a couple tenths of a point from 1st quarter growth (and again, this first look will probably get ratcheted down in subsequent revisions), so enjoy this sub-long-term-potential high water mark while it lasts.

A Presidential Debate That Might Be Worth Watching?

Yes, please.

A Salient SOTU Snippet

Having read some of the advance excerpts, I couldn't bring myself to watch the State Of the Union last night.  Just wasn't feeling up to enduring over an hour of the same tired arguments in favor of ever-expanding government intrusion and the demonization of success and wealth creation.

Have you noticed that Obama and his ilk never get around to defining what actually constitutes "fair share"?  Two obvious reasons: 1) there's no way to credibly argue that the top 1%'s fair share would be more than 40% of the overall burden, double their share of aggregate income (or that the bottom 50% are somehow overburdened at 0%), and 2) if they were to quantify the "little bit more" they're asking for in order to achieve fairness, they'd lose the ability to trot out the same "fair share" argument when they need to pay the tab on their next trillion dollar adventure.

As long as the numbers are left out of the equation, the same class-baiting rhetoric about fairness and inequality can be recycled ad nauseum (as it literally was last night).

Anyway, ranting about the President's pro-tax ravings isn't really the point of this post...

I did wind up tuning in briefly toward the end of the address and as luck would have it, I clicked over at the precise moment the President was uttering what might rank as the single most anAmerican thing I can recall a politician saying (giving Obama the benefit of the doubt here; it's possible the timing of my channel change was no coincidence and the speech was riddled with such heresies):

That’s why we need smart regulations to prevent irresponsible behavior.

It's a brief sentence and a simple enough concept, but it seems to cut to the heart of the drastically divergent view this administration has of the country's guiding philosophies, particularly as regards the interplay between government and the private sector.

This is a question with an obvious answer, but Obama's remark requires that we ask it.  Do we elect a government to prevent us from acting irresponsibly?  That's the very definition of a nanny state.  Only - unlike Bloomberg's New York, where the nannyism concentrates on banning legal-but-societally-unacceptable behavioral choices at the individual level - Obama's nanny state seeks to impose institutional behavioral controls, banning legal activity through executive fiat, red tape asphyxiation, subsidy, and selective taxation.

The plain fact is that we don't need regulations (no matter their ostensible smartness) to prevent irresponsible behavior.  If behavior is truly irresponsible, it has its own deterrents and disincentives, else (and this is the key bit...) by definition it wouldn't be irresponsible.

Note we're not talking about illegal behavior.  We already have laws that prevent, deter, and punish illegal behavior, and that includes financial fraud, the low-hanging fruit Obama likes to pluck when seeking to justify ever-more-burdensome financial regulation.  Any behavior that's legal, but irresponsible, including that to which Obama was referring, namely the sale of mortgages to uncreditworthy borrowers, carries large disincentives for both irresponsible parties.  The lender incurs a risk of loss of principal that outweighs the fees and interest derived from the loan, while the homeowner incurs an undue risk of foreclosure and ruin.  Left to their own devices, few private market participants will engage in value-destroying transactions (and even fewer will repeat the mistake).  As for those who are dumb enough to do so, it's not government's responsibility or prerogative to stand in their way.  If it were, there'd be no meaningful difference between government ruling on the soundness of your housing decisions and the government demanding a transaction-by-transaction review of your stock portfolio, your choice of profession, college, major, or daily caloric intake, all in the name of preventing you from engaging in irresponsible behavior.

Obama pivoted off the "smart" financial regulation theme after bluntly asserting that more regulations make the free market work better, and for good reason.  Dwelling on this note invites intellectual scrutiny into the tacit claim that mortgage lenders are apparently stricken with either horrible math skills or a perverse appetite for losing money.  Why else would they systematically engage in value-destroying behavior?  Neither affliction sounds particularly plausible, yet it happened, so rather than worry about the why, let's focus on how the federal government can induce them to change their ways.

Of course, the filthy secret is that the activity was not value-destroying from the perspective of the mortgage lender (or at least was rationally perceived not to be).  Since there was a secondary market on which to syndicate a limitless number of such loans - a market with an artificially robust appetite for bum loans due to implicit government guarantees - the normal feedback mechanism that curtails irresponsible behavior was interrupted.  Likewise, borrowers arguably had good reason to believe that loans their banks were willing to make were loans they would be able to pay off.  Missing from that analysis, however, was a realization that their banks would have been far less inclined to make such loans without a government-backed secondary market on which they could offload the risk.

Obama insists that the housing crisis illustrates the inevitable flaws in free enterprise that will eventually bring the whole works crashing down if government doesn't keep tightening the yoke.  But it takes a very rare capacity to withstand cognitive dissonance in order to look at what happened and not come away at least wondering whether ever-so-well-intended federal yokes might've been among the corrupting elements.  The degree to which the statist dogma must be ingrained that it yields a policy prescription of yet more government control, that it preserves the fantasy that institutions are so irretrievably evil and people so irretrievably dumb that their interaction can only continue to produce extinction-level pickles, is something I don't think I fully appreciated about this administration until I heard those words.

Those 10 little words, with eerily similar sentiment, may have finally one-upped Reagan's nine most terrifying words in the English language.

Belated: FoxNews.com Live 9-10

I'm again delinquent in posting notice, but I was on FoxNews.com Live this morning from 9-10:30.  You can catch the full replay at the link until Tuesday morning or enjoy the clip below.

Romney's Real Income Tax Rate: Somewhere Between 66% and Infinite

By now, you've doubtless been whipped into a dutiful lather over the fact that Mitt Romney incurs a tax rate of close to 15%, well above the 0% paid by half of Americans, but somehow alleged to be far lower than that of "most Americans" (15% is actually higher than the effective rate paid by more than 80% of Americans, whose marginal rates are no higher than 15%).

Still, we like to see our greedy millionaires getting whacked with astronomical effective tax rates, so 15% is woefully unsatisfying.

What's often glossed over (and frequently misunderstood, deliberately or otherwise) by weighers-in is the fact that the majority of Mitt Romney's "income" comes from capital gains on his investments, which are appropriately taxed at a lower rate than regular income for big earners.

Romney is said to make around $350,000 in speaking fees, which would subject to him about $81,000 in federal income tax (around 23%).  For his capital gains (taxed at a flat 15%) to be large enough to drag his effective rate down to - say - 17%, they would need to be at least $1,000,000.

That would make his total federal tax burden around $230,000 (17.1% * $1.35 million).  If his effective rate were as low as 16%, it would suggest he paid around $450,000, with capital gains totaling $2.5 million.  For the effective rate to actually hit 15%, his capital gains would need to be infinite (as would his tax burden).

What this analysis leaves out is the consideration that capital gains are not regular income (which, of course, is why they're not taxed as regular income).  There's a credible argument to be made that capital gains should be taxed at 0%, since this money is already taxed not once, but twice.

Income generated from corporate dividends is paid with after-tax corporate income (unlike your paycheck, which your employer pays out of pre-tax income).  Likewise, if you realize a gain from the sale of a stock, its appreciation during your holding period is simply a reflection of the market's increased estimate of the present value of all future after-tax earnings (ultimately realizable through after-tax dividends) of that company.  And the money you used to invest in that company was money you were already taxed on when you earned it.  Yes, that money may have in turn been made through earlier capital investments, but that only means it had already been double-taxed multiple times.

So if you want to drill down to the real effective tax rate Mitt Romney (or any succesful investor) pays, you might want to look at the cash tax outflows as a percentage of earned income.  In the above example ($230,000-450,000 on regular income of $350,000), this would come out to 66-130%.  And that's before state and local jurisdictions take their cut.

The closer his reported effective rate gets to 15%, the higher the real effective tax rate on earned income goes, without limit.

This of course does little to quiet those who insist on seeing wealthy investors paying at least as much money as high a percentage as the average American the top fraction of the top 20% who incur effective rates of 15% or more.  Else, this sub-"fair share" leads to an obscene concentration of wealth among those who are doing little productive work and are robbing the Treasury blind at the expense of those in the lower marginal brackets.

Again, this willfully ignores the fact that the wealth being generated has already been doubly taxed (at least once).  It also doesn't consider the reason we tax investment income at a lower rate (0% in lower brackets), namely to encourage (or, rather, to limit the extent to which we discourage) investment in productive enterprise.  It also neglects the fact that such investments incur risk of loss (unlike earned income), which cannot be used to offset taxes on regular income (beyond $3,000) in the same year.  So a 10% gain becomes an 8.5% gain, while a 10% loss remains (very nearly) a 10% loss, at best recouped to 8.5% in later years.

Romney's opponents on both sides of the aisle show few signs of backing off of making class warfare the dominant issue of the campaign.  And in an environment where even simple numbers like the unemployment rate are bent out of recognition (the DNC chair insists 8.5% is lower than 7.6%), there seems to be little chance that the complexities and implications of taxation will receive better than a wildly distorted, soundbite-driven, class-baiting treatment over the next 10 months.

If it's your preference to demonize the investing class in general, and private equity investors in particular, just bear in mind that Mitt Romney and Barack Obama both engage in this activity, the only differences being that Romney's limited partners are willing participants, unlike Obama's tax-paying constituents, and that Romney has been successful at it.

Belated: FoxNews.com Live

I was on FoxNews.com Live this morning from 9:00 to about 10:15.  You can catch a replay at the link until Tuesday morning.  After that, you're left with the bits that made the highlight reel (below).

Mitt Romney and the Most Objectionable Objective Of All

The Obama re-election campaign believes it's found Mitt Romney's fatal flaw:

A memo from deputy campaign manager Stephanie Cutter, titled “Romney’s Economic Record: Profit at Any Cost,” charges that the former Massachusetts governor’s “objective in business was never job creation.” Rather, Ms. Cutter writes, Mr. Romney’s primary goal was to make investors millions of dollars.

I'll agree.  Romney's (and Bain's) objective was indeed never job creation.  Why should it have been?  The objective in business is to maximize shareholder value.  Yes, in so doing, if one's successful, one usually winds up creating a bunch of jobs (as Romney often did).  But even though his pirvate equity stint measures far better than Barack Obama's White House tenure on the yard stick of job creation (and, in fairness, Romney has himself cited this measure as an indication of his Presidency-relevant experience), why on earth should we expect that job creation was his overarching objective?

He was successful in leading an organization that specialized in turning around and/or, when necessary, efficiently liquidating distressed enterprises.  That was his job.  While his record wasn't perfect, it was highly impressive.

Romney's now applying for a different job - one in which job creation (more accurately, setting policies that don't inhibit job creation) is far more central, and a far more appropriate measure of one's success.  Romney's leadership expertise and his real-world business acumen that enables him to understand the dynamics of private enterprise are the practical skills he developed and showcased at Bain.  While his business activities did, on net, create jobs, that's not the takeaway from Bain.  The takeaway is that Romney showed himself to be highly adept at the job with which he was tasked - one that required leadership skills, financial dexterity, wide-ranging business insight, and the ability to solve seemingly intractable problems with measures that would undoubtedly make at least some people unhappy.  That's a solid and uniquely desirable component of a post-Obama Presidential CV.  The fact that this part of Romney's backstory did also happen to throw off more job creation than Obama's entire Presidency is notable mainly for what it says about the incumbent.

A morsel of free investing advice: if you ever have an opportunity to invest in a private equity firm that declares job creation to be among its objectives, keep your wallet velcroed tight.

New Hampshire Pick'em

Well, let's try this again.  No great suspense today, but the battle for 2nd-5th does appear to be as fluid and muddy as ever.

So let's take a prognosticatory stab:

Romney: 43
Hunstman: 17
Santorum: 16
Paul: 15
Gingrich: 8
Perry: 1

For reference, the latest RCP polling average has Romney 20 points over Paul, followed by Hunstman, then Santorum.  So I'm looking for Romney, Huntsman, and Santorum to outperform, Paul and Gingrich to underperform, and Perry to be roughly the afterthought the polls suggest.

Update:  At Humanist7's request, here's a clip from my appearance on FoxNews.com Live yesterday, talking about today's primary.

FoxNews.com Live at 10:30

I'll be on FoxNews.com Live this morning starting at 10:30, talking about the newly reshaped GOP primary field leading up to New Hampshire and South Carolina.  If you miss it live, you can catch a replay at the link until Friday morning (dial the reel back to 10:30).

Iowa Pick'em

With 2012 voting finally getting underway, it seems like as good a day as any to return from holiday hiatus.

The latest polling average has Mitt Romney at the head of the pack with 22.8%, 1.3 points over Ron Paul and 6.5 ahead of Rick Santorum.  Gingrich and Perry are at 13.7% and 11.5%, respectively, with everyone else in single digits.

Based on the candidates' likelihood of over- or underperforming their poll numbers, in light of organization and degree of fanaticism, and more than a little blind conjecture, I'm making two general predictions: 1) that the top 3 won't be Romney, Paul, and Santorum after all, and 2) that Romney doesn't win, but is nonethless awarded the only legitimate ticket out of Iowa.

As for the standings and percentages, here's my shot in the dark:

1) Paul: 30%
2) Romney: 28%
3) Perry: 13%
4) Gingrich: 12%
5) Santorum: 10%
6) Bachmann: 5
7) Hunstman: 2%

Given that Ron Paul is still Ron Paul, no matter how well he does, the only way I can see any viable non-Romney surviving the day is if Gingrich manages to outperform both Santorum and Perry by more than a rounding error, putting up a solid 3rd place showing.  There's no way Gingrich will win New Hampshire, but he's still strong enough in South Carolina and Florida that he can continue to make a credible case for moving forward if he's by far the best non-Paul performer among the non-Romneys.While I'm not predicting that will happen, I think that's the second most likely outcome, behind Romney walking away with it, albeit with a Paul thorn stuck in his side.

Use the comment thread to tell me why I'm an idiot make your own predictions.

Update:  So basically everything I didn't think would happen happened. Romney won (by an incredibly thin 8 vote margin), the top three did fall in line, Santorum outperformed his polling and Perry underperformed.

Sounds like both Perry and Bachmann are dropping out, which is not the best news for Romney. The results seemed good for Romney without the attrition. His two least viable opponents rounded out the top three, while more formidable Gingrich and Perry flamed out. Would've been a great leveler among the non Romneys if not for the consolidation. Assuming Bachmann and Perry make endorsements, the conservative vote could finally coalesce around another candidate, though perhaps the weakest of the five if Santorum is the beneficiary of the endorsements.