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While the market, and various pundits and economists have been mostly focused on the still to be disclosed details of Trump’s infrastructure spending aspects of his fiscal plan, “one of the least talked about but possibly most important tax shifts in the history of the United States” is, according to DB, House Speaker Paul Ryan’s and President-elect Trump’s “border tax adjustment” proposal.

This is part of the “Better Way” reform package and also figures prominently in the writings of senior Trump administration officials.

What is it?

Put simply, the proposal would tax US imports at the corporate income tax rate, while exempting income earned from exports from any taxation. The reform would closely mirror tax border adjustments in economies with consumption-based VAT tax systems. If enacted, the plan will likely be extremely bullish for the US dollar. What’s more, it would have a transformational impact on the US trade relationship with the rest of the world. Consider the below:

• A “border tax adjustment” would, roughly speaking, be equivalent to a 15% one-off devaluation of the dollar. Imports would be 20% more expensive, because corporates would have to pay the new 20% corporate tax rate on their value. Exports would be roughly 12% “cheaper”, because for every $33 of earnings earned from $100 of exports (we use the 33% gross margin of the S&P), there would be a 12% tax cost ($33 earnings*35% current tax rate) that would no longer be imposed on corporates. Taking the average impact on the prices of exports and imports is equivalent to a 15% drop in the dollar.
• A border tax adjustment would be very inflationary. The price of exports doesn’t affect the US consumption basket so would have no impact on CPI. However, the cost of imports would go up by 20%, which based on a simple relationship between import PPI and US inflation would be equivalent to a 5% rise in the CPI. Corporates may of course choose to absorb part of the rise in import costs in their profit margins. But either way, the order of magnitude is large.
• A border tax adjustment would be very positive for the US trade balance. Similarly to the dollar calculations, a border tax adjustment would be equivalent to an across the board import tariff of 20% and an export subsidy of 12%. Keeping all else constant and applying standard trade elasticity impact parameters to an average of the two estimates results in a more than 2% drop in the trade deficit equivalent to more than 400bn USD, or equivalently, an almost complete closing of the US trade deficit.

In other words, should the “border tax proposal” pass, it would not only send inflation soaring, while eliminating the US trade deficit – a long-time pet peeve of Trump  – it would also be the trade-equivalent of a 15% USD devaluation, even as it leads to an offsetting surge in the actual value of the dollar.

To be sure, there are uncertainties related to all estimates above. First, there is a question mark on whether a border tax adjustment based on a territorial corporate tax system (as opposed to VAT) would be allowable under WTO rules. The question is highly complex, but senior Trump advisers have stated they would be willing to take the issue to the WTO.

It is also not clear what types of goods the new tax would cover – the broader the coverage the bigger the impact and vice versa.

Second, the impact on trade highlighted above should be considered an upper bound, as the post-crisis responsiveness of current account balances to relative price shifts has proven to be much lower.

Still, it is hard to argue that such a fundamental shift in tax treatment of US exports and imports would not have a material impact on trade relations and flows with the rest of the world. More importantly, Saravelos argues, the second-order impact of “re-shoring” may be more material given that US corporate activity has been disadvantaged due to the current unfavorable tax treatment of offshore profits.

* * *

Taking all of the above into account, the academic literature is unambiguous in its conclusion that the dollar should rally strongly in the event a “border tax adjustment” is put in place. An appreciating dollar would be a natural response to an improving US trade balance and the competitiveness gains achieved by the shift in the relative prices of exports over imports. In extremis, the dollar would rally by 15% to fully offset the price changes caused by the tax. This analysis is partial however, with the knock-on consequences on the Fed, US corporate off-shoring and global trade relations likely making the impact even more material.

Deutsche Bank concludes that combined with potential changes to the treatment of unrepatriated earnings, “the proposed changes to the US corporate tax code could be one of the most important shifts in US tax and international trade policy in a generation.”

We wholeheartedly agree with DB’s assessment in this particular case.

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Submitted by Michael Snyder via The Economic Collapse blog,

For many Americans, the quality of Christmas is determined by the quality of the presents.  This is especially true for our children, and some of them literally spend months anticipating their haul on Christmas morning.  I know that when I was growing up Christmas was all about the presents.  Yes, adults would give lip service to the other elements of Christmas, but all of the other holiday activities could have faded away and it still would have been Christmas as long as presents were under that tree on the morning of December 25th.  Perhaps things are different in your family, but it is undeniable that for our society as a whole gifts are the central feature of the holiday season.

And that is why so many parents feel such immense pressure to spend a tremendous amount of money on gifts for their children each year.  Of course this pressure that they feel is constantly being reinforced by television ads and big Hollywood movies that continuously hammer home what a “good Christmas” should look like.

Once again in 2016, parents will spend far more money than they should because they want to make their children happy.  According to a brand new survey from T. Rowe Price, parents in the United States will spend an average of 422 dollars per child this holiday season…

More than half of parents report they aim to get everything on their kids’ wish lists this year, spending an average of $422 per child, according to a new survey from T. Rowe Price.

To me, that seems like a ridiculous amount of money to spend on a single child, but this is apparently what people are doing.

But can most families really afford to be spending so wildly?

Of course not.  As I have detailed previously, 69 percent of all Americans have less than $1,000 in savings.  That means that about two-thirds of the country is essentially living paycheck to paycheck.

So all of this reckless spending brings with it a lot of additional financial pressure.  But because we are a “buy now, pay later” society, we do it anyway.  We are willing to mortgage a little bit of the future in order to have a nice Christmas now.

Another new survey has found that close to half the country feels “pressure to spend more than they can afford during the holiday season”…

The SunTrust Banks, Inc. (NYSE: STI) annual Holiday Financial Confidence survey reveals that 43 percent of Americans feel pressure to spend more than they can afford during the holiday season. Pressure to overspend is up four percent since the survey was first conducted in 2014 by Harris Poll, but down slightly from a high of 46 percent last year.

Ultimately, much of this spending ends up going on credit cards, and credit card debt is one of the most insidious forms of debt.

And the truth is that credit card debt was already surging nationally even before we got to the holiday season…

But at least one indicator suggests that much of the US is actually struggling financially: Americans are piling on credit card debt at record levels that we haven’t seen since the financial crisis.

 

Households added $21.9 billion in credit card debt in the third quarter — the largest increase for that period since 2007 — bringing the amount of outstanding credit card debt to $927.1 billion, according to the latest study from WalletHub.

Debt takes future consumption and brings it into the present, but there is a price to be paid for doing that.

Because we have to pay interest on that debt, we always have to pay back more money than we originally borrowed.  And because interest rates on credit cards are so high, paying back credit card debt can be particularly painful.

According to Business Insider, the average American household currently owes nearly $8,000 to the credit card companies, and it is being suggested that this is a sign that the economy is much weaker than we have been led to believe…

The fact that the average household with debt now owes $7,941 to credit card companies, according to WalletHub, suggests that America’s putative economic strength might be a mirage — that the economy may in fact be a lot weaker than all the happy indicators are leading people to believe.

 

“I think it is a cause of concern because it says consumers are struggling despite the low unemployment figures,” says Lucia Dunn, an economics professor at Ohio State University. “I think the rise in debt arises from weakness in the economy. People whose incomes have dropped may be trying to maintain an older level of consumption by just charging everything.”

And guess what?

The Federal Reserve just raised interest rates, and so that means that paying off credit card debt will be even more painful for Americans in 2017 than it was in 2016.

Could it be possible that we have lost our way?

Could it be possible that we need to entirely rethink our approach to “the holiday season”?

According to an old NBC News story, one survey discovered that 45 percent of all Americans would prefer to skip Christmas altogether because of all the financial pressure…

Some 45 percent of those polled said the holiday season brings so much financial pressure, they would prefer to skip it altogether. Almost half said their level of stress related to holiday expenses is high or extremely high.

 

That’s probably because nearly the same amount — some 45 percent — say they do not expect to have enough money set aside to cover holiday expenses.

As a society, we need to learn that things will never make us happy.

Life is not about accumulating toys.  Rather, we were created to love and to be loved.

If you want to live a great life, learn how to be a person of great love.  Unfortunately, most people never seem to learn that lesson.

A couple of months ago, I reported that the total amount of household debt in the United States had reached a grand total of 12.3 trillion dollars.

If you break that number down, it comes to approximately $38,557 for every man, woman and child in the entire country.

In addition to that, we must also remember that corporate debt has approximately doubled while Barack Obama has been in the White House, state and local government debt is completely out of control, and the U.S. national debt is now sitting just under 20 trillion dollars.

Our greed is absolutely killing us, but we can’t stop.

So we will continue to party until eventually somebody comes along and turns out the lights.

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Since November 8th, disaffected Democrats have tried and failed repeatedly to undo the 2016 Presidential election.  First their was the failed recount effort launched by Jill Stein, an obvious front for the Clinton campaign, in Wisconsin, Michigan and Pennsylvania.  Embarrassingly, that effort actually resulted in a wider margin of victory for Trump but not before Stein wasted $7 million raised from devastated Hillary supporters.

Then there was the coordinated efforts of the White House, other prominent democrats and the mainstream media to turn the Electoral College against Trump, because Russia.  Ironically, that effort too resulted in a wider margin of victory for Trump as only 2 electors refused to vote for him while 5 electors abandoned Hillary.  Anyone else noticing a theme here?

Now, with the Electoral College vote done and no other options left, the angry, demoralized dems have turned their fury toward the FBI with allegations that the warrant issued for Anthony Weiner’s computer did not “give rise to probable cause” which must therefore imply some nefarious collusion between James Comey, Trump and Putin. 

Per Bloomberg, attorney Randol Schoenberg sued for the warrant to be released and has since expressed that he is “appalled” by its contents which failed to present “probable cause.”

Schoenberg said he sought the documents because he couldn’t figure out why a judge found there was probable cause that a crime was committed, given that the FBI had already concluded its investigation of Clinton’s e-mails and not charged her.

 

“I see nothing at all in the search-warrant application that would give rise to probable cause,” attorney Randol Schoenberg, who sued on Dec. 12 for the release, said in an e-mail after reviewing the documents. A judge is required to find probable cause that a crime may have been committed before issuing a warrant.

 

“I am appalled,” he added.

We assume Schoenberg simply missed the following two paragraphs which point out that FBI agents, without reviewing contents, happened upon “thousands of emails” sent to/from Huma Abedin using State Department email addresses around the same time they know that classified information was sent out over unclassified systems.

 

If that’s not enough, perhaps Mr. Schoenberg could comment on whether the following Reddit thread from Hillary’s IT guy “would give rise to probable cause” (see “Dear FBI, This Is Intent: Hillary’s “Oh Shit” Guy Sought Reddit Advice On How To ‘Strip VIP’s Emails’“).

Combetta started the thread on July 24, 2014 with the following question seeking technical advice on how to “strip out a VIP’s (VERY VIP) email address from a bunch of archived email[s].”  “Ironically,” the day before the Reddit thread appeared, the Benghazi Committee reached an agreement with the State Department on the production of email and other records related to their investigation.

 

But sure, Mr. Schoenberg, we’ll take your word for it.  No reason at all for alarm when “thousands of emails” from State Department addresses, which could contain sensitive, classified information, just happen to show up on the computer of a man under active investigation for pedophilia. 

Here is the redacted warrant released earlier today:

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Submitted by Patrick Buchanan via Buchanan.org,

The never-Trumpers are never going to surrender the myth that Russian President Vladimir Putin ordered the hacking of Hillary Clinton campaign chairman John Podesta and the Democratic National Committee to defeat Clinton and elect Donald Trump.

Their investment in the myth is just too huge.

For Clinton and her campaign, it is the only way to explain how they booted away a presidential election even Trump thought he had lost in November. To the mainstream media, this is the smoking gun in their Acela Corridor conspiracy to delegitimize Trump’s presidency.

Incoming Senate Minority Leader Chuck Schumer sees Russian hacking as a way to put a cloud over the administration before it begins. But it is the uber-hawks hereabouts who are after the really big game.

They seek to demonize Putin as the saboteur of democracy — someone who corrupted an American presidential election to bring about victory for a “useful idiot” whom Clinton called Putin’s “puppet.”

If the War Party can convert this “fake story” into the real story of 2016, then they can scuttle any Trump effort to attain the rapprochement with Russia that Trump promised to try to achieve.

If they can stigmatize Trump as “Putin’s president” and Putin as America’s implacable enemy, then the Russophobes are back in business.

Nor is the War Party disguising its goal.

Over the weekend, Sen. John McCain called for a congressional select committee to investigate Russian hacking into the Clinton campaign. The purpose of the investigations, said Sen. Lindsey Graham, “is to put on President Trump’s desk crippling sanctions against Russia.”

“They need to pay a price,” Graham chortled on Twitter.

“Crippling sanctions” would abort any modus vivendi, any deal with Russia, before Trump could negotiate one. Trump would have to refuse to impose them — and face the firestorm to follow. The War Party is out to dynamite any detente with Russia before it begins.

Among the reasons Trump won is that he promised to end U.S. involvement in the costly, bloody and interminable wars in the Middle East the Bushites and President Barack Obama brought us — and the neocons relish — and to reach a new understanding with Russia and Putin.

But to some in Washington, beating up on Russia is a conditioned reflex dating to the Cold War. For others in the media and the front groups called think tanks, Russophobia is in their DNA.

Though Julian Assange says WikiLeaks did not get the emails from Russia, this has to be investigated. Did Russia hack the DNC’s email system and John Podesta’s email account? Did Putin direct that the emails be provided to WikiLeaks to disrupt democracy or defeat Clinton?

Clinton says Putin has had it in for her because he believes she was behind the anti-Putin demonstrations in Moscow in 2011.

But if there is to be an investigation of clandestine interference in the politics and elections of foreign nations, let’s get it all out onto the table.

The CIA director and his deputies should be made to testify under oath, not only as to what they know about Russia’s role in the WikiLeaks email dumps but also about who inside the agency is behind the leaks to The Washington Post designed to put a cloud over the Trump presidency before it begins.

Agents and operatives of the CIA should be subjected to lie detector tests to learn who is leaking to the anti-Trump press.

Before any congressional investigation, President-elect Trump should call in his new director of the CIA, Rep. Mike Pompeo, and tell him to run down and remove, for criminal misconduct, any CIA agents or operatives leaking secrets to discredit his election.

Putin, after all, is not an American. The CIA saboteurs of the Trump presidency are. Will the media investigate the leakers? Not likely, for they are the beneficiaries of the leaks and co-conspirators of the leakers.

The top officials of the CIA and Carl Gershman, president of the National Endowment for Democracy, should be called to testify under oath. Were they behind anti-Putin demonstrations during the Russian elections of 2011?

Did the CIA or NED have a role in the “color-coded” revolutions to dump over pro-Russian governments in Moscow’s “near abroad”?

If Russia did intrude in our election, was it payback for our intrusions to bring about regime change in its neighborhood?

What role did the CIA, the NED and John McCain play in the overthrow of the democratically elected government of Ukraine in 2014? McCain was seen cheering on the crowds in Independence Square in Kiev.

Trump has promised a more hopeful foreign policy than that of the Republicans he denounced and is succeeding. No more wars where vital interests are not imperiled. No more U.S. troops arriving as first responders for freeloading allies.

The real saboteurs of his new foreign policy may not be inside the Ring Road in Moscow; rather, they may be inside the Beltway around D.C.

The real danger may be that a new Trump foreign policy could be hijacked or scuttled by anti-Trump Republicans, not only on Capitol Hill but inside the executive branch itself.

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The Brennan Center for Justice has just updated its annual crime report, and the surge in violent crime and murder rates across the country is somewhat staggering.  While the Brennan Center continues to downplay the YoY increases, saying “concerns about a national crime wave are still premature,” the numbers seem to paint a different story with murder rates in the largest 30 U.S. cities expected to increase 15.5% in 2016.  Meanwhile, that number would be over 17% if the study reflected the most recent 2016 Chicago murder estimate of 800.

The violent crime rate is projected to increase slightly, by 3.3 percent, driven by increases in Chicago (17.7 percent increase) and Charlotte (13.4 percent increase). This is less than the 5.5 percent increase initially projected in the September report. Violent crime still remains near the bottom of the nation’s 30-year downward trend.

 

The 2016 murder rate is projected to be 14 percent higher than last year in the 30 largest cities. Chicago is projected to account for 43.7 percent of the total increase in murders. The preliminary 2016 report identified some reasons for increasing violence in Chicago, such as falling police numbers, poverty and other forms of socioeconomic disadvantage, and gang violence. A similar phenomenon occurred in 2015, when a group of three cities — Baltimore, Chicago, and Washington, D.C. — accounted for more than half of the increase in murders. This year Baltimore and Washington, D.C., are projected to see their murder rates decline, by 6 percent and 18.6 percent, respectively.

 

An increase in the murder rate is occurring in some cities even while other forms of crime remain relatively low. Concerns about a national crime wave are still premature, but these trends suggest a need to understand how and why murder is increasing in some cities.

Of course, the stunning increase in Chicago murders (expected to increase over 55% in 2016) does account for over 50% of the overall increase in murders in the country’s largest 30 cities.  That said, per the chart below, several other cities, including San Antonio, Dallas, Memphis and Las Vegas, are starting to reflect some concerning trends of their own. 

 

Meanwhile, per HeyJackAss!, even though the colder weather was supposed to “chill” weekend violence in Chicago’s most dangerous neighborhoods, it appears to be having little impact at all as the city just recorded one of it’s most deadly weekends of the year. 

 

With 769 murders recorded year to date, the Windy City looks to still be on pace to exceed 800 for the full year… 

 

…which would be a 57% YoY increase and the most recorded murders since 1995.

 

That said, “concerns about a national crime wave are still premature”…nothing to see here.

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Expectations were for more inventory draws in total crude levels (and another build in Cushing), but API reported a considerably larger than expected 4.15mm draw in overall crude inventories. Both Gasoline and Distillates saw notable draws and Cushing built for the 4th week in a row (but less than expected). WTI crude kneejerked higher on the news…

 

API

• Crude -4.15mm (-2.5mm exp)
• Cushing +690k (+1.9mm exp)
• Gasoline -1.96mm
• Distillates -1.55mm

4th weekly build at Cushing but 5th weekly draw in overall crude inventories…

 

And the reaction was an immediate kneejerk higher…

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Submitted by Lance Roberts via RealInvestmentAdvice.com,

Over this past weekend, Barron’s Magazine published its big story the “2017 Market Outlook.” Here is what was interesting, after 8-years of a bull market advance not one of the forecasters had a “bearish” outlook. In fact, as the article concludes:

“If all goes smoothly, our experts’ forecasts might even prove too tepid. The old bull isn’t ready to call it quits yet.”

If that isn’t enough to get you all “giddy” for the holiday season, I am not sure what is?

I have written over the last couple of weeks the markets would likely advance heading into the end of the year as portfolio rebalancing, window dressing and performance chasing all collide to give a lift to stocks. However, as we will examine, there is sufficient evidence the markets may have run too far, too quickly.

Signs Of Exuberance

It really isn’t surprising the majority of Wall Street analysts are bullish as prices have advanced improving their performance numbers for the year. Of course, since it is rising asset prices which drives their business – being “bullish” is good for business. (Telling investors to move to cash doesn’t create inflow for their firms or funds.) However, as investors, it is extremes in both “psychology” and “behaviors” that tend to give us the best indications as to future outcomes.

The legendary Bob Farrell had two rules specifically relating to today’s topic.

The first was Rule #9:

“When all the experts and forecasts agree – something else is going to happen.”

Or, as Sam Stovall, the investment strategist for Standard & Poor’s once stated:

“If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”

While psychologically it may seem as the markets will rise indefinitely, the reality is they don’t. The reason is excesses are built when everyone is on the same side of the trade.

While there is ALWAYS both a buyer and seller to every transaction – it is at WHAT PRICE that matters. Ultimately, when a shift in sentiment occurs, the reversion is exacerbated by the stampede going in the opposite direction as a “vacuum” at current prices form.

Currently, we are seeing a lot of exuberance being built into the markets as shown by the composite indicator of both individual and professional investors.

Furthermore, as noted by Randy Frederick at Charles Schwab:

“It is a little scary to see such optimism. But at the same time, when I look out between now and the end of the year, I’m having a difficult time finding anything that’s probably going to derail this market outside of a black-swan event.

 

The only thing I’m worried about is that it seems like nobody is worried about anything right now.”

With virtually all equity put/call ratios are in bullish territory there is literally no one hedging against a potential market decline.

Then there is this:

“The stampede into U.S. equity ETFs since the election has been nothing short of breathtaking,” said David Santschi, chief executive officer at TrimTabs.  “The inflow since Election Day is equal to one and a half times the inflow of $61.5 billion in all of last year.  One has to wonder who’s left to buy.”

It is even more evident when combining both ETF and Mutual Fund flows and comparing it to the overall market.

In other words, all the “kids are in the pool” which is typical near short to intermediate-term peaks in the market.

Snap-Back

Psychological exuberance is a by-product of the extension of prices. As prices rise, investors “betting” on the market become more emboldened in their choice. It is this self-reinforcing cycle as prices rise which push individuals into taking on increasing levels of “risk” in order to “chase the market.” 

It is this push higher in prices, as noted by Bob Farrell’s Rule #2 that is most important:

“Excesses in one direction will lead to an opposite excess in the other direction.”

Markets that overshoot on the upside also overshoot on the downside, kind of like a pendulum. The further it swings to one side, the further it rebounds to the other side.

On a longer term basis markets adhere to Newton’s 3rd law of motion:

“For every action, there is an equal and opposite reaction.” 

The first chart shows that cyclical markets reach extremes when they are more than 2-standard deviations above, or below, their respective 50-wk moving average. While markets can trend higher in the near-term, there is ALWAYS a point where prices revert to the 50-week moving average or beyond.

The second chart shows price reversions of the S&P 500 on a long term basis. Notice that when prices have historically reached extremes – the reversion in price is just as extreme. This current extension above the long-term historical mean will likely end just as badly as they always have in the past.

As Bob Farrell also states:

“There are no new eras – excesses are never permanent.”

There will always be some “new thing” that elicits speculative interest.  These “new things” throughout history, like the “Siren’s Song,” has led many investors to their demise. In fact, over the last 500 years, we have seen speculative bubbles involving everything from Tulip Bulbs to Railways, Real Estate to Technology, Emerging Markets (5 times) to Automobiles and Commodities.

It always starts the same, and ends with the utterings of “This time it is different”

Being a contrarian can be quite difficult at times as bullishness abounds. However, it is also the secret to limiting losses and achieving long-term investment success. As Howard Marks once stated:

“Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, since momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s essential to remember that ‘being too far ahead of your time is indistinguishable from being wrong.’)

 

Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian.”

Yet, it is being a contrarian that allows investors to “buy low and sell high.” Furthermore, it is what allows individuals to truly garner a real advantage over long-term investment time horizons.

Don’t mistake these views thinking I am “bearish” and am therefore “out of the market.” I assure you that I am not. As I have often stated, as a money manager I must navigate the markets to the best of my ability otherwise I suffer “career risk.”

However, as I always tell new prospects with whom I am going to work with:

“While there will indeed be years I underperform the market as they rise, I would much rather have the conversation about how to improve performance next year versus how I am going to recover a large loss of your capital this year.”

Currently, there is an elevated risk of principal loss over the next couple of months.

This isn’t bullish, or bearish, it is “just what it is.”

In the meantime, enjoy your holidays and Merry Christmas.

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