The Market Ticker

If you were wondering where the hidden taxes are in "Health Reform", guess what - President Obama has just given you something to sit on.

The forced march to pass ObamaCare continues, and all that matters now is raw politics. But opponents should go down swinging, and that means exposing such policy debacles as President Obama's 11th-hour decision to apply the 2.9% Medicare payroll tax to "unearned income."

That's what savings and investment income are called in Washington, and this destructive tax wasn't in either the House or Senate bills, though it may now become law with almost no scrutiny.

This is unbelievably destructive to capital formation.

For the person who is "short-term trading" (e.g. daytrading, etc) this is a relatively small tax, an increase of about 7% in the tax (2.9% applied to the 39.6% maximum rate on "ordinary income", which short-term capital gains are.)

But for the person who is INVESTING for the long haul, that is, who is holding stocks for more than one year, this takes the marginal rate from 15% to 17.9%, an increase of almost 20% in the tax owed.

This, of course, comes on the back of President Obama's fraudulently engineered "rally", which was created through Congressional intervention to permit - surprise surprise - legalized accounting fraud through "mark to model."

So you got your stock market rally, and now President Obama and The Democrats are going to cram a 20% tax increase down your throat if you profited from it - and at this point, being 2010, there's not a thing you can do about it.

It gets better.  Since ordinary investors can only write off $3,000 in capital losses, when you lose you don't get a tax credit.  Oh yeah, you get to carry forward the loss to future years, but you paid the tax on the gains already - this is a putative future credit back.

Oh, and let's not forget that there was already a huge tax increase coming this year - the long term capital gains rate goes to 20% at the end of this year anyway as the Bush tax cuts expire.

So in fact the rate goes from 15% to 22.9%, a fifty-three percent increase in the tax rate.

And oh, if your AGI goes over $200,000 by even a dollar you are subject to this tax from the first dollar of your investment income.

A fifty-three percent increase in taxes on long-term (that is, capital-forming, long-term investment) capital gains - exactly the sort of investment activity you want to form businesses and invest for the long haul in America's future, not to mention generating jobs by forming those enterprises.

That's slammed the door on any interest I might have in forming a new business as I did in the 1990s - ever - and I suspect I'm not alone.

When this goes into effect my capital, other than that which I can shelter from taxation, is no longer going to be put at risk in the markets. I'd rather live in a nice little cottage on the beach and simply expend what I have rather than contributing to capital formation in any way, shape or form under a punitive system like this.

Why?

Because if Congress demonstrates that it will put 53% on the capital gains rate once I've already committed my capital (thereby destroying my return) I will not take the risk of them doing it again and making the rate even more punitive.

Mortgage applications fell last week:

The Mortgage Bankers Association’s index decreased 1.9 percent in the week ended March 12. The Washington-based group’s purchase gauge fell 2.3 percent, while its refinancing measure declined 1.7 percent.

The lack of demand even as borrowing costs dropped signals a sustained housing recovery will be slow to develop this year. Federal Reserve policy makers yesterday cited stagnant home construction, declines in commercial real estate and a lack of jobs as risks that continue to face the world’s largest economy.

The problem is rather simple to understand - despite record incentives (such as the "homebuyer tax credit" and similar games) there are simply no more people who are willing and able to gorge themselves on more debt.

The cash-out refinance is dead, as there's no equity to extract.  The use of the home as an ATM machine powered the last "expansion" in our economy, but that was a false expansion - it was not made up of production increases and general weal, but rather with debt.

There is no real demand for housing at today's price.  At 1x or 2x incomes the housing stock would clear immediately.  That's where the market "wants" to go.  But doing so causes all the banks who made those imprudent loans at 5x or even 10x incomes to instantaneously detonate.  Rather than make people eat their own bad decisions and thus learn from them (a great deterrent against sinning a second time!) The Government has instead chosen lies, obfuscation and intentional gimmicking of the accounting rules so that the consumer gets screwed but the institutions who made the imprudent loans are bailed out - in effect charging the consumer twice.

As an example of how badly screwed up our economy (still) is, I present an anecdote that is loosely changed from an actual person who presented themselves to a professional in the mortgage business not long ago.....

Mike, a driver of a piece of heavy construction equipment, became a first-time home buyer in 2004.  His home cost $145,000 and his total mortgage payment was $1,046.  He was making about $50,000 a year, so he had a nice safe, conservative "front end" ratio of about 25% - and with his only other debt being a car loan and a small credit card balance, his back end ratio was a reasonably-conservative 35%.  He was easily able to afford his loan - and his life.

But now it's 2009.  This client comes back to the original mortgage broker and calls in desperation.  Work has evaporated and his income has roughly been cut in half. 

He should have some equity in his home - after all, he bought before prices really took off.  So we look at refinancing the debt - after all, rates have come down some, right?

What we find when credit is pulled is the ugly truth.  Mike has done two cash-out refinances in the last five years, as well as taking out a HELOC.  His total payment is now up to $1650 and the total indebtedness on the house is $216,000 - but the house is only worth $180,000. 

When asked about the refinances Mike says that he was enticed by how easy it was to roll credit-card debt into the first refinance - he turned to this as a means to finance living somewhat-modestly beyond his income.  He kept thinking - and was told repeatedly - that he'd be able to keep coming back to the same brokers for another refinance - after all, prices only go up on real estate.

After much consternation (after all, Mike can't really do much being this far underwater - other than try a modification or lose the house) Mike calls the lender and is "offered" a modification.  His "trial" cuts the monthly payment to 31% of his (now reduced) income, but in doing so the term is extended to 40 years and the loan is essentially interest-only for the first several years.  This "modification" means that Mike will never really own his house, as it will be a decade or more - assuming prices stabilize here - before he has any hope of reaching positive equity.

So Mike does this for a year - after all, he does like the house - and after a year the phone rings.  The lender has denied his permanent modification.  Who knows why - but what a pull of the credit report now shows is that the lender has been reporting the difference between the "trial" modification payments and the original as delinquent amounts to the credit bureaus!  Mike's credit is now destroyed - he's $7,000 behind in mortgage payments, nearly $50,000 underwater, and has a credit score under 500. 

Mike is screwed.

What could Mike have done differently?

Well, first, he could have not debt-binged.  But that's water over the dam - he did debt-binge, and the debt is still there.  Once the hangover hits it's too late to decide that the last bottle of Jack Daniels' was a bad idea.

Second, Mike could have done what I've advocated since this whole mess began.  He could have not believed the snake-oil salesmen from the banks and finance companies and instead called up a good bankruptcy lawyer and enrolled agent (CPA authorized to practice before the IRS), got them both in a room, laid $250 or so on the table between the two of them for an hour of their time and figured out what his liability would be if he told the bank to stuff it.

He might have wound up in bankruptcy or foreclosure, but with proper guidance and a plan he would have almost certainly been in better shape than he is now.  With the foreclosure or bankruptcy behind him, his credit would start to be rebuilt immediately.  He would have contributed to the system clearing (even if he lost the house) rather than contributing to the balance sheet lies of the major financial institutions.  While his credit would have been ruined, it's ruined anyway, he's still going to lose the house, and all he's managed to do is help the banks lie to the American people and perpetrate a scam upon everyone else.

And if, as I suspect, the housing market continues to tank for the next several years Mike would have been in a position to possibly buy a similar house - for cash - at some point in the next few years.  Yes, this would require some pretty-severe austerity measures in Mike's household, but then again, the original goal was to own a house free and clear, right?

Mike listened to the crooners on CNBS and so-called "professionals" in the banks - people who's interest is not aligned with his - instead of hiring his own experts at his own expense to navigate a circumstance that, admittedly, was of his own doing - but from which he DID have choices.

There are millions of Mikes who have been seduced by the dark side of credit and then serially abused by the banksters and their minions.  Until the market clears these moribund consumers' debt from the system, an act that can only occur two ways (through the passage of the aforementioned forty years - or bankruptcy of both borrower and lender) we cannot have sustainable economic recovery.

Our government has committed itself to the balance sheet lies and screwing Mike - as many times and as roughly as they can get away with.  Sadly, so far, the American People are watching American Idol instead of recognizing that while they're culpable for listening to the siren song of "must have it nowitis", the banksters actions were anything but honorable - indeed, they both have been and remain outright predatory in nature.

If you want to know why Japan never got out of its slump more than two decades after their debt bubble burst, this is the reason.  The debt was not forced through the system by defaults, with the government instead protecting imprudent lenders.  They, like us, strung along borrowers for as long as possible, both deepening and prolonging the damage to their financial lives and futures.  Instead of recovery these policies produced a nation of debt-zombies - a state of affairs that persists to this day.

We're stuck in the same trap, having learned exactly nothing from those who went before us as little as a decade ago.

The NY Times puts forward the following sob story:

FLINT, Mich. — Carol Y. Vliet’s cancer returned with a fury last summer, the tumors metastasizing to her brain, liver, kidneys and throat.

That's very bad, by the way.

As she began a punishing regimen of chemotherapy and radiation, Mrs. Vliet found a measure of comfort in her monthly appointments with her primary care physician, Dr. Saed J. Sahouri, who had been monitoring her health for nearly two years.

She was devastated, therefore, when Dr. Sahouri informed her a few months later that he could no longer see her because, like a growing number of doctors, he had stopped taking patients with Medicaid.

For what purpose was she being put through Chemo and Radiation "therapy"?

Look, I don't mean to sound callous, but there are times we must be objective.  This is one of them.

Let's talk about the monetary issue here before we get back to the patient issue.  Specifically:

If she takes too many Medicaid patients, she said, she cannot afford overhead expenses like staff salaries, the office mortgage and malpractice insurance that will run $42,800 this year. She also said she feared being sued by Medicaid patients because they might be at higher risk for problem pregnancies, because of underlying health problems.

Do you understand what this means?

Let me explain it to you:

If you are not on Medicaid you are paying part of the Medicaid patient's health care bill every time you walk in that doctor's door. 

You are literally being held up at gunpoint, without even being told, to pay someone else's bill.  This happens because you had the temerity to get sick.

This is at the core of what is wrong with so-called "health care" in America.  Your price is not my price, for the same procedure performed on the same day in the same clinic or hospital.

If you pay cash, you probably pay the most.  If you have a "health insurance plan", it pays something less.  And if you are on Medicare or Medicaid, it pays less still. 

Now here's the part you're really going to like: If you're an illegal invader or flat broke, you will pay nothing at all.

In each case those who pay less force those above them to pay more.  This happens because doctors and hospitals are immune from anti-trust laws, which generally bar this behavior.  They lobbied hard for this "right" to screw you blind - literally - rather than acting as every other business in every other profession does.

Oh, and as they did, prior to these changes in the law.

Your "local physician" and "local hospital" is not a "victim" of this.  He, she, or it is a willing, intentional malignancy in fomenting this distortion and, unless you're one of the "privileged" (that is, on Medicare, Medicaid, an illegal or broke), is screwing you blind.

This is why your health insurance premiums are going up 20% or more a year.  It, along with what comes next, is the precise reason that costs are out of control.

Now let's get to the other part of it.

I feel for Ms. Vliet.  But this view of entitlement to medical care and (extremely expensive) treatment, when there is no ability to pay or any reasonable medical chance of a cure (metastatic cancer that has spread to multiple locations is nearly always fatal - we're arguing over time here, not outcome), while the patient does not have the means to provide for that care, is a problem.

This is the discussion - the debate over what you're entitled to as a matter of social responsibility and law - that nobody wants to have.

But we have to have it.

See, there is only $X to spend on health care.  We cannot spend the last dollar to wring the last minute of life from every person.  Our nation, and indeed no nation, has the wealth to do so.  This isn't about compassion, it is about reality.

This does not mean we shouldn't provide comfort.  We deign not to do that either, and that's flatly wrong.  We're so "scared" of someone getting addicted to heavy painkillers that doctors are afraid to prescribe them to people with illnesses like this lest the DEA come knocking and threaten them with either arrest, the loss of their medical license, or both!

But this much I can tell you - we can't afford to provide "every last option" for those who have no resources to spend of their own, yet have contracted an illness that we cannot, within reasonable medical certainty, offer a cure for.

Indeed, the line is probably further back from there - although we don't want to admit it. 

Nonetheless, it is.

This is a fundamental debate around our medical policy we simply must have.  We as a nation believe we're supermen and superwomen, and we're distinctly uncomfortable with our own mortality.  This must change.

We can either change it by choice, or fiscal realities will change it by force.  The latter will be far more traumatic, and less-pleasant, than if we do it voluntarily.

I know you're not going to listen to me.

I'm going to say it anyway, because as a concerned citizen of The United States of America, I must.

You are making a grave, perhaps nation-ending mistake.

Attempting to "deem" the Health Care bill passed when it has not actually been voted on is not Constitutional.  Article 1, Section 7:

All bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.

Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States; If he approve he shall sign it, but if not he shall return it, with his Objections to that House in which it shall have originated, who shall enter the Objections at large on their Journal, and proceed to reconsider it. If after such Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together with the Objections, to the other House, by which it shall likewise be reconsidered, and if approved by two thirds of that House, it shall become a Law. But in all such Cases the Votes of both Houses shall be determined by Yeas and Nays, and the Names of the Persons voting for and against the Bill shall be entered on the Journal of each House respectively. If any Bill shall not be returned by the President within ten Days (Sundays excepted) after it shall have been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law.

This is the black-letter law of the land. 

There are millions of Americans who are extraordinarily pissed off right now.  Some of them, like me, write scathing columns on The Internet or we rant on Talk Radio and Television (such as Judge Napolitano)

But some just smolder.  Some remember the other founding document of our Republic, The Declaration of Indpendence, which says, in part:

That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

That doesn't sound so good.  What has tempered these people is largely what always has in all nations, that is:

Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed.

Indeed.

Neither you or I know where the line is for that cross-section of the citizens in this land.  I cannot speak for them, for I am not inclined toward the sort of actions that they are, nor do I countenance them.  As such I'm not exactly on those folks' "A list".

In fact I fear the day they decide to express their disgust, for while in singular number those expressions are horrifying, as a group such actions harken to a time I hope we would never revisit in this nation.

But I do understand, and see, that they are seething in anger at what has befallen this once-great country.

They have watched as thirty years of corruption in Washington DC has turned our economy and government into a bad joke.

They have watched their jobs go overseas to a Communist Nation for the benefit of a handful of corporate oligarchs, while Washington chortles.

They have watched banksters do everything in their power to imprison them in debt, including bribing Congress to remove usury laws, "reform" bankruptcy so as to render a significant percentage of the population under effective indentured servitude (allegedly prohibited by the Constitution) while the very same banksters declare bankruptcy at the drop of a hat and stick lenders with losses, and while these very same banksters peddle fraudulent securities, cook their balance sheets and generally defraud everyone in the nation - then force the taxpayers, at gunpoint (quite literally, if you remember the fall of 2008 - you were in the room with Bernanke and Paulson when they threatened tanks in the streets) to bail them out.

Finally, they have watched Health Care turn into a monstrous mess, with cost increases of 10, 20 even 30% or more a year.  These costs are expanding at that rate because ambulance chasers like former Presidential Candidate John Edwards make millions while Congress has passed laws forcing Americans to eat the development expense for every advanced medical technology over the last 30 years.  Congress has refused to demand that medical practitioners bill everyone the same price for the same procedures and drugs.  Congress has passed laws exempting medical providers and insurers from anti-trust law, so those aggrieved cannot sue in private causes of action for these abuses.  And finally, Congress has forced all of us to eat the cost of care for illegal invaders who commit their first crime with their first step over our national boundary.  All of these abuses and more could be addressed, but none of them are in the bill you wish to advance, and that, Madame Speaker, is intentional.

But all of this, while it has been outrageous and even criminal, has been, for the most part, Constitutional.  It may be the stuff of a Banana Republic, and it may violate equal protection of the law (a founding principle and in fact a guaranteed right), but Congress has never cared about any of that in my 47 years on this planet.

Witness all the laws you, Madame Speaker and the rest of the Government (including this Health Care plan) do not have to obey while the rest of us do under pain of fine or even imprisonment.

What you propose to do now, however, is not Constitutional.

Rather than negotiate, advance and pass something like my four-point plan that would, along with dropping anti-trust protections and ending the practice of preventing reimportation of drugs and devices, attack the problem at the source, you instead are putting forward the Senate's 2200-page monstrosity.

You are doing so because this bill is not about Health Care at all.  It is about revenue, and you know it.  It is about the fact that The Federal Government is running into a wall at warp speed trying to furiously cover up all the fraud and scams in the financial system while at the same time spending over $1.5 trillion we do not have to replace collapsed consumer demand. 

You must raise revenues, and you know it - or this ship called "The USS Treasury" sinks beneath the waves, and the first sacrifices to go overboard will be all the Seniors on Medicare and Social Security - not by choice, but by force of fiscal insolvency.

In short, this is just another Washington scam. 

But this time you're going too far, and you're taking a horrific risk. 

You must not, Madame Speaker. 

You must instead face this nation and tell the truth.

We cannot fund the scams and frauds any more.  Those who committed them must go to prison, even if they're campaign contributors.

We cannot borrow 10% of our GDP and spend it forward, as the CBO projects we will try, in a futile and permanent attempt to replace consumer demand.

If we do not stop this idiocy we will soon be unable to fund Social Security, Medicare and Welfare in all its forms, leading to an immediate and critical breakdown of our society.

The mad reach for revenue, Madame Speaker, is why you're in such a hurry - and you know damn well I'm right.

If you succeed, we will get your tax bill now and the promised health care never. 

That's a fact.

There is a bright white line for every person in this country who has taken an oath to uphold our Constitution.  It is in different places for each of those individuals, but you had better believe it exists.

For some it will be crossed if you try to disarm Americans, as was attempted after Katrina. 

For some it will be crossed if you try to occupy their homes. 

And for some, it may be crossed if you attempt to "deem" this bill passed, when The House has not actually passed it.

I pray this evening I am wrong, and that for no material number of people - indeed, for no one person - that is where their personal line is.

But I am reasonably certain that this prayer will be offered in vain.

Therefore, the choice is yours, not mine, for all I can do in furtherance of my hopes (and abeyance of my fears) is pray. 

You, Madame Speaker, on the other hand, can act to quell this idiocy.

Or you may tempt fate, you may tempt the millions of people who have swore an oath to defend and uphold The Constitution and, having done so, went to war throughout our history.  Many of those people, along with millions more who never wore a uniform stand today in defense of that "quaint" old piece of parchment - but not in defense of you, nor any other person.

You may also provoke States to assert their long-dormant 10th Amendment rights for real, not in some quaint "one off" regarding intra-state weapons manufacturing.  That, Madame Speaker, harkens back to a time I'd rather not revisit as well.

You will almost certainly lose your Speaker's Gavel come November, as the mortal sin against the Constitution of deeming a bill passed without actually voting on it is so inimical to a republican form of government and displays such gross arrogance that you have forfeited your right to wield that gavel by mere contemplation of the act. 

I am quite certain that I stand with millions of other Americans who are willing to put forth whatever effort is necessary to see that occurs come November - at the ballot box - whether you proceed with your abhorrent plan or not. 

But what I pray for this evening, as I complete my day and offer homage to God before retiring, is that your office, and those of your fellow Democrats who are about to violate your sacred oaths willfully, intentionally, and with malice aforethought - is all you lose.

Let's put a bit more color on my morning HAMP Ticker - this time at a more-macro level of the economy.

To recap, here's the table in question:

From this we can "back in" to the median annual income of these completed mods.  If $837.86 is the median home payment and post-modification it is 31% of gross income (Front end ratio) then we get $2,703 a month in median income, or $32,433 a year.

This is gross income - that is, before taxes.

As I pointed out such a person will pay (monthly) $206.70 in FICA and Medicare tax (the half they "see" in their check) and will have another $300 or so a month withheld in federal income tax.

So we start with a "baseline" of $2,196 monthly that comes in the door (ex payroll and federal withholding taxes, but not accounting for state income tax.)

We know, however, that these people have 59.8% of their gross income that goes to all debt service (house and all other mandatory debts), which means that they have $579.30 to spend on everything other than that mandatory debt service a month.

Now realize this: "Mandatory" debt service only includes minimum payments on revolving accounts such as credit cards!  Making a minimum payment on a credit card, while charging nothing new, results in a pay-down period of many years.  But most people will charge back up at least the principal paid down (which isn't much when paying the minimum especially if you have a 29% interest rate!)

Diane Olick and other analysts say that 2 million homes have "started" HAMP.  Of those only something like 16% have wound up in permanent modifications - under 200,000 - which is what the above represents.  In addition, another 2 million+ people have gone delinquent since the HAMP program began.

The remainder of the HAMP "starts" either have not or will not lead to permanent modifications.  That is, their internals are either worse than or equal to the above - it is almost impossible they are better, or they'd be permanent modifications.

Let's put color on this.  According to Diane Olick 7.5 million homes are either delinquent or in foreclosure.  23% of those delinquent properties have been so for more than a year yet have not foreclosed. 

These are people who are spending in the economy, propping up GDP and economic numbers, because they are making no payment on their house at all.

Let's remember that when these loans "resolve", no matter how they do, that spending power will instantly evaporate in the economy.  Whether their loan is modified into a "sustainable" one (ha!) or whether they are ejected from their house and become renters either way the more than $1,000 a month they are not paying for their mortgage, but are instead dumping into consumer spending will evaporate as they will be forced to spend that money on housing once again.

This is not an inconsequential amount of money.  If we assume the "average" amount not tendered in mortgage (and spent into the economy) is $1,000 per month per home, this is $7,500,000,000 - or $7.5 billion a month (that is, $90 billion a year) that is being "contributed" to the economy falsely and will come back out - one way or another.  It simply must.  This is a bit more than 1/2% of GDP - hardly insignificant - and that consumer spending fuels economic activity with a multiplier effect (the money these people spend at Starbucks pays the employees of Starbucks, who then spend THAT money into the economy.)  There is much argument about the multiplier effect of various government spending programs, but there is less dispute that private spending always has some multiplication factor associated with it.  Therefore, the $90 billion number is understated - the gross GDP "goose" from these defaults may be as high as double that $90 billion, or 1% of GDP!

To this we must add the positive impact of credit-card and other defaults.  The paradox is that failing to pay down debt - that is, defaulting instead of paying as agreed, actually increases GDP, because such a refusal to pay down debt while the money is spent elsewhere causes consumption to be supported.

This, along with the "fiscal juice" from running $1.5 trillion in deficits, are two of the biggest issues facing a "sustainable" economic recovery.  The refusal to understand this dynamic is responsible, in large part, for the (false) belief that our economy is in fact recovering.

You can't really blame most of the ToutTV and media idiots for their lack of thinking in this regard.  It requires analysis, which none of these folks actually do, in order to suss out what's going on.  We haven't had a debt-overhang-fueled recession for 70 years - the last one was The Depression in the 1930s.  Literally none of the current reporters and pundits was alive and trading in the markets or anywhere else the last time it happened, and all we have is a (biased) historical record - an incomplete recollection.

How many people think that the 1920s - the "Roaring 20s" - were a time of fiscal reason and a booming economy?  Nonsense.  The "Roaring 20s" were a time of rampant speculation and debt-binging.  The illusion of prosperity was bought, paid for and maintained the same way it was this time in the 2000s - with debt.  Yet if you read "history" you will find scant if any mention of this fact.

We're not out of this one folks, and we're not going to get out of it either, so long as we keep pretending that loans that aren't performing - and can't - are "money good."  Further, the temporary and ethereal "boost" to consumption and thus GDP that comes from debt defaults will dissipate.  It mathematically must, as eventually creditors run out of cash flow to maintain the illusion that they have "performing" assets when payments are in fact not being made.