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The Eighty Percent Solution to Greed
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Good Morning,
Following one of the more positive Fed statements on the economy in quite some time, the US dollar retook the 80-mark on the index and it carried those gains over into the Thursday morning market session. While the Fed’s take on the US economic situation reveals a central bank that is encouraged by the signals being broadcast from various sectors, it also shows that when it comes to hiking interest rates in order to avoid deleterious inflationary effects from recent liquidity injections, the time is…well, it is not now.
The world’s second largest currency traders, UBS AG, feel that the greenback will receive a boost from the Fed announcement and its views on inflation. The dollar may be supported by the Federal Open Market Committee’s view on inflation, according to UBS AG, the world’s second-biggest currency trader. “The rising yields post-FOMC helped support the dollar as an improving yield advantage helps attract capital flows,” Brian Kim, a strategist in Stamford, Connecticut, wrote yesterday in a report.
“This was in response to the more hawkish FOMC wording on inflation and in the absence of sovereign concerns the dollar should continue to benefit with the European-U.S. two-year yield differentials having narrowed by 36 basis points alone since June 4.” Thus, despite “we should buy more gold rather than US Treasuries” mutterings from yet another Chinese official, the dollar and its unwillingness to roll over and simply die, continues to be sufficiently in demand to at least remain around current levels and to possibly rise quite a bit more after rate hikes do start to materialize (we still think fourth quarter, or thereabouts).
Speaking of keeping dollars and tracking dollars, the good old IRS is now “demanding that hedge-fund and private-equity investors disclose hundreds of billions of dollars they have invested offshore, boosting scrutiny of accounts popular for tax advantage. The move comes as regulators and lawmakers are seeking to crack down on questionable use of offshore tax havens and could uncover sources of income that aren't being taxed but should be. Those efforts include the investigation into clients of UBS AG, some of whom the Justice Department alleges used offshore bank accounts to evade U.S. income taxes.” Oops. Where to hide? No can-do.
What cannot be glossed over, however, is the fact that the Fed is cognizant of not only the fragile state of the green shoots – nice as they may be to look at after the hell over the last two years – but also of the dangers that inflation could present if too much time elapses before the interest rate trigger is finally pulled. As we previously observed, this may be a time when the Fed surprises by stepping ahead of the curve, as opposed to what is has been known to normally do…
What else cannot be ignored is the stark reality that “ the U.S. economy just went through its worst two quarters in more than 60 years, as businesses reduced their investments at the fastest pace since the Depression, the Commerce Department reported Thursday as it revised its estimate for first-quarter gross domestic product. Real GDP -- the measure of the value of goods and services produced in the economy -- fell at a 5.5% annual rate in the quarter after plunging at a 6.3% pace in the fourth quarter of 2008, the government said.”
If there is a single reason why the Fed did not step on the interest rate gas pedal just yet, you need look no further than that little set of numbers…In so many words, the US economy (still the globe’s largest one) contracted at almost twice the rate of what the World Bank sees the global economy to contract at during this year. On top of that, as of this morning, data shows that first-time claims for unemployment took an unexpected rise in the latest reporting week. Indications had been that the jobless situation had peaked in March and was on the decline. Such figures actually represent one of the principal ‘green shoots’ that observers have placed so much emphasis upon during the current year. To the point of making the term become universally loathed.
New York spot gold dealings continued to orbit around the $935 level this morning, showing a near half-percent gain in early going. The dollar was trading at 80.82 on the index – almost a full point higher than levels seen on Wednesday, while crude oil rose 80 cents to $69.47 per barrel. Absence of demand versus speculative injections of money from various funds continues to define the market for black gold. At some point, values will return to ‘realistic’ levels – say traders (like, $50 and under, for example).
Silver added a dime in the morning, to rise to $13.93 per ounce. Platinum gained $18 to trade at $1175 per ounce, palladium was flat at $234 an ounce, and rhodium climbed $25 to $1250. The noble metals were clawing back from heavy selling seen earlier in the week – not based as much on news on the automotive or fundamental front as on the aforementioned spec plays by funds. What else is new? Plenty, it seems. Especially, in this post-crash, post-Madoff, post-hedgie environment. Regulation? We know it is coming and it will tighten up significantly. Enforcement? Read the passage about offshore investments, above. Taxation? Whoa. How about the following:
“Louis Gerstner, the former International Business Machines Corp. chief executive officer, said that short-term investment gains should be taxed at 80 percent as a way to counter the culture of greed on Wall Street.
“If you buy something -- a stock or a bond -- in the morning, and you sell in the afternoon, the tax probably ought to be 80 percent,” said Gerstner, also a former chairman of Carlyle Group, the world’s second-largest private equity firm.
“If you hold it for six months, maybe it ought to be 60 percent,” Gerstner told Bloomberg Television. Selling an investment after five years should carry a zero rate “to try to get the incentives for investment to go back to being a true investor and not a trader,” he said.
Gerstner acknowledged that such a change would be “controversial” yet argued it is necessary to encourage investors to think about the longer term. The top tax rate on gains from investments sold within one year is now 35 percent.
“We do have a greed or an inefficiency that comes out of excessive focus on the short term,” said Gerstner, who bemoaned an investment climate driven by quarterly earnings and a 24-hour news cycle. He was an executive at American Express Co. and RJR Nabisco Inc. before joining IBM.
Gerstner, 67, also criticized compensation practices, saying “there’s been astoundingly unnecessary, excessive executive compensation in certain instances.”
He said the solution isn’t government rules or caps on pay. “I despair of a government solution,” Gerstner said. “We’ve had governments attempt to control executive compensation for 40 or 50 years.” Instead, Gerstner called for more disclosure and oversight of boards of directors by shareholders, “because ultimately the boards need to make these decisions.”
“The system can fix itself without rigid rules,” he said. Gerstner, who approves of generous compensation for executives who add shareholder value, called for an end to golden parachutes for failed managers. “We have to see an elimination of pay for people who get fired and then wind up with these huge payments,” he said. Gerstner acknowledged that Wall Street executives he knows wouldn’t like his plan for higher taxes on investment gains.
“They wouldn’t like it at all,” Gerstner said. “Wall Street is driven by transactions. That’s what they live by. They don’t live by long-term investment decisions.”
Sounds pretty...populist to us. What is America coming to?
Probably something healthier. But, that's just one small angle.
Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal
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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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