Assume the Position

Posted On Sep 7, 2012 By Dave Gonigam

September 7, 2012

  • Working stiffs, business owners, savers, investors: How everyone stands to be punished when Congress sends us over the “fiscal cliff” at year’s end
  • Freaky Friday: The 5 follows the breadcrumbs, from a rotten jobs report to a dollar chart that says, “Look out below”…
  • “A hot topic in the next 24 months”: Steve Forbes on the gold standard
  • It’s good to be a banksta: Law enforcement looks the other way at trashing of property… McDonald’s most-daring attempt at “brand extension” ever… a reader who wants Ben Bernanke’s email address… and more!


  “The federal tax system is about to start robbing graves again,” warns Byron King, referring to what he dubs the “Countdown to Taxmageddon”

Yesterday, we had Byron over to explain what we have to (not) look forward to come New Year’s Day. Today, he’s back and ready to discuss what this means for you… and what you can do about it before it’s too late.

You might want to pour a stiff drink before we begin…

  “Pretty much the entire U.S. workforce will take a pay cut of at least a few percent,” says Byron — assuming Congress does nothing before then.

“I suspect that when people see their January paychecks,” he writes, “the paychecks with all the missing money — they’ll be collectively furious.”

But it’s not only the raw percentage of your taxable income at stake. “The end of Bush-era tax rates also impacts itemized deductions and personal exemptions,” explains Byron. “That is, we’ll experience dramatic changes to phaseouts and limitations. Thus, individual taxpayers, and many households, will lose some or all current personal exemptions and deductions, including mortgage interest, charitable contributions and more.”

Meanwhile, the “employee portion” of Social Security tax — 4.2% the last two years — goes back to 6.2%. “This will hit everyone, down to the minimum-wage lunch ladies at the school cafeteria. Don’t think that they won’t notice.

“Also,” Byron continues, “the new 3.8% health care tax will apply to all wages. This tax increase will increase the current Medicare hit on individuals from 2.9% to 3.8%. So if you work and receive a paycheck, the ‘employee portion’ of your Medicare tax will increase from 1.45% to 2.35%. Your employer’s portion will remain the same at 1.45%.

“Here’s a table that illustrates the impact on a couple that brings home over $250,000 per year. In addition to the restored 2% FICA tax, this couple could be subject to marginal federal tax rates as high as 44.3% — a 26% increase in effective tax rates just on the affected income — with possibly higher state and local taxes on top of that.

  “Meanwhile, for savers and investors,” Byron continues as we try to catch our breath, “absent any legislative changes, more key tax rates will kick upward in 2013.

“Right away, taxes on passive, ordinary income, such as interest and dividends, will increase from 35% to 43.4%, including the health care tax,” he says of earners in the highest bracket. “It’s a big hit, considering that most dividend money has already been taxed before getting paid out, at state and federal corporate rates.

“The long-term capital gain rate will increase from 15% to 23.8%. This includes a basic capital gain increase from 15% to 20%, as well as a new 3.8% ‘health care tax’ on interest, dividends and other passive income realized by ‘high earners’ — individuals earning more than $200,000 per year, or $250,000 for married taxpayers.”

The estate and gift tax will also increase in 2013. Currently, the estate and gift tax exclusion is $5 million per person — $10 million for a surviving spouse. Above that level, any excess is subject to a federal estate tax of 35%.

But unless the tax laws change, the maximum estate and gift tax rate will increase from 35% to 55% on Jan. 1, 2013. Worse, the exclusion reverts from $5 million to merely $1 million.

“Think about that $1 million exclusion,” Byron implores. “If you own real estate such as a farm or a house in an upscale neighborhood or a couple of rental properties somewhere, you might be there now. Add in your personal property like cars, furnishings and such, plus bank and brokerage accounts. And don’t forget that life insurance often winds up getting counted against that estate tax exclusion. It’s not difficult for an ‘average’ estate to exceed $1 million.

“Hunker down,” says Byron, checking our pulse, “because this is going to get worse before it gets better.”

With this in mind, Byron’s recommendation in the current issue of Outstanding Investments pinpoints a company he says “pays you in what’s essentially nontaxable dividends.” Not a subscriber yet? Access here.

  There’s one conclusion to be drawn from today’s jobs numbers: As badly as the Labor Department engages in “juking the stats,” the agency does not do so with the aim of making a sitting president look good.

On the other hand, we have two more reports due before Election Day, heh…

130  The statisticians could conjure only a five-figure number of new jobs for August — 96,000.

That’s lower than the “expert consensus” of 120,000… to say nothing of the 150,000 needed to merely keep up with population growth. The internals are horrid: Factory employment fell by the most in two years. Temp firms cut jobs for the first time in five months.

Yet the headline unemployment rate fell from 8.3% to 8.1%. Once again, credit the divergence to the fact that large numbers of people — 368,000 in August — gave up looking for work.

Indeed the labor-force participation rate — the percentage of the working-age population in the labor force — fell to 63.5%. That’s the lowest since September 1981 — when Stephen King published Cujo and the big box-office draw was Chariots of Fire.

Among men, the figure sank to 69.9% — the lowest level since the Labor Department started tracking the data in 1948.

Meanwhile, unemployment measured the way it was during the Carter administration — and the way John Williams at still measures it — is 22.8%.

  The market reaction to the jobs report has been… surreal.

With the caveat that traders now view all economic numbers through the prism of whether they will or won’t spur central banks to new heights of EZ money… and the further caveat that the Federal Reserve’s next announcement is only six days away, behold…

  • The major stock indexes are ruler-flat after yesterday’s monster rally. The S&P is at 1,435
  • Gold is up 2%, to $1,735. Silver’s move is even bigger, to $33.56
  • So you’d think Treasuries are tanking, right? Wrong: The 10-year yield has backed off to 1.62%
  • If hot money’s flooding into Treasuries, it’s also flooding into dollars, right? Sorry, the dollar has fallen below 81 for the first time since mid-May
  • Meanwhile, crude is hanging in there at $95.69.

At 80.25, the dollar index is looking especially vulnerable. It remains above both the 50- and 200-day moving averages, but for how long?

“There’s still support around 80,” Greg Guenthner advises via IM this morning, “but if that goes, bye-bye.”

[Ed. Note: Amid the hurly-burly today, Steve Sarnoff told his Options Hotline readers  it was time to book profits on the Starwood Hotels call options he recommended over the Labor Day weekend: a 60% gain in three trading days — nice!

Steve began issuing explicit sell signals less than two months ago. Since then, he’s recommended five sells. The average play has gained 63.8% with a holding time of only 24 days.

Bottom line: Steve’s sell signals are making this legendary trading service more accessible than ever. You could make money on your very first trade… and Steve’s next buy recommendation is due this Sunday night.]

  Add Vancouver veteran Steve Forbes to the list of luminaries who see a gold standard coming, sooner or later.

“A stable dollar is absolutely crucial in dealing with our economic woes,” he writes in the magazine that bears the family name. “Americans instinctively understand that an unstable dollar is a bad thing. Many Tea Party activists, as well as others, are starting to examine the gold issue. The subject is no longer Ron Paul’s monopoly.”

Thus, the gold commission proposal that made it into the Republican platform. “Gold won’t be a sizzling issue this fall,” Forbes writes. “But the yellow metal will be a hot topic in the next 24 months. The commission is going to take on an importance that will astound today’s political punditry, besotted as they are with stale Keynesian quackeries about money, taxes and spending.”

  As “fraudclosure” outrages go, this one takes the cake.

“I put my whole life into this place, building it for my mom and dad,” retired mason Alvin Tjosaas recalls of a vacation home in Twentynine Palms, Calif. That was in 1961, when he was only 14. It’s been in the family ever since. It carried no note.

Wells Fargo sent a gang of thugs, er, subcontractors, to “repossess” it anyway. The address on the foreclosure notice was indeed the home where Mr. Tjosaas and his wife hoped to retire. The name on the notice was of someone else. No matter: The crew set about “recovering” the possessions inside for resale… including his father’s World War I uniform.

Everything is now gone, and the house is trashed — collateral damage in the banking industry’s scorched-earth campaign to securitize and foreclose, no matter how badly it clouds the title on millions of properties.

Tjosaas recalled what a deputy sheriff told him afterward: “‘Good news, we know who took [your possessions]…Wells Fargo. Bad news, your stuff is all gone.'”

Um… Mr. Deputy, isn’t there a case of trespass here? Fencing stolen goods? Criminal negligence? Something your bosses might like to refer to the DA?


And civil justice? Only after Los Angeles TV station KABC started calling did Warren Buffett’s favorite bank even bother to offer a settlement. (We can imagine Charlie Munger telling Mr. Tjosaas to “suck it in and cope.“)

Is there any doubt left that there’s one set of laws for the powerful and connected and another for the rest of us?

 Uh-oh… Looks as if McDonald’s is veering from its core competency.

After all, one of the appeals of the place is that no matter where you go in the world, a Big Mac is a Big Mac is a Big Mac.

But Mickey D’s reckons there’s too much money to be made at Indian pilgrimage sites to pass up. So in the country that gave rise to the expression “sacred cows,” the burger chain plans to offer a strictly vegetarian menu at two locations.

No Sacred Cows Admitted

One restaurant due to open up next year will be in Amritsar, the holiest site of the Sikh faith. Another will set up in the small town of Katra, the second busiest pilgrimage site in India on the path to the Hindu mountain shrine of Vaishno Devi.

The move is part of a recalibration McDonald’s is making after six years of doing business in a country where up to 40% of the population is vegetarian. Experiments with fish-and-chicken-only faltered. “Did we have the right value proposition? No,” asked and answered managing director of McDonald’s India, Amit Jatia.

Only question now… How will The Economist run the numbers for its famous “Big Mac Index” in Amritsar?

  “Looking at the tax charts,” writes a reader after yesterday’s episode, “I was amused at people thinking 39.6% an outrageous amount to pay.

“In 1979, I had income of $200,000 and had to pay a tax accountant, invest in risky write-offs (oil exploration) and grab every deduction known at the time to get down to a 40% rate. I think high earners are spoiled these days.”

The 5: An interesting point: Even a taxpayer in his or her early 50s would have no memory of the 70% top rate. Doesn’t make the impending increases any easier to stomach, though…

“Always an informative and entertaining read at the end of my day,” writes a complimentary reader.

“The readers/writers/tantrum tossers continue to amuse as well. The most-recent free chuckle was provided by the reader who is upset because he pays for several of your letters, but obviously not for the one written by Patrick Cox, yet wants the info that Patrick’s paid subscribers receive.

“The gimme, gimme, gimme for free, free, free attitude that is infesting the United States seemingly knows no bounds.

“Keep up the great work!”

I want to send an email to Ben Bernanke (even though he will never read it) and describe a grass-roots reason why not to do QE3,” writes a reader who’s apparently a glutton for punishment.

“I am a small-business owner in Ohio that sells fuel. Ever since it was announced he might print more money, commodities have risen and it’s costing me more to do business. Can you provide a contact somehow? Went on the Federal Reserve website and nothing was easily available. Thought you might be able to help.”

The 5: Sorry, we’re on the outside looking in, just like you. But pray tell, where did you get the idea he’d care about the impact of his policies on the “grass roots”?

Have a good weekend,

Dave Gonigam

The 5 Min. Forecast

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