Opinion

The Great Debate

States act on tax reform

The United States needs tax reform — and soon. Our corporate tax rate is 35 percent, while the European average is 25 percent. We are not competitive. Our individual tax code has rates too high and too many politically driven tax credits and deductions. All true. But it’s also likely that no real tax reform will move in Washington for the next three years.

Why? Because the Democrats,who control the White House veto pen, oppose any reform that does not include at least $1 trillion in higher taxes on net and the Republicans, who control the House of Representatives, will never vote for such a tax hike.

In Washington we have three years of guaranteed gridlock ahead. But in 37 of the 50 states there is unified government — the opposite of gridlock.

Republicans have the governorship and total control of the legislature in 24 states, while Democrats hold complete political control in 13 states. This means that in many state capitols, Republicans and Democrats are able to carry out their preferred policy solutions alone. No partisan bickering. No “party of no.”

This dynamic is on display in Tennessee, one of the nation’s nine “no income tax” states. Tennessee, like other states with no income tax, has benefited greatly from its relatively hospitable tax climate.

Obama must surprise in State of the Union

President Barack Obama stirred with an unexpectedly powerful inaugural address – a second effort that far surpassed his first. He summoned great themes of American history to argue cogently for his second-term agenda. Now he has a chance to deliver a State of the Union address that improves on those of his first term, too.

The key to success? Presidents still have the power of surprise. Franklin D. Roosevelt once said, “I am like a cat. I make a quick stroke, and then I relax.” As in his inaugural, Obama should surprise us – this time with new policies and sharp specificity. On the budget, democracy reform and immigration, the president stands well positioned.

Forget the Super Bowl, or even the Oscars. For us policy wonks and ex-speechwriters, this is the biggest event – the time to crack open a beer, microwave the Buffalo chicken wings and settle down in front of the TV for a siege of viewing.

from Global Investing:

Solar activities and market cycles

Can nature's cycles enrich our finance and market theories?

Market predictions based on the alignment of the sun, moon and the earth and other cycles could help investors stay disciplined and profit in economic storms, says Daniel Shaffer, CEO of Shaffer Asset Management.

SPACE/SUN

Shaffer writes that sunspot activities show that the sun has an approximate 11-year cycle and as of March 31, 2009, sunspot activity has reached a 100-year low (this, interestingly, coincides with a cycle low in equity markets, reached sometime mid-March in 2009).

But a low in solar activity seems to be followed by a high. Scientists are predicting a solar maximum of activity in sunspots in 2012 that could e the strongest in modern times, according to Shaffer.

Betting on tail risk seriously endangers your wealth

Investment strategies designed to benefit from tail risks are fast becoming the next bubble. Investors are paying over the odds to reap benefits from remote catastrophic risks and are ignoring more moderate but much more likely outcomes that will cost them a great deal in the interim.

Following the banking crisis and the flash crash, Wall Street is rushing to meet demand from investors wanting to make money from betting on extreme market dislocations and other “black swans” by taking long positions in rare, high-impact events at the tail ends of probability curves.

Bets on tail risks have become increasingly popular and come in a variety of guises. Buying out-of-the-money puts on the major stock averages to benefit in the event of another crash; commodity futures and options to benefit from resurgent inflation or a sudden supply disruption in supply; or physical gold and long-dated Treasury bonds to protect against deflation.

from The Great Debate (Commentary):

Commodities should be short-term investments

Commodity indices and exchange-traded products (ETPs) should be regarded as short- to medium-term investments rather than long-term strategies, as a quick glance at performance over the last 10 years shows.

Their value lies in providing simplicity and liquidity for retail investors and institutions such as pension funds, which do not want the complexity of managing futures positions with their daily margin adjustments and rollovers.

They also permit institutions and retail investors forbidden from investing in derivatives to gain exposure indirectly by repackaging derivatives as swap transactions or embedding them in structured notes, which resemble debt or equity securities.

Bill Gates is optimistic about the future

USA/The following is a post by Stephen Adler, editorial director of Thomson Reuters professional, that was taken from one of his blog posts at aif.thomsonreuters.com. Adler is a moderator at some of the panels at the Aspen Ideas Festival. Thomson Reuters is one of the underwriters of the event. The opinions expressed are Adler’s own.

Bill Gates, the former tech-nerd-genius, seems increasingly comfortable in his post-Microsoft role as philanthropist, humanist, and Big Thinker. Once awkward in public, he now speaks with warmth and authority about health policy, education, energy, and global innovation. His air of sincerity, hyperlinked to his extraordinary intellect, has turned him into a crowd favorite –- perhaps the crowd favorite –- at events such as the Aspen Ideas Festival.

In his hour onstage inside the giant Benedict Music Tent Thursday afternoon, before the largest audience I’ve seen at the Festival, Gates insisted he was optimistic about the future. He got a big laugh by adding the caveat that to stay optimistic you have to “avoid getting exposed to U.S. politics.” In particular, he cited enormous improvements in healthcare, education, and women’s rights over the past 50 years. The most startling statistic: Deaths of children under five declined globally from 20 million in 1960 to 8 million last year, mostly due to vaccines and better malaria prevention and treatment.

from The Great Debate UK:

Punishing investment bankers: the nanny-state goes global

Laurence_Copeland- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

In a previous blog, I expressed the fear that in the aftermath of the financial crisis we were going to see either the innocent punished or guilty men convicted of the wrong crimes, or maybe both.

A topical case is Goldman Sachs, an investment bank which weathered the crisis better than most, only taking Fed money when all the other dominos had already fallen, repaying it extremely quickly, and facing accusations ever since of having been too clever for its own good.

from The Great Debate UK:

Signs are positive for markets and economy

SCHWAB.IMG_4329-Kully Samra is UK Branch Director at Charles Schwab. The opinions expressed are his own.-

There is no doubt that since the lows in March 2009 the U.S. market has rallied massively. However, at Charles Schwab we believe that whilst economic progress will continue, we must look to the months ahead with some caution.  We remain optimistic regarding the equity markets in the longer term and the economy in the short term, but recognise that increased volatility will likely characterise 2010.

Over the last month, we’ve certainly experienced a sense of this increase in volatility in the US markets and we would stress the importance of a diversified portfolio and an appropriate asset allocation that matches one’s risk tolerance in order to combat this. Investors should also ensure that they assess and rebalance their portfolios to fit the market conditions.

Welcome to the Teenies, sorry about those returns

saft2.jpg
-James Saft is a Reuters columnist. The opinions expressed are his own-

As we say goodbye to a decade so abysmal it never even earned a nickname, it is time to take bets on how the coming 10 years will shape up in economics and financial markets.

Welcome, then, to the Teenies, a word that will describe the decade as well as the small returns in financial markets and the shrinking financial sector it will bring.

So, let’s run through some themes for the 2010s:

Banking – The decade will end with meaningful reform of banking in place, but what is not clear is if this happens soon or only after a new banking crisis brought on by an unwillingness to take tough steps now. The likelihood is that regulation limits leverage and causes the share of the economy captured by financial services to shrink. It will be a lousy decade to be a shareholder, but given the government backing, perhaps not a bad one to be a bondholder.

from Global Investing:

What’s on your reading list?

If anyone needed a reminder that Christmas and NewYear holidays are almost here, Societe Generale has provided it. Analyst Dylan Grice has picked up the mantle of the departed James Montier to offer a seasonal reading list for those with a fixation about investment and economics.

True, some people might prefer to immerse themselves in a rollicking sea tale from Patrick O'Brian or a good old  Sookie Stackhouse vampire mystery. But we know that Reuters blogs' readers are a discriminating lot with a keen understanding of and passion for finance. So here is Dylan's list of six must-reads:

1. Manias, Panics and Crashes, by Charles P. Kindleberger;
2. The Essays of Warren Buffet, edited by Richard Cunningham;
3. Reminiscences of a Stock Operator, by Edwin Lefevre;
4. Fooled by Randomness, by Nassim Taleb;
5. The Case against the Fed, by Murray Rothbard;
6. Judgement under Uncertainty: Heuristics and Biases, eds Kahneman, Slovic and
Tversky.

  •