Monday, June 03, 2013 - Cardboard Cutouts, Inflatable Tanks, and the G-8

Cardboard Cutouts, Inflatable Tanks, and the G-8

by Sinclair Noe

DOW + 138 = 15,254
SPX + 9 = 1640
NAS + 9 = 3465
10 YR YLD - .03 = 2.13%
OIL + 1.42 = 93.39
GOLD + 22.90 = 1412.20
SILV + .48 = 22.84

Have you ever heard the expression “Potemkin Village”? That expression which dates back to the story about the head of Russia's Crimean military campaign, who allegedly created false villages along the Dnieper River to reassure Czarina Catherine II that all was well as she sailed past.

Have you ever heard of the Ghost Army? Also, known as the 23^rd Headquarters Special Troops, an elite force whose specialty was tactical deception, they proved their value in World War II. The Ghost Army, some 1,100 men in all, ended up staging more than twenty battlefield deceptions between 1944 and 1945, starting in Normandy two weeks after D-Day and ending in the Rhine River Valley. They used inflatable tanks and airplanes and recordings of the sounds of an army to trick the Germans into thinking there were troops where there weren't.

Have you heard about the G-8 economic conference coming to Northern Ireland in a couple of weeks? Northern Ireland has had a tough time over the past few decades, and in the small town where the G-8 will be meeting, there are quite a few closed down businesses and shuttered storefronts. So, in anticipation of the economic conference, they have been been doing some purely cosmetic surgery. Painting the windows of closed shops to make it look like there is a going business inside. At a former butcher's shop, they applied stickers and posters to the windows to make it look like there is a packed meat counter, and make it look like there is a thriving butcher shop, or an office supply store, or some other business. Even the luxury five-star hotel where G8 leaders will meet in two weeks' time has been in receivership since 2011.

I don't know why someone would think it is necessary to shield the eyes of the economic leaders of the developed world from seeing closed shops. Maybe the images are just too graphic for the sensitive sensibilities of the world leaders. Maybe this is a new approach; a new War on Poverty; maybe they are taking a cue from the central bankers of the world – just paper over the problems.

Can you imagine if this catches on? Detroit would be completely paper mached. We could replace Riverside with a cardboard cut-out. We could replace that bridge on I-5, remember the one in Washington state that collapsed, just cover it with some plywood and a few inflatable trucks. A faltering housing market; just paper it over with bond purchases from the Federal Reserve. A college degree can be switched out for 20 years of debt.

It might not be the most productive use of capital, but I think there are plenty of people who could be employed trying to give the false impression that the economy isn't as bad as it is. Of course, maybe it would be a good thing to let the economic leaders see the closed shops. Maybe.

The Institute for Supply Management’s index declined for the third straight month, dropping to 49.0% from 50.7% in April. Any number below 50% signals that business is shrinking instead of growing.  The weakness in manufacturing underscores the likelihood that growth in the second quarter will slow from the first three months of the year. Gross domestic product is forecast to sag to 1.9% from 2.4% in the first quarter. The latest ISM report showed more weakness in virtually every area. The ISM’s new-orders gauge, for example, fell to 48.8% from 52.3% in April and hit the lowest level since July 2012. Not to worry, a fresh coat of paint will have it looking like new.

On Wednesday, we'll get the ISM report on the service sector, and also a look at the Fed Beige Book. The big economic report of the week will the jobs report Friday morning. Last month's report showed the economy added 165,000 jobs and the unemployment rate was 7.5%; that's also the expectation for the Friday report on the labor market in May. The economy will have to kick into another gear, however, to reduce the nation’s high unemployment rate more rapidly. The economy cannot return to more normal levels of employment until there’s a prolonged surge in job creation to the tune of 250,000 a month or more. The last time that happened was more than 13 years ago. Maybe we could make murals of people working, and then it would look like more people are working.

A new Gallup poll shows significant changes in the way we Americans see ourselves. The big news? We don’t like to call ourselves economic conservatives as much as we used to; in fact, that number is at a five-year low.

Relinquishing old ways of thinking is a painful process, and more often not, a slow journey fraught with setbacks and reversals. It’s not easy to examine old assumptions about how we work, view money and allocate power. Older generations were also challenged to change the way they thought about the economy. The Great Depression etched itself deeply into America’s collective memory: The idea that the government had to step in with jobs programs, education, housing, transportation, and research investments in order to save the economy from Wall Street-driven ruin impressed itself on the Greatest Generation.

The new Gallup poll reveals that only 41 percent of Americans now characterize their economic views as “conservative,” or “very conservative,” substantially lower than the 50 percent who labeled themselves that way in 2010. Thirty-seven percent of Americans now call themselves “economically moderate,” up from 32 percent last year. The percentage identifying themselves as economic liberals has stayed put since 2001.

Many Americans are beyond sick and tired of bankers, financiers and political hucksters. We see that crony capitalism is destroying our communities, our democracy, our economic well-being, and the natural world. Monopolies flourished, financial fraud ran rampant, deficit hawks commanded the political scene, economic quacks were treated as oracles in the mainstream media, the rich got richer, and the poor got poorer. The rich can put their profits off-shore, and they don't pay taxes; it apparently involves the use of smoke and mirrors.

Apple may be getting all the attention from lawmakers and the news media for its offshore tax practices, but a new report finds that other major companies are using similar tactics to avoid paying taxes on billions of dollars in profits. At least 18 companies, including Nike, Microsoft and Apple, are stashing profits in offshore tax havens likely in a bid to avoid paying taxes, according to a new report from the Citizens for Tax Justice, a left-leaning research group. If the companies brought that money home, they would pay combined more than $92 billion in U.S. Taxes

Apple came under fire last month after a Senate hearing revealed that the company paid just 2% in US taxes on $74 billion in profits by housing its money in an Irish subsidiary that hadn’t declared its tax residency anywhere in the world. Apple CEO Tim Cook said the company pays “all the taxes we owe,” which, while technically true, offers an example of the larger issue of corporate tax avoidance that some lawmakers are targeting.

The companies on CTJ’s list disclosed in their filings with the Securities and Exchange Commission that if they brought their overseas profits back to the U.S. they would pay a tax rate above 30 percent, indicating that the countries where their money is currently housed have very low tax rates. When you see somebody estimated that we'd pay 30 percent or even 35 percent when we bring these profits back, that is an indirect admission that they’ve paid nothing. There’s a very small number of countries in which you can pay single digits in taxes on your profits -- and those countries have an awful lot of beach front.

The companies that made CTJ’s list are those that offered an estimate, but there are 235 other companies that told the SEC that they’re holding profits overseas but didn't disclose their hypothetical U.S. tax rate. In total, these non-disclosing companies hold almost $1.3 trillion in non-repatriated profits abroad

Meanwhile, the Federal Reserve is trying to figure out whether they should taper off on quantitative easing, and today's weak ISM report seemed to be just the sort of bad news the equity markets love because it means the Fed should keep pouring money out of helicopters. Most recent economic data have come in below expectations, including higher jobless claims and weaker manufacturing surveys. Most leading economic indicators are suggesting that growth will likely decelerate in the second and third quarters. The Chicago Fed National Activity Index, for instance, fell sharply in April.

The slowdown appears to be a global slowdown.  With the exception of Japan, most economies around the world are slowing. For example, in Europe, unemployment is lingering at a record of more than 12%. Elsewhere, India last week announced a second straight quarter of sub 5% growth, a big slowdown for an economy that up until recently was expected to grow at closer to 10%.US inflation is falling. The Fed’s preferred measure of inflation, the personal consumption expenditure, is bouncing around close to 1% and is at barely half of the Fed’s target inflation level. The upside of slower growth and falling inflation: A change in monetary policy isn’t likely until the fourth quarter or early 2014. To be sure, concerns about an end to easy money in the intermediate term are completely rational. However, worrying about a monetary policy change now is a bit premature. At least that is the theory; the Fed might be so insulated from reality that we never know for sure what they'll do next.

Did you ever hear the story about the Emperor who had no clothes?