Saturday, 21 May 2016

Weekend Update 21/05/2016 – A Conundrum And A Famous Tax Cheat.

Brexit Countdown Clock.

Brexit Quote of the Day.

You will find as you grow older that courage is the rarest of all qualities to be found in public life.

Benjamin Disraeli.

This weekend, the Fedster’s conundrum. Deja vu all over again, to quote the famous bard, or maybe it was Yogi Berra. Barron’s suggests that a decade on from fallen former guru Greenspan’s interest rate “conundrum,” the Fed’s talking chair finds herself with back with an interest rate conundrum again. To raise in June or not to raise, that is the question. And with a possible sea change in inflation underway, that’s quite some question. Hopefully, it’s all’s well that ends well, rather than tempest.

With the G-7 popinjays all set for a meeting in Japan towards the end of next week, the big news leaked so far is that Uncle Scam is set to thump Japan’s Abe and Kuroda over their policy of rigging the Yen lower against the dollar. Technically known to those in the dismal science ranks, as beggaring thy neighbour. Much ado about nothing, probably, these meetings usually are.

Still, all the world’s a stage and everyone looks set to rhetorically kick China over their export steel-dumping, deflation policy. With China not attending, it’s as you like it for the G-7, and a good time will be had by all. But will Dodgy Dave Cameron, use the meeting of fops, to pursue his international campaign against tax evaders and cheats? It’s a given that he will get the G-7 to endorse his personal Brexit, Remainiac, EUSSR surrender campaign. So far for Dodgy Dave’s Remainiacs, it’s all been a comedy of errors.  We provide him today with some extra tax cheat ammunition.

“Some are born great, some achieve greatness, and some have greatness thrust upon them.” But in today’s G-7 it’s a case of “Some are born mediocre, some achieve mediocrity, and some have mediocrity thrust upon them.” Sadly todays G-7 participants have hit the trifecta.

“If you prick us, do we not bleed? If you tickle us, do we not laugh? If you poison us, do we not die? And if you wrong us, shall we not revenge?”

Uncle Scam’s  warning to Japan’s Abe, with apologies.

Fed Stuck in a Time Warp

As was the case a decade ago, the Federal Reserve is preparing for rate hikes. And as was the case then, the yield curve is sending a warning.

By Randall W. Forsyth May 19, 2016
Isn’t this where we came in?

The weekday version of Up and Down Wall Street started on 10 years ago this week, and the remarkable thing is what hasn’t changed in the past tumultuous decade.

As in 2006, the Federal Reserve is in the early stages of raising its policy interest rates—after a period of unprecedentedly low short-term rates, which were put in place to counter the impact of a plunge in asset prices. The subsequent rate hikes were supposed to mark a return of normality and allow an elongation of the recoveries in the economy and the stock market.

As things turned out, instead of a soft landing there was a crash. And although the current expansion is about to enter its eighth year, the economy continues to feel the effects of The Great Recession.

In addition to the calendar, these recollections were brought to mind by central bank officials’ strong suggestions that second interest-rate hike of the current cycle will be on the table at the June 14-15 meeting of the Federal Open Market Committee. Minutes of the April 26-27 confab, released Wednesday, underlined that message offered by a number of Fed district bank presidents.

-----What’s changed? Apparently, mainly the markets. Even though the FOMC minutes noted that indicators of domestic demand had been “disappointing,” the panel explained the shortfalls as reflecting “possible measurement problems and other transitory factors.”

But financial conditions improved, with higher equity prices, tighter credit spreads and a weaker dollar. So, with continued improvement in labor markets, the dollar no longer rising and oil prices no longer falling, inflation was on track to move back to the FOMC’s 2% target.

If—and this is a big if, as Peter Boockvar, chief market analyst at Lindsey Group, emphasizes—economic data line up as the Fed expects, that would leave open the possibility of a hike at next month’s FOMC meeting, according to the April meeting minutes.

-----What’s striking is the Fed officials’ current underestimation of the impact of their words and actions, as happened a decade ago. The clearest signal then was the flattening of the slope of the yield curve—the graph of bond yields of increasing maturity. As pointed out on numerous occasions in this space back then, the failure of long-term interest rates to follow short-term rates higher implied that investors anticipated weaker economic conditions ahead. That is the classic portent of a flatter yield curve.

The current curve, as defined by the spread between the yields on two- and 10-year Treasuries, is the flattest since November, 2007, according to the St. Louis Federal Reserve. The S&P 500 peaked in the preceding month, and the simmering credit crisis exploded in 2008.

Former Fed Chairman Alan Greenspan called the situation a “conundrum.” His successor, Ben Bernanke, pointed to a global saving glut, which depressed long-term bond yields. Neither recognized the more mundane but more dire implications from yield-curve flattening, however.

While most economists now assert that the economy will motor through a Fed rate hike or two, MFR’s Shapiro thinks a June increase could be the last, not just the second, in a long series. “A weakening labor market and an overall market fraying around the edges will keep the Fed on hold for the balance of the year before further weakness leads to easing moves in 2017,” he writes.

Let’s simplify the FOMC’s reaction function further. If the S&P 500 is around 2100 when the FOMC meets in June, the panel will hike rates. The likely subsequent negative stock market reaction (plus renewed dollar strength) would likely put further Fed rate increases on hold.

So, a decade on, the markets remain dependent on the Fed. What’s changed is how dependent Fed policy is on the markets’ actions.

Now back to that dodgy, wool dealing, ancient tax cheat.

"Anybody has the right to evade taxes if he can get away with it. No citizen has a moral obligation to assist in maintaining the government.”

J. P. Morgan. 

How a tax scam built Shakespeare’s outrageous fortune

Published: May 18, 2016 11:39 a.m. ET

The playwright’s family traded its wool in the black economy, research has found

While making much ado about tax avoidance recently, has George Osborne ever stopped to think that excessive enforcement of the tax rules might have deprived the U.K. of one of its greatest exports?

William Shakespeare, who died 400 years ago in April, has been translated into more than 100 languages, according to the British Council. But if the tax authorities had got their pound of flesh, Shakespeare might have remained a dodgy wool merchant, long forgotten.

Shakespeare’s finances are almost as much of a mystery as the meaning of “Hamlet”. After less than a decade in London, writing two plays a year at only 6 pounds ($8.70) per play, Shakespeare paid £120 for the second-largest house in Stratford-upon-Avon, with up to 30 rooms, two gardens, two orchards and two barns. That year, 1597, he bought into the new Globe playhouse, investing roughly £70 for 10% of the profits. Yet when the City authorities taxed residents that year, Shakespeare counted as a “poor player” worth only £5, renting modest lodgings — and still he failed to pay the five shillings that were due! How did he manage it?

Shakespeare’s father, John, had been an alderman, regulating Stratford’s affairs, until he mysteriously withdrew from public life in 1576. It was long believed that he fell on hard times, leaving his penniless son to make his way as a writer in London. But research by David Fallow, a former financier, suggests that Shakespeare’s father did not lose his fortune — he merely moved it into the black economy.

Wool was the commodity boom of the day. As an unlicensed wool trader, Shakespeare senior never paid a penny of tax on his business. Nor did his son, whose move to London, Fallow argues, was as much to develop the family business as it was to write plays. With the family assets in Stratford, Shakespeare was in effect a “non dom” in London, who got away with tax arbitrage by changing lodgings every few years. When Shakespeare moved out of the City to near the new Globe theatre south of the Thames, the tax collectors couldn’t even touch him for the five shillings.
Conspicuous Tudor consumption
Shakespeare’s time was a period of conspicuous consumption, witheringly depicted in “Timon of Athens,” his play about “old money” encountering “new” — and quickly running out. Karl Marx was so struck by the play’s message that he quoted it in “Das Kapital” as an example of how “the cold cash nexus” usurped true human relationships.

The situation of Timon, whose once extensive lands are sold or mortgaged, was not uncommon. Many Elizabethan aristocrats, including Shakespeare’s patron, the Earl of Southampton, were deeply in debt. There was a passion for new houses and rich clothes. “Cash for honors” was widespread: on his journey down from Scotland to his coronation in 1603, King James awarded 46 knighthoods before breakfast.

---- Shakespeare never needed to worry about money once the Globe came to dominate London’s theatre scene. And it was for the Globe that he wrote many of his greatest plays. But it was the black economy and his “non dom” status that allowed him to get started.

Whether today’s private equity bosses and other denizens of “offshore” will be remembered in 400 years — that is the question.

Ayrshire Pullman Motor Services v Inland Revenue [1929] 14 Tax Case 754, at 763,764.

"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue"

Lord Clyde President of the Court of Session.

Brexit Thought of the Week.

Dodgy Dave Cameron: One could drive a schooner through any part of his EU argument and never scrape against a fact.

With apologies to David Houston on William Jennings Bryan.

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