1/31/09

Stimulus, Day Trading, Municipal Bonds

Are the House Democrats serious about fixing the economy, or are they just morons? The Wall Street Journal estimates that about 12% of the spending will go to anything that might produce jobs, the rest of it is waste, including $54 billion for Federal programs that can't pass basic financial audits, $600 million for green cars (on top of the $3 billion a year the government already spends on its vehicles), $1 billion for the insolvent Amtrak, $400 million for global warming research, $50 million for arts, $150 million for the Smithsonian, $2.4 billion for carbon capture demonstration projects, and $335 million for sexually transmitted disease education, among other things (most of the money goes to government programs).

I'm a liberal and think some of these things are worthwhile if we have the money for them. If we're spending money we don't have, we must spend it on something that will create jobs. None of the above does.

Whatever they say, I have always thought that Democrats prefer government spending on useless things over tax cuts for the same reason they prefer social security Ponzi scheme over private retirement accounts: it's much easier to steal the money when it's in the government's hands. If you give the people and corporations a massive tax cut, it's hard to divert money to one of your pet projects or your own pockets. (Republicans have their own methods of funneling away funds, but the Democrats are in charge now.)

The bill is supposed to be a jolt for the economy. How can that be when the Congressional Budget Office says that $26 billion will be spent this year, and $110 billion will be spent in 2010. That's only 16% of the bill. What's so bold and swift about it?

But the worst part of the bill is a provision that will prohibit the use of foreign steel and iron for the infrastructure portion of the stimulus. If this or something similar becomes law, other countries will follow suit. Then we'll have war--first with trade, and then with bombs and bullets.

In the meantime, Obama's tax evading Treasury Secretary (and former president of the NY Fed, responsible for implementing the low interest rate policies that got us into this mess) is angering the Chinese, who we desperately need to buy our debt and who are already complaining about low Treasury yields. Why shouldn't they take the money they use to buy US debt and devote it to their own economy, or military spending? It's not smart to anger someone who's got you by the family jewels.

Comrade Obama has also made Biden a "middle class czar." Already party operatives, or should I say apparatchiks?, are making the press rounds bemoaning the low rate of unionization in this country. What great things unions have done for the industries in which they are entrenched! Look how well the automakers have done, for instance.

And coming down the pike there will be a financial transaction tax, perhaps 0.25% or more. Every time you buy or sell a stock, ETF, future, bond, etc, you'll be taxed. Advocates, like Dean Baker of the Center for Economic and Policy Research, argue that such a tax could provide the government with $100 billion or more a year in additional tax revenue while simultaneously discouraging unproductive economic activity like day trading. It is also argued that long term investors will not be significantly affected. What's 0.25%, after all? They might even benefit from a decrease in volatility (assuming that day traders are responsible for market volatility and not the rumor mill).

I beg to differ. Many day traders and hedge funds will be put out of business if a financial transaction tax is established. Say the tax is 0.25% for buying and selling. A typical day trader might buy $100,000 worth of a stock or ETF, say the Nasdaq 100 (QQQQ), at a support level, wait for it to bounce a few cents per share, and sell it. Repeat this process several times a day, and it becomes very profitable. But if the trader has to pay 0.25% of the transaction each way, on the $100,000 that's $500 in taxes (excluding profits and losses) for one round trip. There goes the profit.

Serves him right, one might say. He's not doing anything useful.

But he is. All the discount brokers make their money from day traders, now that interest rates are super low. If the day traders stop trading, some brokers will go out of business (just what we need, more job losses). Others will have to raise their trading fees and layoff employees to compensate for the loss of revenue.

Long term investors will thus have more fees and worse service, and an additional tax, which they'll incur even if they sell at a loss. Bid/ask spreads will widen due to reduced volume, so it will become progressively harder to buy and sell some stocks. If not for day traders, many stocks would be completely dead. Lower volume will also mean lower revenue for the exchanges, which will also lead to job losses.

So let's take that $100 billion target for extra government revenue. The tax revenue currently generated by the exchanges, clearing firms, and brokers, the employees of these institutions, and day traders (including hedge funds) will decrease. So the government will net a lower gain. If most day traders leave the market, guess who will end up paying all of the tax? Why, the long term investors who are not supposed to be much affected by the new tax.

None of the financial media seem to be commenting about this, but there are already whispers about it in the administration. Day trade while you can, because I bet you that as soon as this is brought before Comrade Obama he'll say yes we can.

I've been negative on muni bonds for about a year now, and rightly so. I'm changing my mind. The tax free yields are certainly attractive. Further, now that Obama, the majority of whose investments are in municipal bonds, is in office it seems likely that state and major city governments will not be allowed to fail. The House stimulus bill certainly suggests this. Given that it is better to own debt in a deflationary environment than to sell it, municipal bonds might finally be worth getting into.

It's reasonable to assume a president will implement policies that will help his (or his friends') wallets. For example, oil related stocks like Exxon Mobil (XOM), Chevron (CVX), and Dick Cheney's Haliburton (HAL) all doubled during the Bush Administration's tenure, in addition to paying decent dividends. Obama may very well do for munis what Bush did for oil.

This post is decidedly more political than any of my previous ones. No offense is intended. If we had Republican control of the two (openly) political branches of our government, I'd be complaining about all the stupid things they were doing. And they would be doing stupid things. As soon as one of the parties is filibuster proof, it is inevitable.

Disclosure: At the time of writing I held no positions in any securities mentioned above. XOM and CVX are in my dividend stock portfolio.



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