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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Pogeu Mahone who wrote (5468)	1/19/2004 10:14:41 AM
From: russwinter	Read Replies (4) \| Respond to of 110194

<can this keep the top spinning longer then you thought?.> This has been discussed in places like Contrary Investor, so it's something most of us are aware of. So no, I don't think it keeps things spinning longer than I thought. Some points about it: the yoy personal income benefit from the tax cut is about over. In 4Q, 2003 wages and salaries reported for withholding to the Treasury was up less than one tenth of one percent (352,253 vs 352,061). In other words in theory, the same number of workers, received the exact same pay. The bogus CPI numbers (EXCLUDING food and energy) was up 1.9% in that period. The tax benefit has been calculated at 4% annualized. So the Fed, Wall Street, and the government would ask us to believe that 1. the exact same worker pool, 2, receiving the exact same wages, 3. receiving a one time boost from the tax cut of 4%, to cover expenses when 4. the CPI is 1.9% higher, which also assumes 5. the consumer doesn't eat and use fuel (not correct as at least 18% of spending is for these items). can 6. continue to spend and borrow at "recovery levels". So what happens after the last tax refunds, if 1. W&S are flat again, 2. there is no more one time tax refund, and 3. the CPI is still running at 2% (excluding F&E)? And when does the market discount that? And that's the best case. And what happens if my train wreck scenario plays out? It looks like this: 1. a DECLINE of 2% in wages and salaries. 2. No more tax refunds (deficit is already 1/2 trillion), 3. Inflation in the prices that REAL consumers pay ()who don't live in Oz or Wonderland (food eaters, and energy users), of 5%, possibly even higher. This would result in a drop of 7% in real personal income for the US as a whole. That by any definition is a train wreck and a depression. The focus now should totally and exclusively be on wages and salaries, and inflation rates (including food and energy), not residual tax refunds. I'll have an update on post XMAS wages and salaries Tuesday. I can already tell you it won't be flat (it will be down, and will confirm my theory). () Bureau of Labor inflation stats are going to the lab tool header above. bls.gov

To: Pogeu Mahone who wrote (5468)	1/19/2004 6:53:40 PM
From: ild	Read Replies (1) \| Respond to of 110194

From 12/4/03 ContraryInvestor: It has been estimated that household income tax refunds in early 2004 will range somewhere around $60 billion ahead of what otherwise might have been the case due directly to the lowering of personal income tax rates that began in July of this year. Unless employees made immediate changes to their tax withholding choices in 2003, they have essentially overpaid taxes for the first six months of the year. For those eligible, those refunds should arrive in consumer mailboxes during latter 1Q and early 2Q of next year. We believe this is important in terms of another potential jolt of liquidity flowing through the household sector. The sharp folks at Merrill Lynch estimated that 80% of cash tax rebates received by folks this summer went directly into consumption during 3Q. In terms of real final sales in 3Q, personal consumption accounted for 60% of the total number. 80% of the assumed "excess" tax refunds to come in early 2004 should total approximately $40 billion. That might not sound like a big number, but let's put it in a bit of perspective. $40 billion was 40% of the total nominal quarter over quarter growth in GDP during 1Q of this year, 35% of nominal 2Q GDP growth, and 15% of the blow out 3Q nominal GDP growth number. $40 billion is not quite as inconsequential as it may sound when it comes to quarter over quarter nominal GDP expansion. During 2003, the cash tax rebates and lowering of personal income tax rates certainly acted as a counterweight to the fact that the labor markets have been sluggish at best. We'll get one last blast of consumer related stimulus in the form of excess tax refunds in early 2004. Beyond that, it seems pretty clear to us that consumers are going to need to experience growth not only in payroll employment, but in wages and salaries. So far, that's just not taking place in a meaningful manner.