Mish's Global Economic Trend Analysis

Investor Bets in Risky vs. Safe Assets Hits Record High
Hosed at the Pump: Where are the Highest Gas Taxes in The Nation?
Smoke and Mirrors Hide the Collapse in Corporate Profits

Investor Bets in Risky vs. Safe Assets Hits Record High

Posted: 03 Jun 2014 11:38 PM PDT

The June 3rd issue of SentimenTrader contains an interesting writeup on risk taking.

Investor Bets in Risky vs. Safe Assets

click on chart for sharper image

Excerpt (below) and chart (above) by permission...

Periodically, we check in on a ratio that first started to become concerning last year.
At the time, the ratio of assets invested in equity mutual funds and ETFs had eclipsed the assets stashed in safe money market funds by a factor of 3. That was on a par with the levels only seen in 2000 and 2006/2007.

At the time, and subsequent to that, we've discussed the fact that the ratio is not necessarily bounded by any limits, and it could "grow to the sky". The reason it was notable is because it had been bounded during the past 15 years, as stocks traded within a broad range.

Now that it was broken out above its previous peaks, there is no telling how stretched the ratio can go.

As of April, the latest data available, there was $4.05 invested in stocks for every $1 stored in money markets. That is 31% above what was seen in 2000 and 19% above the peak in 2007.

That's not too far above and beyond what the S&P 500 has done, so like the growth in margin debt, it seems reasonable given how well stocks have done.

That the ratio is so far above the 2000 and 2007 peaks seems like it should be market-negative, but we haven't considered it to be for quite a while, due to its in-line rise with stock prices, and the fact that the ratio has broken out above its previous peaks and we don't know where the next logical place would be to consider it extreme.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Hosed at the Pump: Where are the Highest Gas Taxes in The Nation?

Posted: 03 Jun 2014 03:11 PM PDT

The Tax Foundation posted the following map of gasoline taxes.

The Tax Foundation says "Gas taxes are generally used to fund transportation infrastructure maintenance and new projects. While gas taxes are not a perfect user fee like tolls, they are generally more favorable than other taxes because they at least loosely connect the users of roads with the costs of enjoying them. However, some of our recent analysis shows that many states do not rely on gas taxes and tolls as much as they could, and instead fund substantial amounts of transportation from other sources like income and sales taxes."

Not That Simple

States with high gas taxes do not necessarily have lower taxes elsewhere. Illinois and California are certainly cases in point. Property taxes in Illinois are over $14,000 on something like a $500K home.

The Tax Foundation notes "rates shown do not include Federal excise taxes of 18.4 cents per gallon."

Nor do they include applicable sales taxes or local gas taxes or Cook County gasoline taxes.

Illinois also has "home rule" sales taxes for various locations within a county. For example, and in addition to special gasoline taxes in Cook County, the Illinois Department of Revenue Tax Bulletin shows that Cicero (in Cook County), has a sales tax of 9.75%, while Dolton (also in Cook County) has a sales tax of 8.75%.

Why Are Chicago Gas Prices So High?

Indiana radio station WBWZ 91.5 asks the question: Why Are Chicago Gas Prices So High?

Customers may also have a desire to blame gas station owners for the high price of gasoline. But Beth Mosher, spokeswoman for AAA Chicago Motor Club, says it's not their fault.

"Everybody wants to take it out on their local gas station owner why these prices are so high," Mosher said. "But the reality is when the prices are this high the profit margins for these gas stations are so thin, they are going to make more from a bag of doritos that they are selling you than they are the gas."

Mosher says the final factor for high gasoline prices can be pinned on the tax man.

"First and foremost, we have to talk about the high taxes in Chicago," she said. "About 70 cents on the gallon is what people pay in Chicago for gas taxes, really, really a high number, especially given the statewide average is 49 cents on the gallon."

Our NW Indiana reporter bravely goes where no Hoosier (willingly) has gone before: a Chicago gas station.

Hosed at the Pump

An Illinois Policy Institute report "Hosed at the Pump" will put things in proper perspective.

That graphic is from August of 2012. Rest assured taxes are higher today.

And Illinois is one of only seven states that charge a sales tax at the gas pump!

Illinois is #8 according to the Tax Foundation, but in reality, Illinois is near the top of the list, especially Cook County.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Smoke and Mirrors Hide the Collapse in Corporate Profits

Posted: 03 Jun 2014 10:15 AM PDT

Did you notice the collapse in corporate profits?

John Hussman, Steen Jakobsen, and Albert Edwards at Society General did. Hussman tweeted the following chart this morning.

Steen Jakobsen, chief economist at Saxo bank passed on the above tweet this morning along with an attachment from Albert Edwards and this comment: "John – who I met at the Wine Country Conference – is not only great economist and fund manager, but also a remarkable Gentleman who lives to support Autism. This is his link Hussman Funds."

From Society General - No Link Available

Smoke and Mirrors Stop Us Seeing a Slump in US Profits

During the excitement of the downward revision of Q1 US GDP from +0.1% to -1.0% investors seem not to have noticed a $213bn, 10% annualised slump in the US Bureau of Economic Analysis's (BEA) favoured measure of whole economy profits, defined as profits from current production. Also known as economic profits, the BEA makes adjustments to remove inventory profits (IVA) and to put depreciation on an economic instead of a tax basis (CCAdj). We show below the stark difference between the BEA's calculation for post-tax headline profits (up 5.3% yoy) and economic profits (down 6.8% yoy). In this note we try to explain what is happening and why the 10% annual slump in economic profits really does matter.

Having spent the best part of 25 years following US whole economy profits I feel I have a good understanding on what exactly is going on. I was however most surprised at the divergence in the two key series shown on the front page chart. After a very long chat with a very helpful person from the BEA, she emailed me to "note this quarter, there is a substantial difference between profits from current production (that include IVA and CCAdj) and profits before tax (that exclude IVA and CCAdj) due to the expiration of investment incentives that allowed companies to accelerate depreciation over the past several years. As provisions of the tax acts from 2002, 2003, 2008, 2009, 2010, and 2012 expire, and as no new provisions are introduced, businesses are now expensing less depreciation for tax purposes. As a result, tax based depreciation expense, measured as CCA, is falling, while economic depreciation expense, measured as CFC, continues on a steady growth trend (see charts below). The difference between these two measures is the CCAdj. With economic depreciation expense higher than tax based depreciation expense, BEA's measure of corporate profits with CCAdj shows a decline, while profits excluding CCAdj show an increase."

So headline reported profits are currently artificially inflated upwards to show a roughly 5% yoy increase, which is incidentally the same pace that the MSCI trailing reported stockmarket profits are rising by – both are misleading investors as to the underlying strength of profits.

Net cashflow with IVA ($bn)

The BEA press release itself describes net cashflow with IVA as "the internal funds available to corporations for investment (calculated as after tax profits with IVA and CCAdj, net of dividend payments but plus depreciation on an economic basis (CFC))". We can see from the chart above that this decreased by $132bn in Q1 following a decrease of $43bn in Q4. This key measure of internal funds available for investment has stalled badly over the last two years (see chart above). No wonder US business investment has been struggling recently. The bottom line is that the US profits margin cycle has begun to turn down at long last (see chart below). It is doing so from elevated but not unprecedented levels – especially the nonfinancial part of the economy (my former colleague Leo Doyle always told me I had to add depreciation into the profits numerator as the denominator GDP was also measured gross of depreciation – i.e. the G in GDP!)

Thanks to Albert Edwards via Steen Jakobsen for the above charts.

There is more in the report, including a discussion of why a renminbi (yuan) devaluation will crush US and European corporate profits.

If I can get an online link I will post it.

Wine Country Conference Videos

Here is a link to the 2014 Wine Country Conference Videos. Steen Jakobsen's, Chris Martenson's, and my presentation will be out later this week.

Inquiring minds should also take a look at Hussman's post today, Market Peaks are a Process. John speaks of the Wine Country Conference Presentations and the cause.

Here is John's blurb on the cause.

Last month, the second annual Wine Country Conference was held in Sonoma California, this year to benefit the Autism Society of America. As many of you know, my 20-year old son JP has autism, so the cause is close to my heart. The conference website has both PowerPoint slides and videos of the presentations and Q&A sessions (and more will be added over the coming weeks). The title of my presentation was "Very Mean Reversion"

My hope is that if you appreciate the conference materials, you'll consider making a donation – in any amount at all – to the Autism Society of America. The proceeds of the conference will go to support programs and chapters at the local level throughout the United States (we've also put up a $50,000 matching grant to encourage donations). I appreciate your generosity.

Thanks – John

Please Consider Making a Donation

More presentations are yet to come! And if you enjoyed the presentations (or even if you didn't), please Make a Donation to the Autism Society.

On behalf of John and the Autism Society, thanks to all who make donations. Any amount helps.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Tuesday, June 3, 2014

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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