Generational Dynamics: Forecasting America's Destiny Generational
 Forecasting America's Destiny ... and the World's


Generational Dynamics Web Log for 4-Aug-2009
US tax revenues fall sharply, the most since 1932

Web Log - August, 2009

US tax revenues fall sharply, the most since 1932

This has significant national and global implications.

 Federal tax revenues collapse <font size=-2>(Source: AP)</font>
Federal tax revenues collapse (Source: AP)

According to a new analysis by the AP, individual tax revenues are down 22% from a year ago, and corporate income tax revenues are down 57%. Social security tax revenues are down slightly, where they had been expected to grow.

From the point of view of Generational Dynamics, this is only the beginning. Corporate earnings have been in a bubble since 1995, and by the Law of Mean Reversion, they'll be falling lower and remain so for many years to come. Thus, tax revenues are going to continue to fall, despite the giddy dreams of the people in Washington.

Last year, I wrote the article, "One, Two, Three ... Infinity," in which I compared the ever-increasing government spending plans to a book by George Gamow that I read in school in the 1950s. After a couple of years of bailouts and stimulus plans, it was clear even last year that the deficits were going to keep growing to infinity until they crashed of their own weight.

That certainly has turned out to be true. What was a disaster during the Bush administration is turning into a major catastrophe in the Obama administration. The President is on television every day, flacking some bailout or a cure for global warming or a gargantuan health plan.

I lost track of it all some time ago. At first I could keep track of the various bailouts and stimulus plans, but after a while there were so many of them that it became hopeless. According to the AP analysis, the federal deficit now balloons to a record $1.8 trillion, when the national debt already exceeds $11 trillion. And from the point of view of Generational Dynamics, these figures are only going to increase, until some crisis creates a default.

Stein's Law: If something cannot go on forever, then it won't.

Here's a chart that I posted a couple of years ago. It comes comes from the Calculated Risk blog from 2005:

Income vs Outlay as %-age of GDP for Federal Government, 1971-2005, not including Social Security <font face=Arial size=-2>(Source: Calculated Risk)</font>
Income vs Outlay as %-age of GDP for Federal Government, 1971-2005, not including Social Security (Source: Calculated Risk)

This graph shows that the huge deficit of the Bush administration, which was supposedly caused by the Iraq war, actually began in 2000, the last year of the Clinton administration, with the crash of the dot-com bubble. The outlays caused by the Iraq war were not particularly large by the standards of the preceding three decades. What mattered was the collapse of tax revenues.

As I've described many times, these financial crises are not caused by politicians, nor could they be prevented by politicians. These crises are generational. These crises would never have occurred if the generations of survivors of the Great Depression and World War II were still alive. Instead, the people alive today are the lethal combination of greedy, nihilistic Gen-Xers, combined with greedy, stupid Boomers, all lacking in ethical values and common sense.

I've been complaining for years about the sheer idiocy of what I hear on CNBC and Bloomberg TV, and read in the Wall Street Journal and the financial press.

But the current stock market rally has raised the level of stupidity to previously unheard of levels.

Let's take, as an example, what I heard on CNBC on Monday morning in an interview of James Paulsen, chief investment strategist at Wells Capital Management. He was grinning like an idiot, and bubbled over with the following stuff:

James Paulsen, chief investment strategist at Wells Capital Management <font face=Arial size=-2>(Source: CNBC)</font>
James Paulsen, chief investment strategist at Wells Capital Management (Source: CNBC)

"The biggest problem that I've seen is the legacy of doubt that's been left by the intensity of this crisis we've been through. You know, we've had at least three months of very good continuous information coming from Wall Street, from Main Street, from earnings, that say for the most part that things are at least getting better if not crisis ending, and yet there's just so much doubt that we're out of this. ...

When I look at it I see an average valuation on an absolute basis. We're around the 15 multiple area, which is kinda average, going all the way back to 1870."

Now let's just take a moment and go through the list of what's wrong with all of this.

First, there hasn't been "very good continuous information." Almost all the information, without exception, has continued to be very bad. The unemployment rate is continuing to surge. The number of lost jobs is still plunging precipitously, just slightly more slowly than in the past -- but it's still plunging. Earnings are still in the tank, just slightly less worse than they were -- but they're still getting worse. Almost everything is still way down.

Second, even if there WERE good news during the last three months, that wouldn't overcome the almost two years of dreadfully bad news that preceded it.

Third, of course there's plenty of doubt. As I've said repeatedly, this is a generational thing. The Boomers and Gen-Xers who were defrauded by structured investments from banks are not going to allow that to happen again in their lifetimes.

And fourth, what he says about valuations (price/earnings ratios) is a complete crock of sh-t. Current valuations, based on reported earnings, are not at 15; they're well over 100, according to the "official" S&P 500 P/E ratios, from the Standard & Poors spreadsheet.

(For discussions of valuations and price/earnings ratios, see "Wall Street Journal sharply revises its fantasy price/earnings computations," and "Laszlo Birinyi provides insight on his fantasy price/earnings computations," and "Wall Street Journal and Birinyi Associates are lying about P/E ratios.")

What Paulsen is talking about is not valuations based on reported earnings; it's valuations based on "operating earnings," which only became popular in the last ten years or so because people like Paulsen, who make money by collecting fees and commissions from stock sales, want to hide the stock market bubble. Operating earnings are specifically designed to excluded huge classes of losses, so that earnings will be bloated as high as possible, and P/E ratios will be as low as possible.

So the average for operating earnings valuations don't go back to 1870, so Paulsen has no idea what the average would be since 1870, since they didn't really exist until about a decade ago.

As usual, when I talk about this subject, I have to point out that Paulsen is a sophisticated investment strategist, probably earning a six or seven digit salary, who surely must already know what I've just written about operating earnings.

So the question is, as usual: Did Paulsen blow out that pile of crap because he's an out-and-out liar, using phony figures to defraud his client/investors, or is he so incompetent that he has no idea what he's talking about? I report, you decide.

And let's not forget that financial firms have provably been massively defrauding investors the last few years, and that the same people who perpetrated that fraud are still in charge.

I've been writing about this stuff for years, and as I've said many times, it makes me so sick to my stomach that I almost want to vomit. Of course now I know that I have nothing to worry about, since the new Washington health care package means that if I'm sick to my stomach, the government will take good care of me.

At any rate, the plunge in tax revenues is an extremely serious development that will alter the direction of the Obama administration. Not only is there no money to fund the extravagant campaign promises, but the economy continues its trend on a path off a cliff.

If you look at a page from Obama's 2008 campaign web site, you see the following: "Did you know that Barack Obama will deliver tax cuts for 95% of American households? Unless you make over $250,000 a year, you will not see a dime of increased taxes. You can calculate your tax cut at"

This was ridiculous at the time that it was promised, and today it can only bring on peals of hysterical laughter. (Incidentally, if you want to calculate your fantasy tax cut, you're too late: is gone.)

Even more important are the global implications. The Chinese and other countries are already concerned about a financial default of the US government, and the plunge in tax revenues brings that closer.

In fact, I still believe that the best way to understand what's going on in the world right now is to look at "The bubble that broke the world," with China today playing the role of the US then. If you haven't read this, or you haven't read it lately, it's well worth looking at.

As the deficits grow -- One, Two, Three, ..., Infinity -- the day of collapse comes closer and closer. At some point, I expect China and other countries to feel forced to bail out the US in order to save themselves, and just as America's bailout of Germany in 1932 didn't do any good, and led to war, China's bailout of the US will fail, and will lead to war.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (4-Aug-2009) Permanent Link
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