ERICOPOLY

My reference point is the present. Watsa says we have excess capacity. Yet you guys think if there were more "float" in the system it would boost investment. You would seriously go out and hire more workers if only taxes were lower? That's where your argument breaks down.

Perhaps we need person C and person D. Person C: capitalist Person D: debtor consumer You (might) agree: Person C will invest when Person D can afford to buy more things. You recommend: Cutting taxes for Person C so he will invest However, I say: Person C won't invest until Person D can afford to buy more things I fear: Lower tax rates on capital gains will do nothing but make person C accumulate cash faster. We would likely cut person D's services in order to afford the tax cuts. Thus you make C better while D is getting even worse off. Instead I think we should try to heal person D.

I think he expects other capitalists to behave as he would. He says that if final demand is there, he will invest in expanding production. Otherwise, he'll sit on his cash until it returns. Lower capital gains tax policy changes nothing in this time line, except his cash piles up faster. So I don't think he's wrong. He just thinks that if you have more cash and demand still isn't there, then you'll still be sitting on your cash (you'll just have a softer cushion). You're not going to go out and waste your extra cash to produce goods that nobody wants. Or would you? Maybe you disagree with him after all.

Guys, I like to keep more of my profits too but in this argument I'm playing the devils advocate. I'm trying to see where the logic flows. Isn't the lack of final demand the issue that is holding up investment and job creation? I believe it has absolutely nothing to do with the capital gains tax rate. Meaning... there is not enough demand to justify an increase in output. If you produce more, and it just sits there, it's a loss. So lowering the tax rate makes the loss more enticing? I'm scratching my head. Having a lower capital gains tax doesn't increase final demand, or does it? And if we already have excess capacity, then wtf with the lower tax argument?

You may only deduct up to 50% of adjusted gross income for charitable deductions. Unused deduction is carried forward to the next year.

Person A has a debt on his boat and another on his sportscar. He has no liquid assets to invest. Person B is a billionaire and has no debts. How does eliminating capital gains tax help person A pay down his debts? I can see how it helps person B, but person A? Person A already has a large incentive to pay down his debts -- the interest rate on his loans is much higher than interest rates available elsewhere. Why does changing the capital gains rate have much to do with anything related to deleveraging?

I was in Sydney for all of October 2008. It was great because when I woke up in the morning I would get the final market score -- be it up 10% or down 10% for the day. I didn't have to watch it go nuts all day long.

Did you notice that he cut back on his bullishness for the US economy? He tells my blonde that they will only be spending $7 billion this year. However in his shareholder's letter he claimed it would be $8 billion. He also said to my blonde that if we let a million wealthy people into the country it would solve the housing overhang. So he must be thinking the housing overhang is no more than 1 million units.

I suppose the government could partner with my local utility to send a guy out to figure why my energy bill is much higher than that of my neighbor's. Then the government could subsidize the cost of getting a solution in place (new windows or insulation. new refrigerator. new furnace). Perhaps the government could enter a public/private partnership with lenders to finance these projects for the homeowner. This is necessary because the homeowner doesn't have enough cash to do the project without help, and banks won't lend to homeowners who are in a financial pinch. Something akin to Fannie Mae that buys loans underwritten to certain guidelines. The government borrows at such a low rate that it should be something that pays for itself, maybe even netting a profit. The homeowner can service the new debt out of the cash flows of the project (lower utility bill). And the subsidy only goes to homeowners that have the worst energy efficiency (per the records of the utility company). It would stimulate sales of items hit hard from the housing construction downturn, and employ laborers idled by the same. It also dovetails with the nation's goal of energy independence. Perhaps it also generates fee income for banks that underwrite the loans -- instead of higher account fees, maybe this kind of a program.

There are quite a bit of differences with Japan so I agree with you point. This leads to one more way for margins to come down. Employment compensation to go up even in a weak economic environment. Outsourcing has enabled companies to cut down on compensation via moving some of the work offshore to lower labor cost locations. As wages increase in those lower cost locations (directly impacting margins) or backlash aganst oursourcing limits or even reverses the outsourcing trend it could cut down on the profit margins. Vinod Higher labor costs offshore resulting in more domestic sourcing here (less unemployment and more wage pressure) -- again, great for banks. I can't help but conclude that bank shareholders will be partying when these margins come down.

I have doubts about Parsad's point about higher interest rates changing margins. Look at Japan, even with super low interest rates their margins are at very low levels. Higher interest rates would allow many companies to earn higher margins via greater returns on their cash and investments. Although companies on a net basis have debt so overall costs should increase with higher rates, but not sure if that is really the critical element supporting margins. Vinod I asked Prem about Japan's cultural tendency to not fire the personnel when business turns down. He agreed that it was one of the differences between US and Japan. So while yes they have low interest rates, they also don't throw the worker under the bus to save margins. Their unemployment peaked at 5.5%. EDIT: However it very well may be something in addition to interest rates that is helping margins. Anyhow, I'm heavily long financials so I just smile when people say that competition will move in to take out the margins. That just sounds like people getting hired left and right (fewer credit losses at the banks), people getting raises, new homes being built to house all these employed workers, and lots of credit growth at the banks to fund all of this activity.

You are right they should be feeling poor right now, but many homeowners still have expectations (or hope) that their home values would recover. It might take a few more years of low prices along with sustained high unemployment to change behavior. Vinod I'm not saying there is no way you are right. I just think its going to play out differently -- we're in a period of high unemployment currently that will abate in the years ahead. This will raise animal spirits. I liked Parsad's explanation -- higher interest rates will change the margins. However an exception would be a company that doesn't lever through borrowed money. And if the margins are high during this crappy economy I wouldn't think a return to normal will hurt the margins. There is either a moat everywhere that's been protecting these margins for years, or it's some easy explanation such as interest rates that's floating the market's profit margin boat.

I do not think that is the only way for margins to collapse. I can think of two examples 1. Take PG. Many of its brand products sell at a premium price to more generic ones. If consumers are feeling poor, they can switch to non premium brands and margins would collapse at PG. This can occur at any company - actually more likely at other companies that do not have moats like PG. 2. Take Apple. Profit margins of iPhone, iPad etc are going to come down as rivals just catch up just enough in quality to erode margins. At some point say iPhone 12, the androids and windows phones of the world are going to be pretty close to iPhone to reduce the premium Apple was able to charge. No huge spending boom needed for either case. Vinod We're not in boom times right now. What's going to force the switch to generics? You say "if consumers are feeling poor". Well, aren't they? Are they delevering because they feel rich or something? Regarding tech: well, I have to say you're right. And the tight labor market for tech workers is to show for it. When this hits the rest of the labor market, then that's what I'm talking about.

The trouble is that the taxpayer has to pay for the health care. So it's shortsighted to teach these eating habits to children. Look, if Republicans want to cut healthcare entitlement spending then they should bring a healthier menu to school cafeterias. It's just like investing in infrastructure -- arteries can be jammed just like aging highway systems. It probably couldn't hurt to formally teach nutrition in schools -- after all, we have PE class.

a permanent resident of Australia may become a dual citizen by becoming an Australian citizen. Prior to 4 April 2002, Australian citizens who became citizens of another country lost their Australian citizenship automatically. http://www.citizenship.gov.au/current/dual_citizenship/ Just curious. Does the US allow dual citizenship? Yes. My mother gave up her Australian citizenship when she became a US citizen. Then after 2002 she got her Australian citizenship back (while still keeping her US citizenship). Now she is a citizen of both.

not only must the private sector pay down debt, but they also must PAY THE GOVERNMENT b/c the government is pulling assets out of the private sector's hands. It's a double whammy - saving to pay down debt AND paying the government. That's my only reasoning for finally supporting the "tax the rich" angle. They're not going to be spending the money anyway, so there is no "double whammy". For starters, eliminate the tax deduction on IRA and 401k contributions for a few years (and tax the corporation's contribution as well). Explain how that would reduce present consumption or reduce debt repayment? This is by definition money that is being saved in excess of debt repayment and consumption -- just eliminate the government subsidy. They will still be motivated to contribute on an after-tax basis because there is still tax-deferred compounding benefits of such plans. It's fair anyhow. Why is the government subsidizing the retirement of the rich while they are reducing the social security for the poor? I also find it peculiar that the government is effectively subsidizing savings at a cost to the Treasury while at the same time trying to boost spending to keep the economy going. Republicans always want to reduce entitlement spending. Isn't this savings subsidy an entitlement for the rich?

a permanent resident of Australia may become a dual citizen by becoming an Australian citizen. Prior to 4 April 2002, Australian citizens who became citizens of another country lost their Australian citizenship automatically. http://www.citizenship.gov.au/current/dual_citizenship/

Those of you who are worried about the profit margins collapsing. Your reasoning is something along the lines where capitalism will fail in theory if these margins hold up -- thus competition will move in for sure. Well, lets say a company makes a widget where he's got these huge margins. And given that the entire market taken as a whole trades at these fat margins, you are worried about competition springing up anywhere and everywhere, essentially. Just remember. In order for a competitor to spring up, then people need to be hired to create this duplicate competing product, and factories need to be built. Offices need to be occupied. But you are worried about the margin for the entire market coming down, so this is going to be the mother of all economic expansions. In other words, it's all good news for the US banks. Oh, and the US banks don't have record margins right now. Hmm... we're all terrified of this roaring future economy where new companies are formed left and right to create competing products? Or do I have it wrong. What are your thoughts on how the margins will be squeezed if not from new company formation and job creation? Is it possible that the low employment and high margins are correlated? I mean, it seems like a logical link that if traditionally there were more competition then traditionally there were more employed in order to create that competition. So what's bad for everything else (margins), is going to be good for the banks (employment). Or if that doesn't make any sense then explain.

I'm waiting for that too -- look at the ASX. It's all banking and mining. So when commodities get routed and real estate is in the dumper, their share market (and dollar) is going to be a lot lower. That's when I will shift a lot of money to AUD assets.

I think there is a long line of pretty blonde women to replace her when that tragic event happens. Relief. I just need to make sure my cash pile grows to the 12 inch equivalent (whatever that means in terms of future buying power).

The population grew by 2% in 2009 (I'm too lazy to check the data for other years). The place is also enormous (bigger than the 48 connected USA states), and the population I think is still smaller than California. They can just let more people into the country if they want GDP to grow. The whole aging boomers problem can be solved in this manner for them. And they have national debt that seems manageable (well, they have $209 billion). I met some people there this year from Yorkshire at the Flying Fox Cafe (a kids playground) in Mona Vale (along the beach near Sydney). They had just moved but he said it's getting increasingly difficult given the long line of "economic refugees" trying to flee from Europe to Australia.

Actually that's exactly what I was driving at. Tax rates alone don't determine prosperity -- it's these things like "final demand" that determine whether anyone is in the mood to create factories and create jobs. Thus the argument that lower taxes (the Republican argument) will stimulate demand is kinda strange given that they're talking about lower taxes for the people who have so much money they don't spend all their income.

Eric as long as pretty girls find men with money more interesting than men without I think the wealth creators will pile up the dough as quick as they can regardless of the marginal tax rate. I just want to be interviewed by Poppy Harlow before she loses her figure.

I suppose if we went through a period of building more houses than immediately needed made us feel good for a while, then fixing more bridges than immediately needed would feel similar. And the types of people who are sitting on their butts after building too many houses are now the very people who could do work on bridges (or other government building renovations, like perhaps adding insulation or something where it could pay off in energy savings). Then perhaps when homebuilding finally comes back there will be a labor shortage in construction as these govt projects would perhaps overlap homebuilding until completed. Although instead of increasing the deficit to do this I feel they should raise taxes on the rich (who aren't investing the money anyhow). This argument that higher taxes are going to keep them from investing doesn't make sense -- their taxes are low now and yet they are not investing. Ireland has like an 11% or 12% corporate tax and they are not booming. Low taxes don't make people open factories and create jobs.

Does Japan have jingle mail? Or is it full recourse everywhere? I was thinking... they never had much unemployment. Thus their indebted consumers had to repay their debts. We have high unemployment which forces personal bankruptcy and we have mortgage rules that allow lots of people to mail the keys in to the bank. Does our system cleanse consumers of our debts faster? I mean, it's dirty and ugly to have all this unemployment and stuff but in a way is this "taking our medicine"? Lets say our corporations didn't fire anyone and let's say that all mortgage loans were full recourse from the beginning. There would be no bankruptcy and no jingle mail. We'd be stuck waiting for people to actually pay down their loans. Instead, we have been dedicating would-be bank profits to charge offs for a few years now (in addition to some people paying down loans). So if most of our GDP comes from consumer demand (as Prem says), and if the consumer is 2/3 complete with consumer debt reduction (as Jamie Dimon says), then isn't it time to take a sigh of relief? It's taken 3-4 years to become 2/3 complete with consumer debt reduction -- does this imply 1.5 to 2 more years to call it done? Then can the consumer demand come back and government deficit reduction take hold? Are we almost there? Or is Jamie Dimon on crack.