marți, 25 martie 2014

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


IRS Clarifies Bitcoin as Property Not a Currency; What are the Implications?

Posted: 25 Mar 2014 07:07 PM PDT

Today the IRS further legitimized bitcoin simply by issuing a ruling bitcoin is property not currency.

In some respects this was the best possible ruling for bitcoin. In other respects it subjects those who intend to use it for everyday transactions to potentially huge bookkeeping requirements.

Please consider I.R.S. Takes a Position on Bitcoin: It's Property.
The Internal Revenue Service may have just taken some of the fun out of Bitcoin. But that may mean that the virtual currency is growing up.

The I.R.S. announced on Tuesday that it would treat Bitcoin, the computer-driven online money system, as property rather than currency for tax purposes, a move that forces users who have grown accustomed to operating under the government's radar to deal with new tax issues and reporting requirements.

While that may seem like an expensive headache for some, some financial experts view the move as a way to push Bitcoin further away from the fringes and into the mainstream financial system.

"It's getting legitimacy, which it didn't have previously," said Ajay Vinze, the associate dean at at Arizona State University's business school. The ruling, he said, "puts Bitcoin on a track to becoming a true financial asset."

While many users already treat Bitcoin like a currency, the I.R.S. made it very clear that "it does not have legal tender status in any jurisdiction."

The industry had been expecting the government to come out with some sort of guidance on Bitcoin, so the announcement on Tuesday did not come as much of a surprise. But some users worry that treating it as an investment could discourage the use of Bitcoin as a payment method. If a user buys a product or service with Bitcoin, for example, the I.R.S. will expect the individual to calculate the change in value from the date the user acquired Bitcoin to the date it was spent. That would give the person a basis to calculate the gains — or losses — on what the I.R.S. is now calling property.

The I.R.S.'s decision would treat Bitcoin as property subject to capital gains taxes. Long-term capital gains taxes are capped at 20 percent, a more favorable rate than the top rate of 39.6 percent on federal income taxes. Individual traders in the currency markets — the British pound, for example — are expected to treat gains or losses as regular income for tax purposes.

"From a tax perspective, this is really the best possible outcome," said Barry Silbert, the chief executive of SecondMarket, which is planning to introduce a new Bitcoin exchange.

The new guidelines also mean that online exchanges that buy and sell Bitcoin will now have to provide customers with annual reports of their transactions, just as stock brokerages and other investment firms do.

But some efforts may already be underway to ensure that the new reporting requirements will not discourage users from trading with Bitcoin.

"I can assure you that there are a number of companies that have come up with software to automate this entire process," Mr. Silbert said.

Bitcoin has attracted many of its users precisely because it operated outside the established financial system and offered the promise of cheaper transactions. But many Bitcoin advocates and experts have said that regulation is necessary to make Bitcoin a viable currency.

"The people that feel ideologically that Bitcoin should be free of all regulation aren't going to be happy," said Gil Luria, a managing director at Wedbush Securities who has written about virtual currency. "If you're trying to replace an existing financial system, then you need to have all the features that are required of that financial system."

The few employers who pay in Bitcoin will have to report those wages just like any other payment made with property, and Bitcoin income will be subject to the normal federal income withholding and payroll taxes, the I.R.S. said.
What are the Implications?

As I have said, Bitcoin is here to stay. Moreover, because of the IRS ruling, bitcoin has tax advantages over currencies.

However, for day-to-day transactions, accounting is potentially a problem. One needs to track gains and losses from both a long-term and short-term perspective on every purchase!

Regardless of the property distinction, I am still willing to bet that I took the correct side in Missing the Boat on Bitcoin Ownership; Theoretical Question Regarding Bitcoin Theft

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

Rise of the Eurosceptics: Socialists Hammered in French Elections; Le Pen Surprises, Calls for "Alliance of Eurosceptics"

Posted: 25 Mar 2014 10:49 AM PDT

Round one in French elections is over, and the socialists were hammered.

The victor was Marine Le Pen's Front National party. The Socialists only received 43% of the votes, with the center-right pulling in 46-48%. Front National only got 5-7% (reports vary), but that was far better than expected. Front National fielded candidates in fewer than 600 of France's 36,000 municipalities.

The goal of the socialists was to prevent Front National from winning a mayoral race in any town. They failed.

Recall that French elections are in two rounds. If someone gets 50% in the first round, they win. Otherwise there is a runoff between the top two candidates.

Le Pen Surprises in French Elections

The Guardian reports Le Pen Grows Stronger Amid Disillusion as FN Surprises in French Elections
Was this the moment the Front National became more than just a protest party?

While France's local elections on Sunday were notable for record voter abstention and a bloody nose for the governing Socialists, it was the far-right party's showing in a crucial European election year that really stood out.

The anti-Europe FN, led by Marine le Pen, fielded candidates in fewer than 600 of France's 36,000 municipalities – and still secured about 5% of the total votes cast at the weekend. As a result, expectations are mounting that it will do extremely well in May's European elections.

The FN secured one mayor elected outright in the northern town of Hénin-Beaumont, a former coalmining area traditionally in Socialist hands, and enough votes to take part in the second-round runoff in nearly 230 municipalities. The FN goes into next Sunday's vote ahead in a number of major and symbolic towns and cities including Avignon, Perpignan and Béziers.

France's biggest selling newspaper, Ouest-France, said the FN was now the "third political force" in the country.
Swing to the Right

EuroNews reports France's Front National Far Right Punches High in Local Polls
In France's latest municipal elections, almost four out of ten voters abstained. The centre-right UMP did best in Sunday's round one, scooping more than 46 percent of the country's votes, the governing Socialist party almost 38 percent. Notably, however, the far right Front National (FN) packed quite a punch.

Ifop polling expert Frédéric Badi said: "The left lost badly except in a few strongholds. The Front National only ran in 600 cities; this means only one French voter in three had the chance to vote FN. The five percent score it got across the country is an illusion compared to its real potential."

In the ex-industrial north, the small city of Hénin Beaumont has been in Socialist hands since 1945, and FN leader Marine Le Pen has been vote-hunting here for several years; finally, the FN candidate gets to be mayor. That's just the thin end of the wedge in her strategy.

Le Pen said: "The Front National success signifies a national force and also, from now on, a great local force. It's a vote calling for us to grow roots in all the territories of the Republic, to prepare for tomorrow's alternative."

France's big centre-left and centre-right parties realise tomorrow's alternative could hurt them worse: the daughter of FN founder former paratrooper Jean-Marie aims to gain ground gradually in preparation for the legislative elections to be held in 2017. The prime minister, Jean-Marc Ayrault, appealed to stop the FN in its tracks.

Ayrault said: "Where the Front National is ready to prevail in the second round, the left and the right are responsible for creating the conditions to prevent it."
Le Pen Calls for "Alliance of Eurosceptics"

Via translation from Corriere.It, please consider Le Pen Calls for "Alliance of Eurosceptics"
Regarding European elections in May, which according to some surveys, the National Front is credited in  first or second place, Le Pen has called on all euro-skeptics in Europe, including the Five Star Movement and the Northern League, to do so to "be as many in the pews of the European Parliament."

All anti-euro parties "must unite for the defense of nations, the return of democracy, the sovereignty of peoples and national identities," added Le Pen, who on Sunday earned a historic achievement in the first round of the municipal elections of France.

Beppe Grillo responded in a blog "Marine Le Pen is a beautiful lady of great success. No one hates her. However, M5S has a different political agenda so deals are not possible.
Le Pen a Bigger Threat than Grillo

Commenting on the above story, Eurointelligence offered this opinion "Those who dismissed Grillo as a comedian have clearly underestimated him. The bit of his past he has not shaken off is that he is still performing a one-man show, unwilling to form coalitions of any kind, in Italy and at EU level. This is why Le Pen is a far more potent threat than Grillo."

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

Ukraine's Hryvnia Down 10 of Last 11 Days, Nearly Back to All-Time Low vs. US Dollar; Default Back in Play?

Posted: 25 Mar 2014 09:23 AM PDT

Following the imposition of capital controls towards the end of February, Ukraine's currency, the Hryvnia recovered a bit over a period of six days. Since then it has been nearly all downhill, losing to the US dollar in 10 out of the last 11 days.



click on chart for sharper image

Given that about half of Ukraine's debt is in foreign currencies, the latest plunge spells renewed trouble.

The Economist notes
The Ukrainian shadow economy is one of the biggest in the world—at around 50% of GDP, according to IMF research. Businesses operating underground tend not to pay taxes, further depriving the government of funds. And last week Ukraine's new prime minister estimated that $37 billion had gone missing during Viktor Yanukovych's rule.

Right now Ukraine is not too worried about improving economic management. But big bills are imminent: Ukraine needs to find about $25 billion this year to finance its large current-account deficit and to meet foreign creditors. Foreign-exchange reserves are only $12 billion. Default is certainly on the cards.
Default back in play? Probably not, but a wrecked country is a near certainty.

The Troika is highly likely to put together some economically crippling "aid" program to stave off default just as it did to Greece and Cyprus.

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

Jeremy Grantham 1999, Jeremy Grantham Today: "Over Next Seven Years, Market Will have Negative Returns"

Posted: 24 Mar 2014 11:49 PM PDT

It is extremely difficult to sit out a party. Do so and you lose both clients and assets. Invest in unloved and undervalued assets and you do even worse.

But what is the alternative? Get drunk like everyone else?

I have to admit (time and time again actually), that this market has gone further, faster, than I thought possible. Bubbles of the current magnitude have never been blown back-to-back in such a short timeframe.

I am not the only one who see things that way. John Hussman has been preaching essentially the same message, and so has Jeremy Grantham.

"Over Next Seven Years, Market Will have Negative Returns"

I strongly encourage you to read an interview of Jeremy Grantham, by Stephen Gandel, senior editor of Fortune: The Fed is Killing the Recovery.

The entire article is well worth a read. But here is one snip that caught my eye.
Fortune: Are you putting your client's money into the market?

Grantham: No. You asked me where the market is headed from here. But to invest our clients' money on the basis of speculation being driven by the Fed's misguided policies doesn't seem like the best thing to do with our clients' money. We invest our clients' money based on our seven-year prediction. And over the next seven years, we think the market will have negative returns. The next bust will be unlike any other, because the Fed and other centrals banks around the world have taken on all this leverage that was out there and put it on their balance sheets. We have never had this before. Assets are overpriced generally. They will be cheap again. That's how we will pay for this. It's going to be very painful for investors.
It's well worth reading the entire interview. But I am biased. It supports my own view about market valuations and the Fed.

Jeremy Grantham 1999

Grantham is one of few who saw things correctly in 1998 and 1999. While others were partying like no tomorrow, Grantham sat things out. In the process, he lost 60% of his asset base simply for not acting like a drunken fool, like nearly everyone else.

Please consider this Forbes Interview of Jeremy Grantham, by Steve Forbes, from 2009. The section of most interest to me pertains to 1999
Steve Forbes: Well thank you, Jeremy, for joining us today. First, since you have bragging rights in this situation, what made you a bear, [a] great skeptic? Between 1999 until about a couple of months ago, you were saying, "Stay out."

Jeremy Grantham: Well, really very simple. Not rocket science. We take a long-term view, which makes life, in our opinion, much easier.

Steve Forbes: Well everyone says it, but you certainly practiced it.

Jeremy Grantham: We actually do it. Well, we tried the short-term stuff and it was so hard; we thought we'd better do the long-term. We just assume that at the end, in those days, of 10 years, profit margins will be normal and price-earnings ratios will be normal. And that will create a normal, fair price. And more recently, we've moved to seven years, because we've found in our research that financial series tend to mean revert a little bit faster than 10 years–actually about six-and-a-half years. So we rounded to seven

And that's how we do it. And it just happened from October '98 to October of '08, the 10-year forecast was right. Because for one second in its flight path, the U.S. market and other markets flashed through normal price. Normal price is about 950 on the S&P; it's a little bit below that today.

And on my birthday, October the 6th, the U.S. market, 10 years and four trading days later, hit exactly our 10-year forecast of October '98, which is worth talking about if only to enjoy spectacular luck. The P/E was a little bit lower than average and the profit margins were a little bit higher, so they beautifully offset. And given our methodology, that would mean that on October the 6th, the market should have been fairly priced on our current approach. And indeed it was–that was even more remarkable–950, plus or minus a couple of percent.

Steve Forbes: And what did you see during that 10-year period that made you feel–other than your own models–that this was something highly abnormal, that this couldn't last?

Jeremy Grantham: Well, first of all, the magnitude of the overrun in 2000 was legendary. As historians, you know we've massaged the past until it begs for mercy. And we saw that it was 21 times earnings in 1929, 21 times earnings in 1965 and 35 times current earnings in 2000. And 35 is bigger than 21 by enough that you'd expect everyone would see it. Indeed, it looks like a Himalayan peak coming out of the plain.

And it begs the question, "Why didn't everybody see it?" And I think the answer to that is, "Everybody did see it." But agency risk or career risk is so profound, that even if you think the market is gloriously overpriced, you still have to get up and dance. Because if you sit down too quickly–

Steve Forbes: Famous words of Mr. Prince.

Jeremy Grantham: If you sit down too quickly, you're likely to get yourself fired for being too conservative. And that's precisely what we did in '98 and '99. We didn't dance long enough and got out of the growth stocks completely, and underperformed. We produced pretty good numbers, but they're way behind the benchmark. And we were fired in droves.

I think our asset allocation, which is the division I'm now involved in, we lost 60% of our asset base in two-and-a-half years for making the right bets for the right reasons and winning them. But we still lost more money than any other person in that field that we came across, which is a fitting reminder that career risk runs the business.
Grantham did not lose client's money. Rather, he lost accounts and assets. Clients who stayed with him did quite nicely.

Unfortunately, it's a sad state of affairs that investors (speculators really), time and time again chase rising markets and managers with a current hot-hand rather than invest prudently. Then again, that's precisely what it takes to make a bubble.

This bubble is in a rare class with 1929, 2000, and 2007. But I do not know when the party ends, nor does Grantham, nor anyone else.

Actually, it matters not, at least in the long run.

Stocks in general are poised for negative returns for seven years once again.  If the party lasts a lot longer, seven might turn into eight or ten, but that will not change the ultimate outcome.

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

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