Fisher Investments Editorial Staff
Geopolitics, Capitalism, Taxes, Developed Markets, Media Hype/Myths, US Economy

Midweek Mash-up

By, 11/09/2011

Euro politics dominated headlines again Tuesday, but eurozone musical chairs wasn’t the only story. Here’s a look at what news caught our eye.

So Long, Silvio

Following similar events in Greece, Italian Prime Minister Silvio Berlusconi’s time appears up. Having survived over 50 confidence votes since 2008, Berlusconi announced he would resign after mustering only 308 votes out of the 630-member lower house of Parliament in a routine budget vote Tuesday. Since 321 lawmakers abstained, the bill passed without a full majority, making it difficult for Berlusconi to claim Parliament’s confidence. Hence his promise to resign after this year’s budget, to which key austerity measures are attached, passes both houses of Parliament.

President Giorgio Napolitano likely chooses the course determining Italy’s leadership from there—either through a national unity government or open elections. Whatever the outcome, don’t expect a new PM to act remarkably different from Berlusconi—personal activities aside. As we’ve said before, the eurozone periphery’s options are limited when it comes to the larger debt reduction issues, and politicians seem to accept the need for continued austerity, although politicking continues as usual. 

Trouncing the Tobin Tax

The EU’s proposed financial transaction tax (aka the Tobin Tax) ran into ye olde British objection Tuesday, when UK Chancellor George Osborne formally denounced it. Since the tax requires unanimous approval, and Denmark, Sweden, the Czech Republic and Romania are also opposed, it’s likely DOA. (Member states vote in early 2012.)

In our view, that’s an incremental (though small) positive. The Tobin Tax is largely a solution in search of a problem. Supporters argue it’s necessary for banks to pay their fair share after being bailed out (a notion we’d quibble with), but as the Chancellor points out, consumers likely ultimately foot the bill via increased fees. Additionally, EU officials assume the Tobin Tax would generate significant revenue, but we’d argue the most likely outcome would be capital markets activity moving to tax-friendlier countries, which could hurt European economic growth. Britain, home to 80% of Europe’s financial services, would likely feel this the most.

Germany and France still want the tax, and it could take effect in the eurozone only. That could indeed have some knock-on effects on growth there, but, since the tax is fairly small, odds are it would be only an incremental negative.

From the “Watch What They Do” Dept.

Small businesses are a critical component of the US economy. They employ the majority of American workers, innovate, pay taxes and provide products and services critical to daily life. So it makes sense economists and business groups attempt to put their finger on the pulse of American small business. One such effort, the National Federation of Independent Business (NFIB) Small Business Optimism Index, polls business owners as to their future plans for hiring, expansion, capital spending and general economic conditions.

In October 2011, NFIB found small business owners are, on average, rather glum. The index showed a minor improvement, gaining 1.3 points to 90.2—but that’s below the year-to-date average 91.1, and both are well below the index’s long-term average. Sentiment regarding planned hiring was particularly dour—only 3% of net respondents indicate they expect to increase employment. In fact, the survey’s employment component has been mired in a range between -3% and +6% since positive private hiring data began in February 2010.

But over the same period, small and medium businesses led US job creation. ADP’s private hiring report indicates small and medium businesses have added 1,126,000 and 1,034,000 jobs, respectively—far eclipsing large employers’ hiring. So like consumer sentiment surveys, it seems watching what small business owners do in aggregate is more important than surveying what they say.

Seizing the Capitalist Day

Dr. Perry had a couple interesting posts that caught our eyes Wednesday:

US Corn Yields Have Increased Six Times Since the 1930s and Are Estimated to Double By 2030

IRS Data from 1992-2008 on the Top 400 Show Significant Turnover: 73% Remain for Only One Year

The first discusses the fact that corn yields, while largely flat between 1866 and 1939, have increased six times since then and are projected to double by 2030. Not only that, but yield per acre has increased dramatically, meaning farmers are producing more on roughly 20% less land. Which seemingly flies in the face of arguments the population’s growing too quickly for the world to continue supporting it. For more, see an interesting post on our managing editor’s Forbes blog and another take from the insightful guys at Truth on the Market.

The second discusses some IRS data which highlight the fairly fluid nature of the composition of the group filing the biggest annual tax returns. Recently, the media’s focused on the gap between the highest and lowest earners and whether there’s a material economic or market impact from said gap. While it’s true over time, the gap between both groups has gotten wider in fits and starts (which is understandable, given the upper end is near-infinite), turns out there’s a pretty active game of musical chairs at the top. Meaning income mobility is normal—both up and down.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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