Authored by Lance Roberts via RealInvestmentAdvice.com,

While often difficult, investing rules can help us maintain our focus and investment discipline in volatile or uncertain markets. This year, such has certainly been the case with surging interest rates, expectations of a recession, and geopolitical conflicts in two countries. In times like this, it is easy for us to imagine the worst of possible outcomes. However, in last week’s newsletter, we discussed the “probabilities” and “possibilities” of macro outcomes. To wit:

“On Wednesday’s Real Investment Show, I spent a good bit of time discussing the normal distribution of events in the economy. The chart below is a normally distributed “bell curve” of potential events and outcomes. In simple terms, 68.26% of the time, normal outcomes occur. Economically speaking, such would be a normal recession or the avoidance of a recession. 95.44% of the time, we are most likely dealing with a range of outcomes between a fairly deep recession and normal economic growth rates. However, there is a 2.14% chance that we could see another economic crisis like the 2008 Financial Crisis.

But what about “economic armageddon?” An event where nothing matters but “gold, beanie weenies, and bunker.” is just a 0.14% possibility.”

While “fear sells,” we must assess the “probabilities” versus “possibilities” of various outcomes.

Poker is always an easy way to understand this concept.

If you were playing a hand of poker and were dealt a “pair of deuces,” would you go “all-in?”

Of course not.

The reason is you intuitively understand the other factors “at play.” Even a cursory understanding of the game of poker suggests other players at the table are probably holding better hands, which will rapidly reduce your wealth.

Investing in the financial markets is one of the purest forms of speculation. Every day, investors make bets on the future and must weigh the possibilities and probabilities of winning or losing. The size of the “bet” should ultimately be determined by the “potential loss” of being wrong.

Ultimately, investing is about managing those risks that will substantially reduce your ability to “stay in the game long enough” to “win.”

So, how do you navigate volatile markets and stay within the “probabilities” of outcomes when emotions run high? Here are ten basic investing rules that have historically kept investors out of trouble over the long term. These are not unique by any means but rather a list of investment rules that, in some shape or form, have been uttered by every great investor in history.

Investing Rule #1) You Are A “Saver” – Not An Investor

Unlike Warren Buffet, who takes control of a company and can affect its financial direction – you are speculating that a purchase of a share of stock today can be sold at a higher price in the future. Furthermore, you are doing this with your hard-earned savings. If you ask most people if they would bet their retirement savings on a hand of poker in Vegas, they would tell you “no.” When asked why, they will say they don’t have the skill to be successful at winning at poker. However, daily, these same individuals will buy shares of a company in which they have no knowledge of operations, revenue, profitability, or future viability simply because someone on television told them to do so.

Keeping the right frame of mind about the “risk” that is undertaken in a portfolio can help stem the tide of loss when things inevitably go wrong. Like any professional gambler – the secret to long-term success was best sung by Kenny Rogers; “You gotta know when to hold’em…know when to fold’em.”

Investing Rule #2) Don’t Forget The Income

An investment is an asset or item that will generate appreciation OR income in the future. Little diversification is left between asset classes in today’s highly correlated world. Markets rise and fall in unison as high-frequency trading and monetary flows push related asset classes in a singular direction. This is why including other asset classes, like fixed income, which provides a return of capital function with an income stream, can reduce portfolio volatility. Lower volatility portfolios will consistently outperform over the long term by reducing the emotional mistakes caused by large portfolio swings.

Investing Rule #3) You Can’t “Buy Low” If You Don’t “Sell High”

Most investors do fairly well at “buying” but stink at “selling.” The reason is purely emotional, driven primarily by “greed” and “fear.” Like pruning and weeding a garden, a solid discipline of regularly taking profits, selling laggards, and rebalancing the allocation leads to a healthier portfolio over time.

Most importantly, while you may “beat the market” with “paper profits” in the short term, it is only the realization of those gains that generate “spendable wealth.”

Investing Rule #4) Patience And Discipline Are What Wins

Most individuals will tell you they are “long-term investors.” However, as Dalbar studies have repeatedly shown, investors are driven more by emotions than not. The problem is that while individuals have the best of intentions of investing long-term, they ultimately allow “greed” to force them to chase last year’s hot performers. However, this has generally resulted in severe underperformance in the subsequent year as individuals sell at a loss and then repeat the process.

This is why truly great investors stick to their discipline in good times and bad. Over the long term – sticking to what you know and understand will perform better than continually jumping from the “frying pan into the fire.”

Investing Rule #5) Don’t Forget Rule No. 1

As any good poker player knows, you are out of the game once you run out of chips. This is why knowing both “when” and “how much” to bet is critical to winning the game. The problem for most investors is that they are consistently betting “all in, all of the time.”

Over time, the “fear” of missing out in a rising market leads to excessive risk buildup in portfolios. It also leads to a violation of the simple rule of “sell high.”

The reality is that opportunities to invest in the market come along as often as taxi cabs in New York City. However, trying to make up lost capital by not paying attention to the risk is a much more difficult thing to do, which brings us to Rule #6.

Investing Rule #6) Your Most Irreplaceable Commodity Is “Time.”

Since the turn of the century, investors have theoretically recovered from two massive bear market corrections. After 15 years, investors finally returned to where they were in 2000. Such is a hollow victory when considering that 15 years to prepare for retirement are gone. Permanently.

For investors, getting back to even is not an investment strategy. We are all “savers” with a limited amount of time to save money for our retirement. Those retirement plans were vaporized if we were 15 years from retirement in 2000. Could such an environment happen again? Absolutely. It is ultimately a function of valuations. Will it happen? No one knows.

Do not discount the value of “time” in your investment strategy.

Investing Rule #7) Don’t Mistake A “Cyclical Trend” As An “Infinite Direction.”

An old Wall Street axiom says the “trend is your friend.”  Unfortunately, investors repeatedly extrapolate the current trend into infinity. In 2007, the markets were expected to continue to grow as investors piled into the market top. In late 2008, individuals were convinced that the market was going to zero. Extremes are never the case. The same occurred at the bottom of the market in March 2020.

It is important to remember that the “trend is your friend.” That is, as long as you pay attention to it and respect its direction. Get on the wrong side of the trend; it can become your worst enemy.

Investing Rule #8) Success Breeds Over-Confidence

Individuals attend college to become doctors, lawyers, and even circus clowns. Yet, every day, individuals pile into one of the most complicated games on the planet with their hard-earned savings and little or no education.

When the markets are rising, most individuals’ success breeds confidence. The longer the market rises, the more individuals attribute their success to their own skills. The reality is that a rising market covers the multitude of investment mistakes individuals make by taking on excessive risk, poor asset selection, or weak management skills.  These errors are always revealed by the forthcoming correction.

Investing Rule #9) Being A Contrarian Is Tough, Lonely & Generally Right.

Howard Marks once wrote that:

“Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, since momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s essential to remember that ‘being too far ahead of your time is indistinguishable from being wrong.’)

Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian.”

Historically, making the best investments occurs when going against the herd. Selling to the “greedy” and buying from the “fearful” are extremely difficult things to do without a very strong investment discipline, management protocol, and intestinal fortitude. For most investors, the reality is they are inundated by “media chatter.” That “noise” keeps them from making logical and intelligent investment decisions regarding their money, which, unfortunately, leads to bad outcomes.

Investing Rule #10) Comparison Is Your Worst Investment Enemy

The best thing you can do for your portfolio is to stop benchmarking against a random market index. That index has nothing to do with your goals, risk tolerance, or time horizon.

Comparison in the financial arena is the main reason clients have trouble patiently sitting on their hands, letting whatever process they are comfortable with work for them. Unfortunately, some comparison along the way causes investors to lose their focus.

It is pleasing to inform clients they made 12% on their account. However, if you inform them that ‘everyone else’ made 14%, you have upset them. As it is constructed now, the financial services industry intentionally upsets people, so they move money around in a frenzy. Money in motion creates fees and commissions.

Creating more benchmarks and style boxes is nothing more than creating more things to COMPARE to, allowing clients to stay in a perpetual state of outrage. The only benchmark that matters is the required annual return to obtain your future retirement goal. If that rate is 4%, then trying to obtain 6% more than doubles the risk you have to take to achieve that return. The end result of taking on more risk than necessary will cause you to deviate from your goals when something inevitably goes wrong.

It’s All In The Risk

Robert Rubin, former Secretary of the Treasury, changed the way I thought about risk when he wrote:

“As I think back over the years, I have been guided by four principles for decision making.  First, the only certainty is that there is no certainty.  Second, every decision, as a consequence, is a matter of weighing probabilities.  Third, despite uncertainty we must decide and we must act.  And lastly, we need to judge decisions not only on the results, but on how they were made.

Most people are in denial about uncertainty.  They assume they’re lucky, and that the unpredictable can be reliably forecast.  This keeps business brisk for palm readers, psychics, and stockbrokers, but it’s a terrible way to deal with uncertainty.  If there are no absolutes, then all decisions become matters of judging the probability of different outcomes, and the costs and benefits of each.  Then, on that basis, you can make a good decision.”

It should be obvious that an honest assessment of uncertainty leads to better decisions, but the benefits of Rubin’s approach go beyond that.  Although it may seem contradictory, embracing uncertainty reduces risk while denial increases it.  Another benefit of “acknowledged uncertainty” is it keeps you honest. A healthy respect for uncertainty and a focus on probabilities drives you never to be satisfied with your conclusions. It keeps you moving forward to seek more information, question conventional thinking, continually refine your judgments, and understand that certainty and likelihood can make all the difference.

The reality is that we can’t control outcomes; the most we can do is influence the probability of certain outcomes, which is why the day-to-day management of risks and investing based on probabilities rather than possibilities is important not only to capital preservation but to investment success over time.

Growth in Texas service sector activity stalled in October, according to business executives responding to the Texas Service Sector Outlook Survey.

The revenue index, a key measure of state service sector conditions, fell eight points to 0.7, with the near-zero reading suggesting little change in activity from September.

Perceptions of broader business conditions continued to worsen in October, as pessimism notably increased.

The general business activity index dropped from -8.6 to -18.2, its lowest level since December of last year, while the company outlook index fell to -12.8, its lowest level in 16 months. The outlook uncertainty index jumped from 14.8 to 23.0.

Source: Bloomberg

Labor market indicators pointed to no growth in employment and a largely stable workweek. The employment index fell from 2.7 to 0.1, its lowest level in seven months. The part-time employment index fell five points to -3.4, while the hours worked index declined from 3.0 to -1.3.

All-in-all, a shitshow.

The comments from respondents were mixed with some seeing growth or hoping for it, but the following quotes should clarify just how most feel…

• Overall activity is still stagnant due to overall economic conditions, uncertainty and interest rates.

• Financial challenges remain. Access to capital will continue to limit growth in some sectors. Cash management has taken on a whole new meaning.

• The economy seems to be steeply going down in the US and major global regions we serve, Europe, China and Asia.

• For our engineering services, 2024 is projected to be a recession year.

• The commercial real estate market really seems frozen in some ways. Financing is hard and deals don’t pencil at these rates.

• We have seen our restaurant business suffer as some of our long-term customers have shut down facilities.

• We are seeing an abnormal decrease in overall business activity that started in September and has continued into October.

• People are nervous and not spending money, like in early spring. They are making choices, and we can see them holding back.

• The downstream effects of overspending and the ripple effect to interest rates and inflation are having a negative impact on business. Decisions from prospects for new purchases are delayed, and current customers’ budgets are under intense scrutiny to continue purchases.

• The geopolitical climate has increased uncertainty for the economy. Liquidity continues to be challenging. Interest expense is the single major expense facing lenders and borrowers.

• Rapid increases in interest rates have frozen debt markets, meaning we cannot refinance properties. We are feeling the pain.

• Something must give. Interest rates, a tightening of capital access, increasing geopolitical turmoil and more all add up to problematic conditions.

• People are stuck where they are, not buying cars, houses, appliances, etc.

• Headwinds are mounting. Interest expense due to floating rate credit, continuing increases in both labor and input costs, unsustainable construction costs and a softening economy are finally going to bring growth to a halt and likely result in a step back in GDP.

• We are starting to see meaningful decreases in consumer spending.

• We are hearing more businesses are having problems.

Finally, there was this comment that seemed to sum things up very well…

The general level of activity in the real estate market continues to slow while the 10-year rate continues to climb.

Higher interest rates have stifled this market, and we are afraid the worst is yet to come. Refinancing existing debt will be challenging due to the 500-600-basis-point increase in rates and the fact that regional banks are not lending. Most owners will not have the additional equity required to refinance their debt.

On the purchase and sale side of the market, we still have a re-pricing issue that needs to be resolved between sellers and buyers before assets can trade.

We are all trying to find something positive in this marketplace, but it is just not there.

This is looking more and more like a train wreck instead of a soft landing.

But, but, but Bidenomics?

Authored by Simon White, Bloomberg macro strategist,

A recovery in US stocks into year-end hinges on whether an expected strong upswing in earnings growth will be enough to counteract a weakening technical and liquidity backdrop.

Information is surprise. This was a concept formulated by Claude Shannon in his groundbreaking Information Theory, the foundation of digital computing. The true content of information comes not from what is expected, but from what is unexpected. Nowhere is this more valid than in markets, which have their most outsized moves when there are surprises.

They can be endogenous and exogenous, and naturally a rapid escalation in the conflict in the Middle East would represent a negative surprise of the latter type for the market. But if we focus on endogenous surprises, then there is potentially a sizable positive one in the pipeline in the shape of US earnings.

That’s signaled by multiple leading indicators, which are pointing to an increasingly pronounced and protracted recovery in large-cap earnings growth, which fell to flat from an annual rate of more than 50% last year.

First, there is the manufacturing ISM, which has been persistently rising all summer. This points to earnings surprising to the upside in the coming months, with trailing earnings beginning to outperform forward ones.

The manufacturing ISM crops up all over the place in macro analysis because it’s one of the best standalone leading indicators for global stock markets and the economy.

Tailwinds for earnings are also in the pipeline from a weaker dollar. It has strengthened in recent months, but economy-market relationships operate with lags. The lagged impact from the weaker dollar since last year is unlikely to have had its full positive impact on US earnings yet.

There should be more where this came from as the dollar is likely to re-establish its weakening trend based on leading indicators for the currency.

More companies have already been positively surprising on their earnings, which also points to stronger profit growth. We’ll get more color on this as another raft of US companies announce their 3Q earnings this week.

Additionally, there are increasing signs that the US may avoid a recession and global growth will experience an upturn. The exports of small, open economies are reliable leading indicators for the world economy. South Korean exports look to have bottomed and started turning up, which typically leads to a rise in the earnings growth of large-cap US companies.

A rise in earnings, though, is not a shoo-in for higher prices. The P/E ratio at least needs to remain steady. Leading indicators are pointing in that direction just now, but a re-acceleration in inflation, which I expect at some point next year, will eventually be a negative for P/E ratios.

But before that, liquidity is a burgeoning risk for stocks. First, there is excess liquidity, the difference between real-money growth and economic growth. Rising excess liquidity has been a key tailwind for risk assets this year, but it’s showing the first signs of rolling over. If that gathers momentum, then what has been a positive for stocks will morph into a headwind, counteracting in whole or in part the tailwind from an upswing in earnings.

Liquidity will also be affected by the decisions of the Treasury, as the size of the fiscal deficit increasingly shifts the US toward fiscal dominance, where government borrowing and spending decisions overwhelm monetary policy.

As important as the amount Treasury borrows is how much its issuance is skewed toward bills. That’s been the case this year, which has meant money market funds (MMFs) have been able to absorb most of the new borrowing. MMFs have bought bills by drawing down on the RRP (reverse repo) facility, cushioning what would otherwise have been a large hit to liquidity.

Bills are now more than 20% of total UST debt outstanding, a level around where the Treasury has aimed to cap issuance in the past. A skew back toward bond issuance and away from bills is likely soon (confirmed by the Treasury) and is a non-trivial risk for the market as borrowing necessarily moves away from MMFs – holders of low-velocity reserves – to holders of high-velocity reserves such as US households.

The Marketable Borrowing Estimates released on Monday indicated a bond-bearish skew to expected issuance, but it’s on Wednesday with the recommending financing schedules we’ll get more information on the breakdown between bond and bill issuance.

To add to risks, the technical backdrop for the S&P is deteriorating. Along with several measures of breadth, one of the best – and simplest – guides to the medium-term trend of the market is on the threshold of turning negative.

The 13-26 week moving-average crossover for the S&P turned positive in February, about a month before the index bottomed and then began its rally. The crossover is very close to going back to negative-trend territory, when the market tends to struggle or sell off.

Earnings are poised to surprise strongly to the upside in the coming months. But it’s hard to be sure whether that will be enough to catalyze a strong year-end rally given the conflicting messages from technicals and liquidity.

All in, it’s difficult to disagree with Stanley Druckenmiller’s comments to Paul Tudor Jones at last week’s JP Morgan/Robin Hood conference: “It’s not exactly an environment that excites me about paying 20%-30% above the multiple for equity prices … I don’t find the equity market as a whole that interesting.”

Home prices rose for the 5th straight month in August (the latest data released by S&P Global Case-Shiller today), up 1.01% MoM (better than the 0.8% rise expected).

Source: Bloomberg

The ongoing MoM rises pushed the YoY gain in home prices at America’s 20 largest cities up 2.16%, the most since January 2023. The National Home Price index rose even faster at 2.57% YoY.

Chicago, New York, and Detroit all saw major home price rises (+5.0%, +4.9%, and +4.8% YoY respectively). Las Vegas, Phoenix, and San Francisco remain lower YoY (-4.9%, -3.9%, -2.5% respectively).

But, judging by the resumption of the rise of mortgage rates since the Case-Shiller data was created, we would expect prices to also resume their decline…

Source: Bloomberg

Inventory is going nowhere, buyers and sellers are stuck (affordability for the former and the mortgage cost gap for the latter), and The Fed isn’t cutting rates any time soon. Not pretty…

US employment costs unexpectedly accelerated in the third quarter, heightening concerns that a strong labor market risks keeping inflation above the Fed’s target.

The employment cost index, a broad gauge of wages and benefits, increased 1.1% in the July-to-September period (above the 1.0% rise expected) after rising 1% in the second quarter.

Source: Bloomberg

Compared with a year earlier, the ECI was up 4.3%, the smallest annual advance since the end of 2021. Still, that’s well above the typical pace seen in the years before the pandemic.

Source: Bloomberg

While wage growth picked up slightly within private industry, salaries at state and local governments surged.

Source: Bloomberg

We already knew this was happening…

Why oh why is wage/price inflation so sticky?

Well, it’s not because of private workers: here wages and salaries rose just 3.9%, the lowest in 2.5 years.

It’s all government workers, where wage growth was 7.8%, just shy of a record high! pic.twitter.com/v46KyqekMg

— zerohedge (@zerohedge) October 27, 2023

Bear in mind that while there are a number of other earnings metrics published more frequently – including average hourly earnings figures from the monthly jobs report – economists tend to prefer the ECI because it’s not distorted by shifts in the composition of employment among occupations or industries.

This prompted a spike higher across the yield curve with the short-end affected most…

Source: Bloomberg

Bidenomics and the Re-Inflation Reduction Act is buggering up The Fed’s cunning plan.

Shares of Caterpillar are tumbling more than 5% in premarket as investors fear the industrial bellwether’s latest report indicates machinery demand peaked. That, as Bloomberg’s Joe Deaux writes, “bodes ill for the economic outlook, already facing headwinds from the Fed’s aggressive tightening.”

A quick look at Q3 earnings, which actually were stronger than expected after Caterpillar posted better-than-expected revenue in its construction equipment business, while sales from mining as well as its energy and transportation businesses were weaker than analysts’ anticipated.

• Revenue $16.8BN, beating exp. of $16.59BN
• Adjusted EPS $5.52, beating exp. of $4.77

Analysts warned that sales in Caterpillar’s biggest business markets — construction and mining — would be a drag on third-quarter earnings, though they also suggested the weakness should be offset by stronger growth in energy and transportation. Helping damp the slowdown has been healthy end-market demand for Caterpillar and other machinery makers.

And while revenue and profit in the third quarter were better than expected…

… the industrial bellwether said in its earnings presentation slides that its order backlog plunged $2.6 billion from the prior quarter.

Not only did the backlog drop Q/Q, but it also slumped by $1.9 billion YoY, which is the first decline the company has reported since 2020 as it battled through global pandemic shutdowns. The collapsing backlog for the company – which is viewed as an economic bellwether because its machines dot construction, mining and energy sites around the world – is an ugly sign for future demand.

CAT shares tumbled 5% in premarket trading, underperforming the S&P by double digits and sending the company back in the red for the year.

CAT’s earnings presentation is below (pdf link)

Shares of JetBlue Airways Corp. slid 7% during premarket trading in New York. This drop came after the budget airline warned about increasing headwinds that are anticipated to result in a larger-than-anticipated loss for the fourth quarter. Additionally, the company fell short of Wall Street estimates for both loss and revenue in the third quarter. 

“While we faced challenges in the quarter, including significant weather-related impacts and rising fuel prices, our Crewmembers rose to the occasion, focusing on what we can control to mitigate these headwinds and provide our customers with great service,” Robin Hayes, JetBlue’s CEO, wrote in a statement, adding the airline is positioned for less turbulence “in 2024 and beyond.” 

JetBlue reported a loss of $153 million, equivalent to 46 cents per share, in the third quarter. This compares with the previous year’s third quarter when the airline had a net income of $57 million, or 18 cents per share. The adjusted loss for the recent quarter was 39 cents per share, exceeding the FactSet consensus estimate, which predicted a loss of 25 cents per share. Revenue also fell 8% to $2.35 billion, below FactSet consensus estimate of $2.38 billion. 

Third Quarter Results:

• Adjusted loss per share 39c, estimate loss/shr 28c

• Operating revenue $2.35 billion, estimate $2.37 billion

• Passenger operating rev. $2.20 billion, estimate $2.23 billion

• Adjusted net loss $129 million, estimate loss $91.7 million

• Adjusted Ebitda $32.0 million, estimate $64 million

• Available seat miles 17.36 billion, estimate 17.34 billion

• Revenue passenger miles 14.78 billion, estimate 14.65 billion

• Load factor 85.1%, estimate 84.4%

• Average passenger fare $201.73, estimate $198.16

• Operating expense per available seat mile $14.45, estimate $14.12 

• Yield per passenger mile 14.89c

Joanna Geraghty, JetBlue’s President and COO, said: 

“We continue to see healthy travel demand during peak periods and the fourth quarter holidays. However, industry capacity is outpacing domestic demand during off peak travel periods.

“For the fourth quarter, our growth will be driven primarily by international as we proactively work to manage our capacity and reduce schedules in off-peak periods.” 

 Fourth Quarter Forecast:

• Sees adjusted loss per share 35c to 55c, estimate loss/shr 21c

• Sees revenue -6.5% to -10.5%

• Sees available seat miles +0.5% to +3.5%

Year Forecast:

• Sees adjusted loss per share 45c to 65c, saw EPS 5.0c to EPS 40c, estimate loss/shr 35c (Bloomberg Consensus)

• Sees revenue +3% to +5%, saw +6% to +9%

• Sees available seat miles +5% to +7%, saw +5.5% to +8.5%

Besides JetBlue, several other airlines have warned about slowing US air travel demand: 

• Airline Stocks Hit Turbulence After Alaska Air Signals Slowing Demand
• JetBlue Joins Chorus Of Airlines Warning About Slipping Demand
• American Airlines Cuts Earnings Forecast As Headwinds Hit Airline Industry

Investors have dumped airline stocks since mid-July on souring demand outlooks from carriers. 

At the start of October, Morgan Stanley US equity strategist Michelle Weaver told clients to expect a “chilly season for travel” as headwinds mount for consumers. 

Authored by Tom Ozimek via The Epoch Times (emphasis ours),

IRS Commissioner Danny Werfel faced a grilling by lawmakers on Capitol Hill this past week, where he hinted that there’s a chance that the agency will—contrary to its repeated pledges—increase tax audits of Americans earning under $400,000.

The question of whether the IRS will use some of the $80 billion or so funding boost to increase tax enforcement of people making less than $400,000 has been a contentious issue.

IRS and Treasury Department officials have pledged not to increase audit rates for this group of Americans, while Republicans and others have argued that this pledge is either false or wishful thinking.

Treasury Secretary Janet Yellen has directed the IRS not to raise audit rates above historical levels for this group of taxpayers, while Mr. Werfel has repeatedly made the same pledge.

But a watchdog recently cast doubt on this promise, warning that Americans making less than $400,000 could inadvertently get caught in an enforcement dragnet because the IRS doesn’t have a clear definition of “high-income” and its enforcers use an outdated $200,000 high-income threshold as their default.

Meanwhile, the latest data on the tax gap (the difference between taxes owed and paid to the government) show that it has jumped from $601 billion to $688 billion, putting pressure on the IRS to ramp up enforcement and bring in more money for all the Biden administration’s big spending plans.

At the Oct. 24 hearing on Capitol Hill, Rep. Gary Palmer (R-Ala.) pointed out that former IRS Commissioner John Koskinen once testified that increasing tax audits as a way to reduce the tax gap was not an advisable strategy.

“One of your predecessors, John Koskinen, testified before this committee in 2015, and he said it would not be advisable to audit your way out of the tax gap, yet that’s exactly what you’re trying to do,” Mr. Palmer said.

In a bid to increase tax collections, the IRS has vowed to increase tax enforcement on corporations and high-income filers in a “sweeping, historic” crackdown on what it says are wealthy tax evaders.

In his line of inquiry, Mr. Palmer implied that the IRS’ appetite to boost collections would mean some lower-earning Americans could get caught up in that effort.

Mr. Werfel said he had instructed staff at the IRS not to raise audit rates for lower-earning Americans but hinted that there’s some chance this could (inadvertently) happen, and only time will tell.

“The so-called Inflation Reduction Act gave the IRS an additional $80 billion in funding. I think we can all agree that that’s an incredible amount of money. Even after Congress trimmed this amount down to nearly $60 billion in the Fiscal Responsibility Act, how many new agents does the IRS plan to hire?” she asked.

Mr. Werfel sought to deflect by focusing on all the other hires that the IRS is planning.

“We’re hiring not just agents. We’re hiring customer service reps, accountants, agents,” he said. “We have published our three-year view of staffing, which I’m very confident on because I can make key assumptions about needs and market trends. We are at 90,000 today, and I think over the next three years, we should be over 100,000, but not much over 100,000.”

Asked how many tax enforcement agents there would be among this figure, Mr. Werfel replied: “We should be hiring about 8,000 total by the end of 2025.”

“You are guaranteeing that you will not increase the number of audits of people making less than $400,000 a year?” Ms. Foxx then asked.

“That is my marching order to the IRS,” Mr. Werfel replied before adding that “if we fall short of that, I will be held accountable for it,” hinting that, even with the best of intentions, there’s a chance that the IRS might fail to make good on this promise, much like the watchdog has warned.

“But we will publish those rates,” Mr. Werfel added, referring to tax audit rates for Americans earning less than $400,000, suggesting that time will tell how closely the agency’s growing army of tax enforcers will follow his orders.

The watchdog report includes scathing criticism of the IRS for lacking a clear definition of “high-income” earners—despite the very same watchdog asking the IRS to look into developing a better definition years ago.

“The IRS does not have a unified or updated definition for individual high-income taxpayers,” the watchdog said in the report, which notes that the IRS uses different definitions of “high-income” depending on context as various IRS programs address different compliance issues across different parts of the filing population.

“The high-income terminology is being used loosely inside the IRS with no common understanding of what the term means,” the watchdog said.

The watchdog recommended in 2015 that the IRS reevaluate the appropriate income thresholds for its high-income and high-wealth strategy.

But despite its recommendation to the IRS nearly a decade ago to reevaluate its income thresholds, the IRS “made no changes,” the watchdog said, noting that the tax agency cited “internal data analysis results and resource constraints.”

Further, the IRS continues to rely on old tax examination activity codes adopted half a century ago with the Tax Reform Act of 1976, which used a $200,000 threshold to measure high-income returns.

“This amount is equivalent to more than $1 million in 2023, but the IRS still uses $200,000 as the default high-income threshold,” the watchdog said, adding that the $200,000 threshold is “no longer a reasonable standard for high earners given inflation since 2005.”

The IRS disagreed with the watchdog’s recommendation. It asserted in a statement included in the report that a “static and overly proscriptive” definition of high-income taxpayers for audit purposes “would serve to deprive the IRS of the agility to address emerging issues and trends.”

The watchdog commented on the IRS’ pushback, saying that the definition need not be “static” and income thresholds should be adjusted based on economic and complexity factors—otherwise, there’s a risk that the agency will break its pledge not to audit more Americans earning less than $400,000.

“When the high-income thresholds are set too low, the result can be higher numbers of inefficient examinations,” the watchdog said. “When the definition is too low, the base of taxpayers earning those incomes is wider so that the IRS does many more audits in that category in order to achieve desired audit coverage.”

The watchdog said that, under the circumstances of a lack of a clear definition of “high-income,” the IRS would not only be conducting more audits on lower-earning Americans (contrary to its pledge not to), but it would also be less effective in its stated goal of closing the tax gap.

The watchdog also said that the IRS’s lack of action in response to the TIGTA recommendation in 2015 to reevaluate its income thresholds means that the IRS is in a difficult position if it hopes to meet its pledge not to raise audit rates above historical norms for Americans earning less than $400,000.

Currently, “there is no way to identify the complete population of taxpayers that meet the criterion of $400,000 or more specified by the current Treasury Secretary,” the watchdog added.

The IRS partially agreed with the watchdog’s recommendation to refine its examination activity.

“The IRS agreed to identify the best method to identify and track high-income examinations as part of the work being undertaken to implement the Treasury Secretary’s directive to not increase audit rates for households making less than $400,000 and small businesses,” the IRS said in a statement included in the report.

But the watchdog responded by saying this isn’t good enough.

“The IRS’s partial agreement and planned corrective action will not satisfy the intent of our recommendation, and additional actions are needed,” TIGTA said in a comment.

“The IRS should establish examination activity codes for additional TPI increments, which will help the IRS identify noncompliance at different income levels,” the watchdog added. TPI stands for “taxpayer profile increment.”

When The Epoch Times asked the IRS for comment on the watchdog’s rejection of the IRS’s response to its recommendation, the tax agency pointed to its original response included in the report.

Thanks to Hunter Biden’s laptop, we learned in 2021 that while serving as vice president, Joe Biden used several private email accounts from which he would sometimes forward or receive government correspondence.

Now we know that three of them in particular, pseudonyms robinware456@gmail.com, JRBWare@gmail.com, and Robert.L.Peters@pci.gov, sent or received 82,000 pages worth of emails, according to the National Archives – far more than the 33,000 emails former Secretary of State Hillary Clinton illegally deleted from her private server.

The reason we know this is because the Archives refused to provide the information, and was sued via the Freedom of Information Act by the conservative nonprofit organization Southeastern Legal Foundation.

The emails themselves, which span an eight-year period, will purportedly take a considerable amount of time to produce due to the “scope” – and as such, “the volume of potentially responsive records is necessarily large.”

“NARA has completed a search for potentially responsive documents and is currently processing those documents for the purpose of producing non-exempt portions of any responsive records on a monthly rolling basis,” reads a Monday filing in the lawsuit.

That said, according to the filing, NARA and the plaintiffs are searching for ways to narrow the request for records in order to get copies of the emails out in a more timely manner (like, before the 2024 election?).

Government officials use of private email for official business is discouraged under the law, and officials like Biden are required to preserve all government-related emails conducted on their private accounts under the Federal Records Act. The fact that NARA has such a large collection suggests Biden gave those emails to the nation’s history-preserving agency.

The total revealed by the Archives, however, is stunning in size, even dwarfing the total from the most infamous private email scandal in American history involving former Secretary of State Hillary Clinton, which also involved government business on Obama’s watch. -Just the News

There is no indication thus far from the National Archives that any of Biden’s emails contain classified information, however he is under investigation by Special Counsel Robert Hur related to the removal an improper storage of classified documents from his days as VP.

The stunning admission also comes as Republicans are seeking records related to the Biden family dealings in Ukraine and other countries, raising the specter of possibility that some, or many, of the 82,000 emails will bolster various Congressional corruption investigations.

Republicans have asked NARA for an un-redacted document that indicates that then-Vice President Biden took a call with the president of Ukraine, Petro Poroshenko, on May 27, 2016.

Republicans say the document was emailed to ‘Robert L. Peters’ with Hunter Biden copied.

At the time, top Ukrainian prosecutor Viktor Shokin was investigating oil company Burisma Holdings for corruption – the same company that Hunter was a sitting board member of.

Their demands come after Hunter Biden’s ex-business partner Archer testified before the House Oversight Committee earlier this month that Joe Biden’s ‘brand’ protected Burisma because ‘people would be intimidated to mess with them.’ –Daily Mail

Could these emails contain the smoking gun?

They’re about to arrest Trump again https://t.co/dBuFqJJvBJ

— zerohedge (@zerohedge) October 31, 2023

By Ven Ram, Bloomberg markets live reporter and strategist

What happens when ever-widening deficits, resilient demand in the economy and expectations that interest rates will continue to stay aloft collide with one another?

Higher Treasury yields on longer-dated maturities, that’s what.

While this week is punctuated by several central bank meetings, the US Treasury Department will also lay out its plans for new bond sales.

That road map matters more against a backdrop where the fiscal deficit doubled in the year through September to just above $2 trillion. The economy has taken it all in its stride, with growth in the third quarter coming in at almost 5%, well more than twice the pace seen in the second.

Meanwhile, inflation expectations for the next 12 months have now accelerated past 4%.

That’s a pretty heady mix, so it isn’t surprising that readers in the latest MLIV Pulse survey reckon that the US neutral rate – a sort of nirvana where the economy is at full employment without stoking inflation – has doubled to at least 100 basis points from pre-pandemic levels. Which is why 10-year Treasury yields haven’t really pulled back from 5% despite all the tensions in the Middle East. So much so that the median of MLIV readers is for the 10-year yield to settle around 5% by the end of this year.

While that seems entirely plausible, there may be upside risk lurking to yields even beyond, should the Federal Reserve be compelled to tighten policy further to get inflation back to target. While we were in a period of disinflation through the first half of the year, that hasn’t quite been the case in the second. Problem is, the Fed doesn’t quite have any other tool apart from interest rates to get that down.

Given how restrictive its policy rate is, the central bank may well decide to wait and watch for a while more, but those stellar growth numbers from the third quarter may just make policymakers less wary of doing more eventually.