• Silent Congress Best For Stocks? at IBD – Talk about crooks in a big house! To sum it up in the words of young River Tam: People don't like to be meddled with. And neither do markets.
• Deflation: the new threat at CNN.com – Last week it was inflation. Next week it'll be stagflation. In a month or so, we'll round the bases again.
• UAW pressed for sacrifices at The Detroit News – What?! Unions have to give up some of their power too? But they're the people, and they do all the work! Oh, right, if GM, Ford, et al go under, they won't have any jobs. Hmmmm....
• Market Bottom? For Some Investors, It’s Close Enough at The New York Times – The reason Graham and Grantham are buying is because they can get deals that nobody else can. When you buy 10-15% below current value for a stock (the actual price isn't that low, but because it's preferred stock with guaranteed returns, it's effectively that low), then you can have the cojones to call a bottom while others still have a ways to fall if they buy in now. Not saying these guys are dumb or wrong – just that they have opportunities none of the rest of us have.
• Financial Reversals at Reason – Everything that happens is bad. Woe be us.
• Will The Markets Be Higher Ten Years From Now? from Meridian Business Group – Maybe this declaration from The God Buffet will finally convince The Motley Fool that 11% annual returns are not guaranteed, even over the long term.
• [Mark Cuban responds to] The SEC from blog maverick – Cuban goes ballistic Wyatt Earp-style (the Kurt Russell Earp, not the Kevin Costner Earp) on The SEC, telling them: You suck!

And that's all for now folks. Enjoy!

Basically, this week was a ginormous roller coaster ride. The Dow Jones Industrial Average swung within a 16% range between 9,800 and 8,200, and the other indices oscillated similarly. Volatility is "off the charts" – not really (since volatility charts theoretically have an infinite range), but metaphorically it's true. And all the while, governments around the world continued to display socialist tendencies as they directed their central banks to buy bank loans or even outright purchase banks themselves.

Which is all to say that it's very possible the world is going to hell in a hand basket. For the last two weeks I've tried playing the volatility to small success. Fortunately, I've come out ahead, but only to the tune of making gains of less than 1%, which barely makes a dent in the losses I've made so far this year. (And I'm just talking about my active trading portfolio, not even my retirement accounts, which are a shambles.)

Or maybe the market is going through the expected drunken convulsions required to foment a change in course. Investors Business Daily – a rag that this poor brother highly esteems – seems to suggest exactly this in the Oct. 20 installment of The Big Picture (subscription required to read the full article). IBD views Thursday as a confirmation of a rally started on Monday, which if it holds up under pressure could be the beginning of an upturn.

It's hard to know now, of course, what is going to happen, especially with the final sprint of the presidential race over these next two-and-a-half weeks. While this poor brother cannot endorse either of the major party candidates, I have to recognize that one of them may be more palatable for the market. Which one that is, though, remains to be seen.

My advice: Don't rush into anything now. Do your research to find fundamentally sound companies (there are still a few out there), and be prepared to enter a position when you see the technical indicators supporting a move in the right direction.

• 10 links to walk you through today’s financial crisis at I Will Teach You To Be Rich – It's no 12-step plan, but if you don't already know why the things that are happening are happening, then it's a great place to start learning about them all. It's a good review too, for those who already understand.
• The Common Sense Fix (PDF) by Dave Ramsey – I normally can't stand the guy, and I disagree with some of what he says here (isn't government backing of loans what got us into this mess in the first place?). The "remove mark to market" and "eliminate capital gains" ideas are two that I can get behind.
• How Magazines Led Investors to Ruin at Gawker – People are sheep, and their shepherd is mass media. This excellent piece of blognalism shows how some of the most revered financial magazines (like Forbes and Fortune) led investors, um, sheepishly into vortices of financial despair.
• Bargain Prices? at Freakonomics Blog – Steven Levitt asks a pertinent question about the marketability of "toxic debt."
• Warren Buffett Tells CNBC He Wholeheartedly Supports Bailout Plan at CNBC – Proving, once again, that he is a socialist.

And this week's adrenaline-pumping ultra-thrill post is: I Just Day-Traded AIG, It’s Dangerous & Addicting by Jim at Blueprint for Financial Prosperity

Don't let the market get you down. It might be the best time to buy.

Nonetheless, capital gains taxes are extremely relevant at the moment. For one thing, it is an issue in the presidential race: Obama wants to increase the capital gains tax rate to 20% for households that make more than $250,000 per year, while McCain has stated that he would like to leave it at the current rate. While this might be a side issue compared to other, larger issues, it is one that could affect the economy for years to come.

Capital gains and their taxes

Capital gains are increases in value of capital assets, such as equities, real estate, etc. Such gains are realized when the asset is sold, and the government taxes the increase at that point as income. For example, if you buy a stock at $10 and sell it at $15, you would be taxed on the $5 you earned.

How much you are taxed depends on a couple of different things. Primarily, you will be taxed differently depending on when you sell the stock: If you sell within a year of buying, you will be taxed at your normal income tax rate; if you wait a year or longer to sell, you will be taxed at a flat 15%, unless you are in the bottom two income tax brackets, in which you will be taxed only 5%.

There are some criticisms against the capital gains tax.

Some people believe that the capital gains tax is unfair because of inflation. They claim that the nominal dollar value of a capital asset might increase simply because the value of the dollar goes down (which means more dollars are required to buy the same asset). In this case, the objective value of the asset has not increased, and so the tax being levied is effectively an inflation tax. Opponents of this view say that inflation is only one aspect of how much an asset may increase or decrease.

A second argument goes in the opposite direction: That the long-term capital gains tax is not high enough. Proponents say that there is effectively no difference between selling a profit earlier rather than later, and that gains on either should be taxed at the normal income tax rate. Arguments against this view say that a lower long-term capital gains tax rate encourages people to hold onto securities and other assets longer, lowering overall volatility and generally stabilizing the market (that is a hard argument to make in current times, but I think it's correct on a long-term timeline).

The third and final argument I've seen is from a libertarian standpoint. As a principle, libertarians (and some conservatives) believe that taxes are categorically bad, because they redistribute wealth from one class of people to another, which is tantamount to theft. Also, they claim that government is more inefficient than the market, and therefore taking money out of the market hurts the overall economy.

My own criticism the tax

I tend to agree with the libertarian view, but I think it is unrealistic at this point to expect the capital gains tax will go away anytime soon (if ever!). Primarily, the reason is that the government has simply become too dependent on the tax.

Consider this scenario: You have a second form of income that is relatively passive. It might be a website that entices a lot of people to visit with little maintenance, or it could be a rental property that you don't have to put a lot of time into managing yourself. It's not your primary income – you still keep a "day job" that pays the bills – but it has helped you pay off your debt and build an emergency fund. If you suddenly lost it, you would not need it, because you never relied on it.

Now, say you have a friend who has a similar passive income. Only instead of paying down existing debt and building an emergency reserve, he has taken out a home equity loan or bought a new house with a mortgage that requires him to pay all or most of the money from this second income into the new debt. If the second income suddenly dried up, he would be on the hook for a mortgage he can't afford, with no way to make up the difference.

You can call your friend Government, because that is exactly what they do with the capital gains tax. Capital gains, more than any other type of income, are "good economy" income. While it's true that in a bad economy all forms of income will likely go down, in aggregate capital gains tend to take a worse hit than other forms. Unfortunately, and ironically, these bad times when fewer taxes are being paid are exactly the same times when people start demanding more services and bailouts.

But the government doesn't seem to be too worried about that, because they have a unique ability that none of us have. For one thing, they can simply raise taxes. Also, unlike other debtors, they are able to dictate how much debt they can afford by raising the debt cap, which they tend to do every few months. Finally, they can simply print more money whenever they want to, usually by extending credit through the Federal Reserve to various member banks.

If the government is going to continue taking capital gains from people, the money they take should be used just like any other passive income. Namely, it should be used to pay down existing debt and then build an emergency fund that can be tapped into in bad times. Of course, that would require our congresscritters to be responsible for what they do, which they largely aren't.