I’ve noticed an uptick in scary stock charts; as usual, most of them provide zero value. That’s what I wrote about this week. Hopefully, your clients will walk away with the same level of skepticism towards any chart circulated online (with obvious exception to what’s provided in this blog). As always, reach out if you want a copy.
Ignore everything I’ve written about the strength of the economy. Clearly, I missed something big because there’s zero chance we are not in a recession if Balenciaga can sell a trash bag for $1,790.
To be clear, I fully support any product and/or service that can trap Millennials like the one pictured above into financial quicksand. But if there’s this much excess in the system, we’re not only in a recession, we’ve been in one for some time.
Don’t worry. We’re on top of it. Our asset allocation models have already been modified to trade on a new “Balenciaga” factor. For every trash bag that gets sold, they automatically de-risk proportionally.
Taxes are deadly
Let’s say a company sells Widget 1.0 for $100 and spends $30 to produce it. They keep $70, which can either be paid out to shareholders through dividends and/or distributions or reinvested into the company to create Widget 2.0. Either way, the economy grows.
But that’s not entirely how our system of government works because Uncle Sam also wants his cut. So let’s say profits get taxed at 25% (not including the 500 other taxes companies are subjected to, such as payroll, property, tariffs, air, etc.). Now, the government gets $17.50, and the company keeps $52.50.
Here, the economy grows, but it’s slower than in the unrealistic example where there is no tax because $52.50 is less than $70. That’s not political; it’s just math.
Some may say that the $17.50 goes to pay for government employees, roads, etc., but my counter is that the government sucks at doing these things (that’s a little political, but I don’t care because taxes also suck).
The government is a monopoly, and because this is an undisputed fact that will never change, they operate like one. It’s like the cable and phone companies back in the day. When there’s no competition, there’s no incentive to do better.
So, the basic rule is that higher taxes slow economic growth and vice versa. That’s why this new tax bill will slow economic growth, but it will certainly not stop economic growth. And let’s be honest… It could have been WAY worse.
Don’t forget that Biden campaigned on raising corporate taxes, income taxes, Social Security tax, and getting rid of the step-up basis. None of these made it in, which should be viewed as a big win for the economy and investors.
Regarding what did make it in, the three significant sources of revenue are the 15% minimum tax on the book profits of large publicly-traded companies, a new 1% tax on stock buybacks, and increased tax enforcement.
The two are likely benign because the boards that govern these companies are collectively way smarter than Congress. They will 100% find ways to avoid most, if not all, of the new tax.
For example, remember tax inversions? Pfizer, Accenture, and several other large companies moved headquarters overseas during the last decade to escape our old corporate tax code.
What about the repatriation of foreign cash? Before 2018, large companies kept trillions in cash in foreign accounts because the tax to repatriate those earnings back to the U.S. was 35%.
So, guess what they did with that cash… Nothing! They kept it in foreign accounts for years collecting dust until the tax was lowered to 15%. Then a windfall hit the economy – fueling buybacks, employee raises, oh and tax revenue.
Simply put, this whack-a-mole game will persist, and my money is on corporate America.
The IRS one concerns, though. Not because I cheat on my taxes but because so much of this stuff is open to interpretation. That’s why I’m going on record that a new industry comprised of tax lawyers will soon commoditize fighting the IRS.
This is not all that crazy, either. Ask anyone living in a municipality where fighting property tax increases is an annual event. Nowadays, it’s as easy as paying a local firm $1,000 to do it for you. Well, I could see this happening, too, with income taxes.
But don’t get too cute with the IRS. In the past, they may have only hired people who would die alone, but now they’re also looking for Enforcement Agents who are cool with deadly force. So, watch out.
Anyway, back to this new tax bill. It’s not going to do anything for inflation. Even if it were, it would take years before it moved the needle, and by then, I’d wager inflation is less of a midterm election concern.
But like I said, this could have been WAY worse, and we’ve dealt with dumber tax bills in the past and did just fine. I don’t see why this time would be any different.
What is Quantitative Tightening?
Lots of talk over the years of Quantitative Easing (QE). This expands the Fed’s balance sheet by buying bonds. A lower supply of bonds on the market pushes yields down, stimulating the economy.
There’s been much less talk of Quantitative Tightening (QT) because it’s the opposite of QE. QT shrinks the Fed’s balance sheet by selling bonds. A higher supply of bonds on the market pushes yields up, which should slow down the economy.
Since 2009, the Fed has done a lot of QE and very little QT. However, this changed in June because the Fed began attacking inflation. So, for those still new to this concept and want to learn more, here’s a thorough tutorial of what some view QT’s impact has been on risk assets.
If space paid better, I’d 100% have been an astronaut, which is code for being one of those mega-geeks sitting safely behind a computer terminal, free from the dangers of space travel.
But anyway, I love all things space. Here’s a pic of Earth from the Cassini spacecraft right before it crashed into Saturn.
Enjoy the weekend…