Markets – Macro – Technicals

Tax Cuts Now, Consequences Later

Look, who doesn’t like tax cuts? You get more money in your pocket and you spend more, that’s the premise after all. So it all sounds good on paper, especially when there’s not a detailed discussion of any downsides or risk, or consequences. And that fact in itself has me suspicious and should make you too.

Have you ever tried buying a car and you got the distinct sense the guy selling you the car is trying to pull a fast one on you? That’s what that tax cut press conference yesterday felt like to me. Complete and utter BS. But increasingly it’s the entire presidency that smells like it and I deeply worry that they are setting us on a path that will completely hollow out the financial structure of the country more so than it already is. What will all the look like during the next recession?

As you all know I’m structurally bearish , but I sure as hell don’t want to live through a depression either. Fine, give me a 20% correction and we muddle along maybe through a quick recession, I’m fine with all that, but I don’t want a complete financial collapse with a depression to boot. Who wants that? But I do worry this is what they are setting us up for.

Look, let’s start with some dialectical truth here:

The last balanced budget was under Clinton with a Republican Congress when tax money was just flowing in during the tech bubble. Since then it’s been a deficit disaster no matter who is in charge. Why? 4 reasons: The tech crash, 2 really expensive wars and tax cuts that exacerbated a revenue short fall during the following recession and financial crisis, one that was brought about by easy money and loose bank regulation enabling the real estate bubble, and ongoing excessive spending by both parties.

So when somebody says this:

…then they are lying through their teeth.

Tax cuts don’t pay for themselves. They don’t. There’s zero evidence for it:

It’s complete and utter BS. And to cut taxes in a massive way ahead of the next business cycle recession will completely cripple the revenue base even further. Tax revenues decline during recessions after all.

So to use this type of rhetoric is completely disingenuous.

But here we are at the supposed nirvana for economic recovery with the FOMC declaring victory and wanting to raise rates.

Yet the US government is still running huge deficits. $600B in 2016:

Aside from net interest ballooning to the moon in the next few decades according to the Treasury Department’s own forecasts….

….and defense spending being raised by the new administration, entitlement expenses also will continue to fly higher. The demographics demand so:

It’s all basic math. Now I’m all for simplifying the complex tax code we have, I’m also obviously in principle for paying less taxes and also having an efficient government. Principally this all sounds good.

But these are just words without details and that’s all you got yesterday. Words on ONE sheet of paper in shitty font no less:

The Goldman boys claimed they had 100 people working on this. No they really said this.

Nonsense.

You and I could have drafted this up over a couple of drinks at the local. And worse: ZERO details associated with this. “We’ll work on the details, we’ll have listening sessions”. Right.

All this means they have zero clue what this will do to the budget, especially a stress tested budget, you know one that assumes a recession coming in. See this is when all this falls apart and you are looking at trillion dollar deficits again. But nobody is willing to admit this, but rather assume fictitious 3% GPD growth to make the numbers work.

Do these guy care? Absolutely not. Donald Trump asked a key question during the campaign:

I do not mean to offend anyone here, but I do have ask, what, specifically, in any of this president’s past indicates he cares about the poor or the middle class? What? Tell me:

My take: Trump will do what ever benefits him and his ego and he’ll use any means necessary to get what he wants. That’s his entire life’s track record.

You know when the press conference was abruptly ended yesterday? Precisely when the uncomfortable questions came on how Donald Trump himself would benefit personally from the tax cuts he is proposing. You can skip to the end of the clip and see for yourself:

So how would the president personally benefit from the tax cuts he proposed? This was the substantive response:

They left.

Seriously, how much more banana republic like can this become? Of course he won’t release his taxes as then everyone can calculate what the personal benefit to him and his family will be. Donating his salary? Please, it’s a nice PR show. This is about benefiting the big rollers in a big way.

What phrase comes to mind here? Fist bumps. No really:

‘Fist bumps’ at hedge funds over Trump’s tax plan

“While the proposal is being billed as a boon for small businesses from pizzerias to investment management firms, one clear winner looks to be the hedge fund set, where owners can earn hundreds of millions in income a year, tax experts, managers, and their lawyers said on Wednesday.

“For hedge funds, this is an unmitigated benefit as their tax liabilities could drop significantly,” said Robert Willens, an independent tax consultant. “Obviously, they are quite enthusiastic and there may be a few fist bumps along the way.”

A manager whose hedge fund earns $50 million a year, for example, would be paying some $19.8 million in taxes, or 39.6 percent, under the current rules. That could drop to as little as $7.5 million if the rate were cut to 15 percent.”

If that doesn’t help the middle class and help balance the budget I don’t know what does (sarcasm intended).

On substance Mohamed El-Erian had the following to say:

“The devil is very much in the design details and in the political implementation process.

For now, we lack the detailed information to assess the extent to which the direct objectives will be met, let alone the broader ones. Moreover, proper design does not guarantee smooth political implementation.

Any significant and sustainable tax plan — and this one will be no exception — involves both winners and losers. As such, it will attract a very large number of lobbyists, some of whom are major financial contributors to serving and aspiring lawmakers in Congress.

While there is disagreement in the economics profession as to whether tax cuts are necessary to promote higher and more inclusive growth (with much depending on the assessment of the initial level of the tax rates and the set of exemptions and deductions), most economists agree that, by themselves, they are not sufficient to produce this outcome. For President Donald Trump’s plan to succeed, its proper detailed design and technical and political implementation would need to be accompanied not just by progress on the other announced elements of his pro-growth economic policy approach (infrastructure and deregulation), but also by other measures that further promote labor productivity (including retooling and education reform).

Finally, and most consequential for medium-term economic well-being, the administration’s tax plan will increase the stakes in the important race between growth and debt. And this is ultimately what will matter most for current and future generations. If growth were to win convincingly, Trump would take a big step in enhancing the prospects for “building durable American prosperity,” his oft-repeated goal. But if debt emerges the winner, it will take years, if not decades, to undo the harm.”

Right. Decades to undo the harm.

Look, I reiterate the core basis for the structural bear case: All this global record debt acceleration has only been possible only because of artificial low rates and ongoing never ending stimulus. As I said this week and last night on twitter:

If they all took stimulus away tomorrow what do you think would happen?

But they won’t, indeed they keep on doubling down:

“The Riksbank on Thursday prolonged its quantitative easing beyond June and will buy a total of 15 billion kronor ($1.7 billion) in nominal government debt and inflation-linked debt.”

More and more and more:

And so what we got? A couple of Goldman Sachs guys telling the American people their hard worked on tax plan will do wonders for the economy.

I don’t believe it for a New York minute and apparently neither do lots of other people:

No, it all smells like a bad con job at the used car dealer lot.

But no worries, if it all goes bad the very same guys helping with the tax cuts for the rich can then cut rates again if they take over the Fed next year. That part of the plan already seems to be in the works:

“Speculation is building on Wall Street that a likely replacement to run the central bank would be Gary Cohn, director of the National Economic Council and Trump’s closest economic advisor. Cohn also is a former chief operating officer of Goldman Sachs.

“The buzz among those who claim Cohn confides in them is that he would like to eventually replace” Yellen, assuming Trump decides to move in a different direction when the chair’s term ends in early February, Beacon Policy Advisors said in its daily report for clients Tuesday.

On paper, Cohn likely meets Trump’s expected top two requirements for a Fed chair candidate,” the Beacon analysis said, specifically citing Cohn’s advocacy for deregulation and his likelihood to keep interest rates low as Trump seeks to implement his pro-growth economic policies.”

No, free money always sounds good and may have short term benefits for those that receive them. Just don’t assume there are no consequences or no risks in doing so. Indeed, those that peddle free money should be demanded to define precisely what those are.

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1 Response »

  1. Yeah,
    I was very disappointed to see Trump pick the two GS guys – ‘same as it ever was’.

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