Hoisington Management

[K2SO]

Does Hoisington offer a short bond product? I always take their commentary with a huge grain of salt as if they don't call for deflation and ever-lower rates, there is no reason to invest in their asset class.

 

[TwoCitiesCapital]

Does Hoisington offer a short bond product? I always take their commentary with a huge grain of salt as if they don't call for deflation and ever-lower rates, there is no reason to invest in their asset class.

 

Not sure I agree with this. When I worked @ PIMCO, the hope was for higher rates.

 

Higher rates make fixed income more attractive and more sustainable in the long-term and is ultimately the key to long-term AUM growth.

[thowed]

Forgive me for a snap reaction without all the info, but isn't there a large bias here with Siegel?  Hasn't he always been a MASSIVE Stock bull?  So I would expect him to always say that bonds are toast.

 

Not saying he's wrong, but I'd prefer arguments from more independent voices.

[TwoCitiesCapital]

The biggest disagreement I have is that I think the Fed will do absolutely anything to avoid a deflation trap. In fact with the latest round of interventions they are hinting how determined they are. Those interventions are not just another round of QE (which isn’t necessarily inflation-inducing for reasons correctly discussed in the interview), they are a step toward some real money printing.

 

In terms of "money printing", I always think in terms of this short-hand rule about US monetary operations:

1) US Treasury spends - creates a new reserve in the private sector banking system (money printing)* 

2) US Treasury issues debt - swaps a reserve in the private sector banking system for an interesting earning asset. (asset swap)

3) Fed does a repo (or lends) - swaps a private sector interesting earning asset (collateral) for a reserve in the private sector banking system or vice versa (asset swap).

 

I think its pretty clear that money printing comes from the US Treasury (and not the Fed). 

wabuffo

 

Coming back to this after watching the video of Day Dalio in the other thread and I think I understand your position better this time around. Thanks for sharing your insights!

 

I've been leaning towards the bolded part of your comment myself. Don't fight the Fed works until it doesn't and the fact that we had 50+% declines in 2000 and 2008 depsite Fed stimulus suggests sometime "it doesn't".

 

To no one in particular -

 

I'm trying hard to reconcile Ray's "no one will want to own bonds and stocks can trade @ 40x earnings" with Hoisington's "unproductive debt = deflation and lower rates" and I think the primary difference is probably timeframe.

 

My main thesis has been it's the backstop of unemployment benefits @ $+600/week that has resulted in this rebound. Also, backdoor  unemployment benefits via PPP loans which is subsidize employment so unemployment is underreported. All of this is the Treasury - not the Fed - and this money has the potential to circulate. Most likely, these programs are reduced/end soon so I think results are probably in Hoisington's favor in the short-to-medium term. There will be a huge income hole and some reconciliation to debts/liabilities must occur - and liabilities are still growing dramatically relative to incomes so the reconciliation grows more painful by the day.

 

This is deflationary and a credit negative. Interest rates go lower, credit spreads go higher, equities probably go lower (but maybe won't get "cheap" as I previously hoped) and Fed/Treasury will step in once again to mitigate.

 

All this intervention takes 18-24 months to really hit the economy. Starting sometime in mid-to-late 2022 we'll probably see the green shoots of inflation.  You'll have an improving economy, improving demographics, stimulus sloshing around, and rates near 0%. This is probably the environment stocks can make the run to 40x earnings in as per Day Dalio. It's also when the USD is probably losing its relative advantage over other developed currencies with the Fed's repression in full swing. So stocks remain high until the combo of currency debasement and prior stimulus work inflation sustainably above 4ish%?

 

Do any of you have thoughts on how this plays out differently?

[KJP]

The biggest disagreement I have is that I think the Fed will do absolutely anything to avoid a deflation trap. In fact with the latest round of interventions they are hinting how determined they are. Those interventions are not just another round of QE (which isn’t necessarily inflation-inducing for reasons correctly discussed in the interview), they are a step toward some real money printing.

 

In terms of "money printing", I always think in terms of this short-hand rule about US monetary operations:

1) US Treasury spends - creates a new reserve in the private sector banking system (money printing)* 

2) US Treasury issues debt - swaps a reserve in the private sector banking system for an interesting earning asset. (asset swap)

3) Fed does a repo (or lends) - swaps a private sector interesting earning asset (collateral) for a reserve in the private sector banking system or vice versa (asset swap).

 

I think its pretty clear that money printing comes from the US Treasury (and not the Fed). 

wabuffo

 

Coming back to this after watching the video of Day Dalio in the other thread and I think I understand your position better this time around. Thanks for sharing your insights!

 

I've been leaning towards the bolded part of your comment myself. Don't fight the Fed works until it doesn't and the fact that we had 50+% declines in 2000 and 2008 depsite Fed stimulus suggests sometime "it doesn't".

 

To no one in particular -

 

I'm trying hard to reconcile Ray's "no one will want to own bonds and stocks can trade @ 40x earnings" with Hoisington's "unproductive debt = deflation and lower rates" and I think the primary difference is probably timeframe.

 

My main thesis has been it's the backstop of unemployment benefits @ $+600/week that has resulted in this rebound. Also, backdoor  unemployment benefits via PPP loans which is subsidize employment so unemployment is underreported. All of this is the Treasury - not the Fed - and this money has the potential to circulate. Most likely, these programs are reduced/end soon so I think results are probably in Hoisington's favor in the short-to-medium term. There will be a huge income hole and some reconciliation to debts/liabilities must occur - and liabilities are still growing dramatically relative to incomes so the reconciliation grows more painful by the day.

 

This is deflationary and a credit negative. Interest rates go lower, credit spreads go higher, equities probably go lower (but maybe won't get "cheap" as I previously hoped) and Fed/Treasury will step in once again to mitigate.

 

All this intervention takes 18-24 months to really hit the economy. Starting sometime in mid-to-late 2022 we'll probably see the green shoots of inflation.  You'll have an improving economy, improving demographics, stimulus sloshing around, and rates near 0%. This is probably the environment stocks can make the run to 40x earnings in as per Day Dalio. It's also when the USD is probably losing its relative advantage over other developed currencies with the Fed's repression in full swing. So stocks remain high until the combo of currency debasement and prior stimulus work inflation sustainably above 4ish%?

 

Do any of you have thoughts on how this plays out differently?

 

There are even more variables to consider.  For example, the U.S. economy is not a closed system, and the effects of trade and transnational supply chains on domestic inflation is not fully understood.  (See, e.g., https://www.bis.org/publ/work602.pdf )  To the extent the US has been importing deflation via accessing lower cost production from overseas, what happens if there are increasing tariff or non-tariff barriers to that trade?

 

Also, what if policy changes are enacted in the US (e.g., strengthening unions) that increase the percentage of income that goes to labor (https://fred.stlouisfed.org/series/W270RE1A156NBEA )?

 

I don't know how to assess the likelihood of any such changes happening or their effect on inflation if it did happen.  In short, I have no idea whether we'll have a 1% (or lower) or 5% (or higher) inflation rate in 5 years.  I have to invest with the knowledge that either outcome is possible.

[wabuffo]

Do any of you have thoughts on how this plays out differently?

 

I think perhaps there is confusion between the terms contraction and deflation.  I may have posted this model before, so forgive me if I'm repeating myself.  Think of four quadrants with an X-Axis and Y-Axis.

 

X-Axis:  Economic Growth  (contraction is -ve, growth is +ve)

 

Y-Axis:  Monetary Growth  (deflation is -ve, inflation is +ve).

 

So I like to think of it as four quadrants and I try to place the state of the economy in one of the four boxes.  Initially, as the economy was put into a forced shutdown starting in mid-March, we had a contraction AND deflation for about 10 days (til March 23rd or so).  The economy was in the lower left quadrant. 

 

Today, we are still in contraction (though perhaps not as severe as initially in March but still pretty bad in terms of GDP decline) but monetary policy is inflationary.  So we are probably in a stagflation sort of scenario.  I think the US federal government will continue to spend to support incomes and the US Treasury has accumulated $1.6t on deposit at the Fed ready to flow into the banking sector as deposits of one sort or another depending on the programs that will be carried out in July- September.

 

There is absolutely no monetary deflation - you just have to look at the price of gold (gold supply increases ~1.8% per year and is very stable as an indicator).  If we had deflation, gold would be falling, not rising.  You can see deflation if you look at a chart of the spot price of gold for March - there is a severe break in its price and then rebound as both the Fed and the US Treasury stepped into the breach.

 

 

Just my 2-cents.

 

wabuffo

 

[TwoCitiesCapital]

Do any of you have thoughts on how this plays out differently?

 

I think perhaps there is confusion between the terms contraction and deflation.  I may have posted this model before, so forgive me if I'm repeating myself.  Think of four quadrants with an X-Axis and Y-Axis.

 

X-Axis:  Economic Growth  (contraction is -ve, growth is +ve)

 

Y-Axis:  Monetary Growth  (deflation is -ve, inflation is +ve).

 

So I like to think of it as four quadrants and I try to place the state of the economy in one of the four boxes.  Initially, as the economy was put into a forced shutdown starting in mid-March, we had a contraction AND deflation for about 10 days (til March 23rd or so).  The economy was in the lower left quadrant. 

 

Today, we are still in contraction (though perhaps not as severe as initially in March but still pretty bad in terms of GDP decline) but monetary policy is inflationary.  So we are probably in a stagflation sort of scenario.  I think the US federal government will continue to spend to support incomes and the US Treasury has accumulated $1.6t on deposit at the Fed ready to flow into the banking sector as deposits of one sort or another depending on the programs that will be carried out in July- September.

 

There is absolutely no monetary deflation - you just have to look at the price of gold (gold supply increases ~1.8% per year and is very stable as an indicator).  If we had deflation, gold would be falling, not rising.  You can see deflation if you look at a chart of the spot price of gold for March - there is a severe break in its price and then rebound as both the Fed and the US Treasury stepped into the breach.

 

 

Just my 2-cents.

 

wabuffo

 

I like the 4 quadrants (that's how Dalio does it too, p his All Weather/risks parity strategies). I'm not certain a $20 trillion economy moves back and forth between those quadrant over days though. Also not certain we can simply look at gold price and assume it's inflationary environment. Didn't gold triple during the Great Depression when cumulative deflation was ~25%? 

 

It seems to me it's less of an inflation hedge and more a hedge against negative real rates (when inflation exceeds nominal rates) AND/OR financial repression (when 0% rates lower the opportunity cost of owning gold increasing demand). This deflationary environment probably fits the bill of the latter and we're probably still in the lower left quadrant IMO.

 

[wabuffo]

Didn't gold triple during the Great Depression when cumulative deflation was ~25%?

 

The USD was convertible to gold throughout the Great Depression.  FDR devalued the USD by changing the exchange ratio from $20.67 to $35 per oz (where it stayed til 1971 when Nixon ended the convertibility by closing the gold "window") in 1934. 

 

The Depression was a prolonged economic contraction.  The original cause was the growing tariffs to trade, but it was made worse by Hoover's tax rate hikes in 1932 (top marginal rates went from 25% to 63%) and FDR's 40% dollar devaluation in 1934.

 

wabuffo

[Gregmal]

Didn't gold triple during the Great Depression when cumulative deflation was ~25%?

 

The USD was convertible to gold throughout the Great Depression.  FDR devalued the USD by changing the exchange ratio from $20.67 to $35 per oz (where it stayed til 1971 when Nixon ended the convertibility by closing the gold "window") in 1934. 

The Depression was a prolonged economic contraction.  The original cause was the growing tariffs to trade, but it was made worse by Hoover's tax rate hikes in 1932 (top marginal rates went from 25% to 63%) and FDR's 40% dollar devaluation in 1934.

wabuffo

 

Situations similar to this may be quite close to occurring if there is a radical regime change come November.

[RichardGibbons]

Situations similar to this may be quite close to occurring if there is a radical regime change come November.

 

The odds of a third party being elected in the USA is quite remote.  There's basically zero chance of radical regime change.

[Cigarbutt]

Didn't gold triple during the Great Depression when cumulative deflation was ~25%?

The USD was convertible to gold throughout the Great Depression.  FDR devalued the USD by changing the exchange ratio from $20.67 to $35 per oz (where it stayed til 1971 when Nixon ended the convertibility by closing the gold "window") in 1934. 

The Depression was a prolonged economic contraction.  The original cause was the growing tariffs to trade, but it was made worse by Hoover's tax rate hikes in 1932 (top marginal rates went from 25% to 63%) and FDR's 40% dollar devaluation in 1934.

wabuffo

Situations similar to this may be quite close to occurring if there is a radical regime change come November.

i wonder if the radical regime change theme should not trigger to question the direction of the cause and effect.

Both President Hoover and Governor FDR had very similar positions on a strong dollar and a balanced budget. President Hoover in July 1932 expected recovery by the end of the year and before the election. FDR's approach accounted for the possibility of a severe and prolonged contraction. At the time of the devaluation, the US had a positive trade balance and even if the move was a global one, the overriding objective was domestic. The idea was reflation, just like now.

Moving away from certain regime changes that still need to be defined:

https://www.clevelandfed.org/our-research/indicators-and-data/inflation-expectations.aspx

Reflation will happen somehow but it's hard to see how an economic slowdown will not meet negative rates.

[Spekulatius]

Didn't gold triple during the Great Depression when cumulative deflation was ~25%?

The USD was convertible to gold throughout the Great Depression.  FDR devalued the USD by changing the exchange ratio from $20.67 to $35 per oz (where it stayed til 1971 when Nixon ended the convertibility by closing the gold "window") in 1934. 

The Depression was a prolonged economic contraction.  The original cause was the growing tariffs to trade, but it was made worse by Hoover's tax rate hikes in 1932 (top marginal rates went from 25% to 63%) and FDR's 40% dollar devaluation in 1934.

wabuffo

Situations similar to this may be quite close to occurring if there is a radical regime change come November.

i wonder if the radical regime change theme should not trigger to question the direction of the cause and effect.

Both President Hoover and Governor FDR had very similar positions on a strong dollar and a balanced budget. President Hoover in July 1932 expected recovery by the end of the year and before the election. FDR's approach accounted for the possibility of a severe and prolonged contraction. At the time of the devaluation, the US had a positive trade balance and even if the move was a global one, the overriding objective was domestic. The idea was reflation, just like now.

Moving away from certain regime changes that still need to be defined:

https://www.clevelandfed.org/our-research/indicators-and-data/inflation-expectations.aspx

Reflation will happen somehow but it's hard to see how an economic slowdown will not meet negative rates.

 

Lower interest rates have been mentioned a lot as a reason for higher equity multiples, but the lower tax rates are a factor too. I recall statuatory tax rates of close to 46% and they were 56% (for retained profits with cash back for dividends) in Germany. It has been a race to the bottom, but the last tax rate reductions seems to have done little for growth and much for wealth inequity. Time to try something else, I think.

https://tradingeconomics.com/united-states/corporate-tax-rate

 

[wabuffo]

... but the last tax rate reductions seems to have done little for growth and much for wealth inequity. Time to try something else, I think.

 

The US government runs on a Sept year-end fiscal calendar.  The last full year under the old 35% rate was 2017 (Oct 2016-Sep 2017).  The first full year under the new 21% rate was 2019 (Oct 2018- Sept 2019).  Per the US Treasury's monthly budget reports:

 

https://www.fiscal.treasury.gov/files/reports-statements/mts/mts0919.pdf

Total Federal Corporate Income Taxes paid 2019 at 21% = $230.2b -- Corporate Taxable Income = $1,096.2b ($230.2/.21)

https://www.fiscal.treasury.gov/files/reports-statements/mts/mts0917.pdf

Total Federal Corporate Income Taxes paid 2017 at 35% = $297.0b  -- Corporate Taxable Income = $  848.6b  ($297.0/.35)

 

That's 29% income growth over a 2 year time period.  Think that's a fluke? 

 

Let's keep going to the wayback machine.

 

Total Federal Corporate Income Taxes paid 2016 at 35% = $299.6b  -- Corporate Taxable Income = $  856.0b  ($299.6/.35)

Total Federal Corporate Income Taxes paid 2015 at 35% = $343.8b  -- Corporate Taxable Income = $  982.3b  ($343.8/.35)

Total Federal Corporate Income Taxes paid 2014 at 35% = $320.7b  -- Corporate Taxable Income = $  916.3b  ($320.7/.35)

Total Federal Corporate Income Taxes paid 2013 at 35% = $273.5b  -- Corporate Taxable Income = $  781.4b  ($273.5/.35)

 

If you want more of something, tax it less.

If you want less of something, tax it more. 

 

For me, giving up a bit of tax ($67b) to increase private sector incomes (corporate taxable income) and wealth (market value of public companies) seems like a good trade to make.  It seems to me that the government doesn't need the $67b of revenue but the domestic US sector really needs the income and wealth.  I worry high rates will destroy income and wealth and then the federal govt will have to redistribute more than $67b to fix the damage that raising corporate rates will inflict. 

 

wabuffo 

[Cigarbutt]

... but the last tax rate reductions seems to have done little for growth and much for wealth inequity. Time to try something else, I think.

...

If you want more of something, tax it less.

If you want less of something, tax it more. 

...

wabuffo

From an individual point of view and forgetting about second- and third- order effects, why even tax corporate profits?

There are the equity and efficiency questions and maybe that's too much to ask for the sake of this discussion.

 

There may be a flaw in your tax receipts analysis. You seem to obtain pre-tax profits by using the statutory tax rate on after-tax profits. The effective tax rate has remained about 50% lower than the statutory basis but has been quite volatile over the years. To asses an effect (a pre-tax income boost after enactment of changes unrelated to fluke), it may be more relevant and valid to look at various forms of NIPA profits. These profits have been flat for years and there is no noticeable effect from the recent (2017) corporate tax changes. If anything, profits have been coming down (started before the virus). One could argue that after-tax profits would have been even lower without the tax "relief" but i won't go down this rabbit hole. From the inter-jurisdiction point of view (tax policy competition), it is interesting to note that the effective corporate tax rate of the US before 2017 Tax Act was within the OECD average and now it is lower than the average which is a good thing if you keep everything else equal but the other criteria (equity and efficiency) are more equal than others.

 

The point i want to make is that context matters. In the 1950s, in the context of initiating an investment partnership, i estimate that conditions were great to be fully invested and more even if the corporate statutory rate was slightly above 50%. Then, corporate tax receipts reached 6% of GDP (vs about 1% now). Now is different on many levels... It has to be recognized that the C-corporation share of receipts has gone down over time because of the rising share of passthrough entities (that ends up as tax receipts at the individual level) but there is no question that the share of tax paid by corporations has significantly decreased over time. Of course, that can matter little when the pie keeps growing. Under usual circumstances, i would entirely focus on the share owner's total return and not worry about the worker but much quality work has shown that the typical American worker has harvested very little (if anything, vs real wage growth) from the corporate adjustment. So, contrary to what's implied in your post, the trickle-down has not occurred after the 2017 Tax Act.

 

And the fiscal context now is somewhat special. Q2 Federal withheld income tax receipts dropped a record 25% from year ago levels and the 2020 deficit looks to be 20%+ of GDP. At a time when very unusual debt is used to buy bread and circus to the masses, it will (IMO) become increasingly difficult to "justify" the corporate's dwindling share of tax receipts.

 

Between mid-March and late June 2020, the Treasury’s total borrowing rose by about $2.9 trillion, and the Fed’s holdings of U.S. Treasury debt rose by about $1.6 trillion and i offer the opinion that this, in itself, is not a way to create long term value.

 

To link with the spirit of the thread (the inflation swindler versus the debt-deflation trap), it seems that more debt is not the answer to too much debt and the overhang will tend to decrease the flexibility to deal with slowing money velocity, growth and, eventually, animal spirits.

[Guest]

... but the last tax rate reductions seems to have done little for growth and much for wealth inequity. Time to try something else, I think.

 

The US government runs on a Sept year-end fiscal calendar.  The last full year under the old 35% rate was 2017 (Oct 2016-Sep 2017).  The first full year under the new 21% rate was 2019 (Oct 2018- Sept 2019).  Per the US Treasury's monthly budget reports:

 

https://www.fiscal.treasury.gov/files/reports-statements/mts/mts0919.pdf

Total Federal Corporate Income Taxes paid 2019 at 21% = $230.2b -- Corporate Taxable Income = $1,096.2b ($230.2/.21)

https://www.fiscal.treasury.gov/files/reports-statements/mts/mts0917.pdf

Total Federal Corporate Income Taxes paid 2017 at 35% = $297.0b  -- Corporate Taxable Income = $  848.6b  ($297.0/.35)

 

That's 29% income growth over a 2 year time period.  Think that's a fluke? 

 

Let's keep going to the wayback machine.

 

Total Federal Corporate Income Taxes paid 2016 at 35% = $299.6b  -- Corporate Taxable Income = $  856.0b  ($299.6/.35)

Total Federal Corporate Income Taxes paid 2015 at 35% = $343.8b  -- Corporate Taxable Income = $  982.3b  ($343.8/.35)

Total Federal Corporate Income Taxes paid 2014 at 35% = $320.7b  -- Corporate Taxable Income = $  916.3b  ($320.7/.35)

Total Federal Corporate Income Taxes paid 2013 at 35% = $273.5b  -- Corporate Taxable Income = $  781.4b  ($273.5/.35)

 

If you want more of something, tax it less.

If you want less of something, tax it more. 

 

For me, giving up a bit of tax ($67b) to increase private sector incomes (corporate taxable income) and wealth (market value of public companies) seems like a good trade to make.  It seems to me that the government doesn't need the $67b of revenue but the domestic US sector really needs the income and wealth.  I worry high rates will destroy income and wealth and then the federal govt will have to redistribute more than $67b to fix the damage that raising corporate rates will inflict. 

 

wabuffo

 

I really, really enjoy your posts on this. I'm just curious but how are you currently positioned? Not really looking for names but more of allocation.

[wabuffo]

the typical American worker has harvested very little (if anything, vs real wage growth) from the corporate adjustment. So, contrary to what's implied in your post, the trickle-down has not occurred after the 2017 Tax Act.

 

This macroeconomics thread is getting dangerously close to skirting the line with the politics thread.  There's much I respectfully don't agree with in your post about using NIPA profits that is too long and wonky to get into here (perhaps after I've had my coffee we can go over to the IRS's data on corporate income tax filings which is a much better source - though only current to 2013, unfortunately).

 

But I wanted to highlight your assertion up above in bold.  There is no doubt in my mind that the American worker benefited greatly from the 2017 Tax Act.  To prove it, let's roll the film. 

 

One way to test this hypothesis is to look at Federal FICA taxes - particularly Social Security taxes.  These are paid by both the employer and employee (self-employed pay both ends) for annual employment income up to ~$137k.  The salary cap helps to make it a good indicator of general employment levels because it is not skewed by the 1% getting large bonuses in "good years" the way employment income taxes withheld at the source are.

 

Once again, let's ignore 2018 which was a bridge year (due to federal govt year-end being Sept 2018).

 

YEAR    TOTAL SS Taxes 

2019:    $773,220 M

 

2017:    $690,709 M

2016:    $668 372 M

2015:    $660 956 M

 

For reference 2018 was $693 831 M (though the new corporate tax rate was in effect partially that year).  Social security tax collections jumped 11.4% from 2017 to 2019, almost all of it once the full effect of the corporate tax cuts kicked in.  It really is too bad that the virus has wrecked the economy because job creation (by this measure continued to be strong in 2020.  If I take y-t-d numbers through Feb, 2020 (from Oct 2019 start of Fed govt new fiscal year),  social security tax collections jumped again another 9.5% vs the same period in the 2019 fiscal year (Oct 2018-Feb 2019). 

 

Let's face it, employment income was booming - that's a fact.  And it is all due to the 2017 Tax Act and the cut to the Federal Corporate Tax Rate. 

 

wabuffo

[wabuffo]

I really, really enjoy your posts on this.

 

Thanks - I'm a buzzkill at cocktail parties with my macroeconomic ramblings, I'm afraid....

 

I'm just curious but how are you currently positioned? Not really looking for names but more of allocation.

 

With my small grubstake, I try to be fully invested at all times - but these days its tough to be a value investor ... (though I do have a position in GLD)

 

 

wabuffo

[Cigarbutt]

This macroeconomics thread is getting dangerously close to skirting the line with the politics thread.  There's much I respectfully don't agree with in your post about using NIPA profits that is too long and wonky to get into here (perhaps after I've had my coffee we can go over to the IRS's data on corporate income tax filings which is a much better source - though only current to 2013, unfortunately).

 

But I wanted to highlight your assertion up above in bold.  There is no doubt in my mind that the American worker benefited greatly from the 2017 Tax Act.  To prove it, let's roll the film.

...

{list of precise numbers, which amounts and trend can be reasonably countered by rational facts and explanations}

...

Let's face it, employment income was booming - that's a fact.  And it is all due to the 2017 Tax Act and the cut to the Federal Corporate Tax Rate. 

wabuffo

Let's face it, this 'macro' sub-topic could easily turn into an unnecessary and regrettably destructive exchange.

i will add another line to my investment credo:

Don't fight wabuffo (along certain lines} (at least publicly). :)

[wabuffo]

CB - you are a gentleman and a scholar!  I always enjoy the conversations with you.

 

wabuffo

[DooDiligence]

CB - you are a gentleman and a scholar!  I always enjoy the conversations with you.

 

wabuffo

 

Second that & would add the title Ambassador Extraordinary and Plenipotentiary of CoBF.

[Spekulatius]

I really, really enjoy your posts on this.

 

Thanks - I'm a buzzkill at cocktail parties with my macroeconomic ramblings, I'm afraid....

 

I'm just curious but how are you currently positioned? Not really looking for names but more of allocation.

 

With my small grubstake, I try to be fully invested at all times - but these days its tough to be a value investor ... (though I do have a position in GLD)

 

 

wabuffo

 

I think there is a kid at the bottom of this pool that isn’t in this picture. It doesn’t scream any more. Mommy doesn’t care. This would be a “deep value investor”.

[lnofeisone]

the typical American worker has harvested very little (if anything, vs real wage growth) from the corporate adjustment. So, contrary to what's implied in your post, the trickle-down has not occurred after the 2017 Tax Act.

 

This macroeconomics thread is getting dangerously close to skirting the line with the politics thread.  There's much I respectfully don't agree with in your post about using NIPA profits that is too long and wonky to get into here (perhaps after I've had my coffee we can go over to the IRS's data on corporate income tax filings which is a much better source - though only current to 2013, unfortunately).

 

 

Wabuffo - I always appreciate your posts. Wanted to give you a heads up on the archaic world that is the IRS data (and more specific Statistics of Income). Ignore if you already know all this.

 

I think the report you are looking at is here: https://www.irs.gov/statistics/soi-tax-stats-corporation-complete-report

This is the filtered version that goes to SOI and it's mostly final accounting for exam (audit), adjustments, appeals, tax court. There are few other versions that get published before going to SOI but you have to hunt for them. For example https://www.irs.gov/pub/irs-pdf/p55b.pdf

 

If you want to get even more exotic you can get reports by IRS BOD: Large Business & International, Small Business/Self-Employed, etc. but then you'll have to aggregate by type of return that's filed. Other sources I occasionally use are TIGTA reports, congressional reports, and (my personal favorite due to colorful language frequently used) Office of Taxpayer Advocate.

 

 

 

 

[KJP]

the typical American worker has harvested very little (if anything, vs real wage growth) from the corporate adjustment. So, contrary to what's implied in your post, the trickle-down has not occurred after the 2017 Tax Act.

 

This macroeconomics thread is getting dangerously close to skirting the line with the politics thread.  There's much I respectfully don't agree with in your post about using NIPA profits that is too long and wonky to get into here (perhaps after I've had my coffee we can go over to the IRS's data on corporate income tax filings which is a much better source - though only current to 2013, unfortunately).

 

But I wanted to highlight your assertion up above in bold.  There is no doubt in my mind that the American worker benefited greatly from the 2017 Tax Act.  To prove it, let's roll the film. 

 

One way to test this hypothesis is to look at Federal FICA taxes - particularly Social Security taxes.  These are paid by both the employer and employee (self-employed pay both ends) for annual employment income up to ~$137k.  The salary cap helps to make it a good indicator of general employment levels because it is not skewed by the 1% getting large bonuses in "good years" the way employment income taxes withheld at the source are.

 

Once again, let's ignore 2018 which was a bridge year (due to federal govt year-end being Sept 2018).

 

YEAR    TOTAL SS Taxes 

2019:    $773,220 M

 

2017:    $690,709 M

2016:    $668 372 M

2015:    $660 956 M

 

For reference 2018 was $693 831 M (though the new corporate tax rate was in effect partially that year).  Social security tax collections jumped 11.4% from 2017 to 2019, almost all of it once the full effect of the corporate tax cuts kicked in.  It really is too bad that the virus has wrecked the economy because job creation (by this measure continued to be strong in 2020.  If I take y-t-d numbers through Feb, 2020 (from Oct 2019 start of Fed govt new fiscal year),  social security tax collections jumped again another 9.5% vs the same period in the 2019 fiscal year (Oct 2018-Feb 2019). 

 

Let's face it, employment income was booming - that's a fact.  And it is all due to the 2017 Tax Act and the cut to the Federal Corporate Tax Rate. 

 

wabuffo

 

Wabuffo:  Can you link to the source for your annual Social Security tax numbers?  I tried to find it in the 2019 Data Book linked to in the prior post (https://www.irs.gov/pub/irs-pdf/p55b.pdf) but only found total FICA taxes (e.g., Table 1), which don't appear to be the numbers you're using.

[Viking]

Here is their Q3 letter. From my perspective it provides the best model to explain what Japan has experienced the past 20 years, Europe the past 10 and perhaps where the US and Canada are now.

 

Looking at the economies of the West/Japan the question I have not been able to answer is ‘does total debt matter?’ Governments are spending / borrowing at levels not seen since WWII. Total debt as a % of GDP is at or very close to all time records. As we have learned from Japan, total debt can get much, much higher.

 

National/federal debt + state/province + local/ municipal + business + consumer

 

Conclusion? Stimulus spending (massive deficit spending) will provide a 1 or 2 quarter boost but at cost of lower future growth. The trend of lower growth, lower inflation and lower bond yields remains intact.

 

Some are forecasting the 10 year US government bond yield could fall below 0.3% by year end. Will the US ever see a negative rate on 10 year Government debt?

 

- https://hoisingtonmgt.com/pdf/HIM2020Q3NP.pdf

 

———— here are a few lines from the Q3 letter:

 

- Thus, monetary policy is left with one-sided capabilities i.e., they can restrain economic activity by reducing reserves and raising rates, but they are not capable of stimulating economic activity to any significant degree.

- Debt financed fiscal policy can provide a short-term lift to the economy that lasts one to two quarters.

- Diminishing returns occur when a factor of production, such as debt capital is overused.

- If policy makers are incentivized to borrow more because interest rates are low, then the MRP of debt will fall, leading to even weaker growth. Moreover, interest rates are lowered indirectly by poorer growth and inflation, and by a further fall of the MRP of debt. Thus, the whole premise of Modern Monetary Theory is flawed at the core. The low interest rates are not a potential benefit for the economy, they are a result of the overuse of debt.

- We identify two tail risks for long term Treasury investors: (1) a huge new debt financed fiscal package and (2) a major change in the Fed’s modus operandi. The first risk would change the short-run trajectory of the economy. This better growth, although short lived, could place transitory upward pressure on interest rates in a fashion that has been experienced many times. Over the longer run, disinflation would prevail and the downward trend in Treasury yields would resume.

- The second risk would bring a rising inflationary dynamic into the picture, potentially becoming much more consequential. General disappointment with trying to solve economic underperformance by more indebtedness may crystalize along with the realization that debt will not work any better in the U.S. than in Japan, the Euro Area and many other countries. As this dissatisfaction intensifies, either de jure or de facto, the Federal Reserve’s liabilities could be made legal tender, or a medium of exchange.

- As long as the federal government’s policy prescription is ever higher levels of debt, the path toward disinflation will hold and long Treasury bonds will be the preferred area of the curve.

 

—————————-

- Greshams Law: https://www.investopedia.com/terms/g/greshams-law.asp

 

[Guest]

Genius to 10 year returns of averaging .63% annual on WHOSX. Craaaaazy!

 

As side the expense ratio is .66% so at least WHOSX is working out for one party. 

Edited September 6, 2022 by stahleyp