How Trump’s Tax Plan Could Totally Backfire
- The Trump tax plan — like a half-assed term paper
- Rickards on how the tax proposal could blow up in the president’s face
- Another disturbing “soft data-hard data” divergence
- The “hidden profit center” in the banking sector
- Reader expands on our “superficial” tax cut remarks yesterday
Has there ever been a college student who didn’t long to take the easy way out? Who wished to turn in a mere outline instead of slogging through a whole term paper, the better to go out and party?
Well, Trump’s economic team isn’t in college anymore. And they must’ve gotten really hammered on Tuesday night…
Is that all there is?
… because what you see above is the sum total of the “biggest tax cut ever” they delivered yesterday.
“It was a big nothingburger, almost embarrassing,” says Jim Rickards. “The market promptly traded down.
“There was an absence of detail and no clear path to congressional approval.”
White House budget director Mick Mulvaney drew the short straw and went on CNBC this morning to do damage control. “We did it on purpose,” he said. “Not to try and hide the numbers, but to say, ‘Look, this is the first discussion.’”
Nice try, no cigar, says Jim. “It was not even a well-thought-out bargaining position. The ‘plan’ looked more like a press release designed to dress up the ‘first 100 days’ website than anything of substance.”
Even if you give the administration the benefit of the doubt — that it’s setting out broad principles without getting into the weeds — there’s no telling how Congress will read between the lines of this document. (And there’s a lot of white space there!)
Reduce the seven individual income tax brackets from seven to three? OK, fine. What are the income thresholds for those brackets? Your guess is as good as mine.
Oh, and about that “one-time tax on trillions of dollars held overseas.” We get how that’s supposed to encourage Corporate America to bring those trillions home. But at what rate will they be taxed? Again, crickets.
The administration’s one-sheet is also silent on how or whether businesses will be allowed to deduct equipment purchases.
No wonder traders hit the “sell” button yesterday afternoon.
And watch out for the ol’ bait-and-switch.
The administration must have felt the need to put some kind of new revenue source in there to offset the tax cuts. So “protect the homeownership and charitable gift tax deductions” means that all the other deductions would go away — including the one for state and local taxes.
That’d be a gut punch not only in ultrahigh-tax blue states like New York and California, but also higher-tax states that went red last year, like Ohio and Iowa.
It might not stop with the state tax deduction once the proverbial horse-trading begins on Capitol Hill. As we said on Tuesday, even the tax-deferral benefits of a conventional 401(k) could be in jeopardy… and right now there’s no way to know for sure.
Much as the Trump team hopes its proposal will “stimulate the economy,” the effect might be the exact opposite — at least in the short term.
“The Trump proposal has created a huge amount of uncertainty about when and how rates will be cut,” says Jim Rickards. “Humans respond predictably to such uncertainty.
“If rates will be lower next year,” he goes on, “why not push your income back to 2018 if you can? If rates are higher this year, why not pull your expenses forward if you can? If capital expenditures can be expensed next year but not this year, why not wait until next year to make a capital expenditure? And so on.
“There is a serious danger that companies and individuals will defer income and investment and accelerate expenses in order to arbitrage the tax rate differential between 2017 and 2018. Companies and individuals have greater capacity and creativity when it comes to this than economists and analysts imagine. You can probably think of a few ways to play this game yourself.
“In short, the tax uncertainty and tax-year arbitrage could kill the economy this year. Add to that the prospect of a Fed rate hike in June and existing signs of weakness and we may be in a recession by this summer. The stock market has not priced in any of these eventualities. Now reality is beginning to sink in for stocks. Look out below.”
[Ed. note: Days ago, Jim blew the lid off a powerful strategy insiders use to make fortunes from the currency markets — without any of the risks that come from currency trading.
“Imagine,” he says, “a low-risk way to ‘skim’ the global currency markets for tens of thousands of dollars. That’s what the insiders have been doing for years. They may hate me for it, but I want to show you exactly how they’ve been pulling it off… so you can get in on the action yourself.”
You want in on a $477 billion operation? You could grab a $27,600 piece of it from the next big transaction on May 10. Watch Jim’s latest interview right here.]
For the moment, stocks are still reeling from the clue-by-four they took yesterday when the White House revealed its nothingburger.
At last check, the Dow is receding further from the 21,000 mark, now 20,943. Gold rests at $1,265.
The real excitement is in the oil-trading pits. West Texas Intermediate crude has tumbled nearly 2.5% at last check, a barrel fetching $48.41. The proximate event is a restart of production at two large oil fields in Libya.
The big economic number of the day stunk up the joint. Durable goods orders — meaning orders for anything designed to last three years or longer — notched only a 0.7% increase in March.
Whoops, the average guess among dozens of economists polled by Bloomberg was a 1.1% jump.
Worse, if you take civilian aircraft out of the equation, the number fell to 0.2%. Literally none of the economists were counting on that.
As a reminder, this is “hard data” — dollars and cents the statisticians can’t fudge (not too much, anyway). Yet again we’re seeing a divergence with “soft data” — the surveys and such that still indicate optimism in the U.S. factory sector. Hmmm…
“On the surface, it makes sense that bank shares would be trading lower this spring,” says our income specialist Zach Scheidt.
But you don’t come to us for surface stuff… and if you have a good memory, you might recall earlier this year we had an episode or two of The 5 centered on the theme, “Hate the banks, love bank stocks.”
Well, Zach still loves bank stocks even though they haven’t had a stellar spring. They’re laggards because the Federal Reserve is dialing back its talk about raising interest rates and because the eagerly awaited tax and regulation cuts aren’t happening on Wall Street’s timetable (see above).
But beneath the surface lies what Zach calls “a hidden profit center that’s boosting bank earnings.”
“Instead of generating income from traditional banking operations,” Zach explains, “banks are raking in profits from trading desks. In particular, fixed-income (or bond) trading desks pulled in billions of dollars in fees. These trading fees were enough to boost earnings above expectations — and should continue to support bank profits.”
The profits are so huge because of — here we go again — uncertainty over Trump administration policies. Plus the Fed shifting its rate talk and the ever-present “geopolitical tensions.”
“Hedge fund managers, pension fund executives, endowment fund investors and many other institutional money managers are facing a challenging environment. And as these large investors (with trillions of dollars under management) adjust to changing markets, they’re buying and selling positions at a feverish pace!
“That’s great news for banks that charge commissions and fees every time one of these institutional investors makes a trade. And these fees are going to continue to flow into the banks beyond the first quarter. That’s because the Trump administration is still nowhere near completion on policy transitions. And we’re not likely to see the market uncertainty disappear anytime soon.”
Zach’s Lifetime Income Report subscribers already know the names of his favorite bank stocks. You can join their ranks with a trial subscription — and a FREE copy of Zach Scheidt’s Big Book of Income. It’s packed with 47 life-changing tips and tricks. Just spot us $4.95 for handling and we’ll ship it to your doorstep.
“I rarely feel the need to respond to your editorial comments,” a reader writes, “as mostly they are grounded in reason and not far off the mark.”
[An excellent variation on the usual, “I love The 5” winding up to the inevitable “but.” Well done, sir…]
“However, I can’t let your tax cut comments — which were way too superficial — go without some clarification.
“The Bush tax cuts, as you stated, were de minimis, as they provided some stimulus but much of the benefit was negated by rampant spending by Tom ‘Delay’s’ House majority and MBA Bush’s (Cheney: Deficits don’t matter) belief in monetary policy.
“And of course, our 44th president gets a complete pass (our current predicament) for nearly doubling the debt and passing the worst debilitating tax (Obamacare), resulting in GDP growth of less than 2% per annum for eight years. We now know that high tax rates and unrestrained spending lead to robust growth — NOT! Thankfully, the American people aren’t as stupid as the elites thought.
“On the other hand, Reagan’s tax cut got the economy going again after a struggling ‘double dip’ recession, a severe dose of stagflation and a curative healthy dose of raising interest rates past 15%. Contrary to Clintonista propaganda (with the help of a Gingrich-led house), the country never achieved a balanced budget when IOUs to Social Security are taken into account. Also, Clinton had the dot-com bubble assistance, with robust capital gains and other inflated tax revenue.
“Reagan had very little fiscal help (to Tip O’Neill’s credit, he did assist on tax cuts) in reigning in spending, even when promised spending cuts by those on other side of aisle. So yes, the Reagan tax cuts (even with the O’Neill spending) did get the economy rolling again.
“So which would you prefer, Dave, the Reagan cuts and Gingrich spending priorities or the Tip O’Neill spending and the Clinton tax increases? Or just go whole hog and get the full monty with the Obama tax and fiscal policies along with an accommodatingly feckless Fed.
“P.S. David Stockman is looking like the true Oracle (not from Omaha) with his predictions of Republican disunity. Sadly, well done, David!”
The 5: Uh, you forgot the part about Reagan tripling the national debt. Obama and Bush the Younger “only” doubled it, more or less.
So what we’d “prefer” is that the size of government shrink. But we didn’t see that on your menu of options. Guess we’re just hopelessly old-school…
“Happy 10th, 5!” a reader writes with felicitations after our anniversary issue yesterday.
“I know this isn’t how it’s supposed to work, but I was hoping you could give me a present. Disclaimer: I ‘voted’ in the last election by not voting for either unworthy candidate.
“Now my request: Hoping you can provide a list of all the Trump about-faces from before the election to now (for example, his view on WikiLeaks and Julian Assange), maybe with a few pithy before-and-after quotes from The Donald thrown in. He has flip-flopped on so many issues, I would love to have a handy go-to guide for reference. And then I’ll keep adding to it myself as he continues to throw candidate cards onto the discard pile.
“Thanks for a wonderful 10 years! Truly can’t say enough about how important The 5 has become to my days over the past decade. Kudos!”
The 5: You’re too kind. Alas, we’d need to hire at least three new people for the project you propose… and we’d probably never recoup the investment.
The 5 Min. Forecast
P.S. It’s T-minus two days and counting before a “partial government shutdown.” And the newswires have been eerily quiet on the subject this morning.
Maybe the White House and Congress will pull a rabbit from their collective hat — preferably a rabbit that’s still alive — and come to terms on a budget for the next five months in time for the deadline.
If they do, we’re sure you’ll want to read about this.