Tag: finance

Two days after launching a trade war with Canada by imposing tariffs on lumber imports, one day after nearly terminating NAFTA (but stopping just shy after an alleged phone call from the leaders of Mexico and Canada), Trump has finally turned his attention to the one nation whose GDP consists of roughly 60% net trade, and which we said several months ago, is far more likely to be punished for trade malpractice than China: South Korea.

Speaking to Reuters and WaPo, Trump – who earlier also told Reuters that a “major, major” conflict with North Korea is possible – Trump sharply criticized the U.S.-Korea Free Trade Agreement, known as Korus, the latest version of which was ratified in 2011 and said that he will “renegotiate or terminate” the “horrible” free trade deal. Next week marks an anniversary for Korus and triggers a review period to potentially renegotiate or ratify a new version of the agreement.

“It’s a horrible deal. It was a Hillary Clinton disaster, a deal that should’ve never been made,” Trump said. “It’s a one-way street.”

“We’ve told them that we’ll either terminate or negotiate,” Trump said. “We may terminate.”

Trump added: “I will do that unless we make a fair deal. We’re getting destroyed in Korea.”

On his trip to Asia last week, Vice President Pence said to an audience of business leaders in Seoul that the United States was looking to “reform” the Korus agreement because U.S. businesses “face too many barriers to entry, which tilts the playing field against American workers and American growth.”

The president explained that the process of termination of Korus is simpler than with the North American Free Trade Agreement. “With NAFTA, we terminate tomorrow; if we did, it ends in six months. With the Korean deal, we terminate and it’s over.”

* * *

Trump also said he wants South Korea to pay for the recent $1 billion deployment of the U.S. Terminal High Altitude Area Defense, or THAAD battery, a missile defense system deployed to South Korea to protect against accidental North Korean launches, and to antagonize China.

Hyundai Motor shares fell as much as 2.4% after Trump’s comments, while the South Korea’s won also dropped on the comments. South Korea’s automakers association said it was concerned about the possible revision of the country’s trade deal with the United States, an official of the industry group said on Friday. 

“We are worried about the uncertainty of the deal,” Kim Tae-nyen, vice president at the Korea Automobile Manufacturers Association (KAMA), told Reuters by telephone.

As Reuters followed up, a senior South Korean finance ministry official said the country has not yet received official requests on renegotiation of its free trade pact with the United States.

“Talk and actual policy are different,” the official told Reuters. “They have not requested anything from us so we’ll have to wait and see.”

Trump’s aggressive trade stance was unveiled as tensions are rising on the Korean Peninsula and as South Korea’s increasingly more irrational neighbor is proving to be a major source of instability, and thus leverage for any future Trump negotiations.

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Via SRSroccoReport.com,

There’s this notion put forth by the majority in the precious metals community that the Fed and Central Banks control the market price of gold.  I have even heard that some analysts believe the Fed could push the gold price any where they saw fit…. even to zero.  While I agree that the Central Banks do play a role in gold market intervention, they most certainly CANNOT push the price of gold anywhere they want.  This is an absolute falsity…. and I have the data to prove it.

To understand how the market determines the price of gold, we must first dismiss the economic principle of SUPPLY & DEMAND.  While supply and demand forces are factors in the short-term price movement of gold, they do not really factor all that much over the longer term.

Here is a chart showing the relationship of the gold and oil price since the 1940’s:

The gold price is in DARK ORANGE while the oil price is in BLACK.  We can plainly see the price of gold and oil have moved in tandem, especially after Nixon dropped the Dollar-Gold peg in 1971.  While the oil-gold price movements are not exact, they parallel each other quite nicely.  Thus, when the oil price skyrocketed during the 1970’s, so did the gold price.  The same thing took place in the 2000’s.

Interestingly, the same thing took place with the silver price below:

In both of these charts, the volatility in the oil, gold and silver price increased significantly after 1971.  There was an underlying reason for this… and it just wasn’t the dropping of the U.S. Dollar convertibility into gold in 1971.  It was also due to the fact that the United States peaked in domestic cheap oil production in 1970.  This was actually the peak of the U.S. Empire, even though we have continued to dominate the world by exchanging PAPER (U.S. Treasuries) for physical OIL-GOODS.

So, if we look at these two charts above, we can plainly see the oil price was more the LEADING DRIVER in the gold and silver price than were supply and demand forces.  Again, supply and demand forces add volatility to the gold and silver price over the short-term, but the energy cost (mainly oil) has been the leading driver over the longer term.

Who Really Controls The Gold Price??

If the gold price has paralleled the oil price, then who really controls the gold market price??  While I agree that the Fed & Central Banks are intervening in the gold market, they can really only control the UPWARD movement in the price of gold.  Why?  Well, if we look at the chart below, we find our answer:

This chart shows the difference between the total production cost of the top two gold miners, Barrick and Newmont, versus the annual average gold market price.  The chart clearly shows that the production cost is always less than the gold market price.

In the early 2000’s, the top two gold miners production cost was closer to the market price.  However, after the U.S. Housing and Banking Market collapsed in 2008, the gold market price moved up considerably higher than the cost of production.  My analysis suggests that the gold price was starting to head towards its high-quality STORE OF VALUE properties, rather than its COMMODITY PRICING mechanism.

NOTE:  I determined Barrick & Newmont’s production cost by using my Net Income & Adjusted Income approach.  This is much different than going by either Cash Costs or All-In-Sustaining Costs.  My estimated total production cost includes more items such as taxes-interest expense and etc, that are not considered in cash costs or all-in-sustaining costs.

Also, cash costs are a totally bogus metric as they deduct the miners by-product revenue to arrive at a very low cash cost.  They list them as by-product credits —  other metals extracted and produced along with gold in the process.  However, they are not really credits.  These miners need these by-product metal sales to fortify their balance sheets.  Without them, many mining companies would be suffering losses, not profits.

 

Thus, a credit is something that one does not need… it’s a plus.  In reality, most of these mining companies need their by-product metal sales to remain profitable.

That being said, here are some examples of the Barrick and Newmont’s cost of production versus the gold market price:

2000 Production Cost = $276

2000 Market Gold Price = $279

2012 Production Cost = $1,272

2012 Market Gold Price = $1,669

2016 Production Cost = $1,113

2016 Market Gold Price = $1,251

Now, the reason the production cost at Barrick and Newmont has fallen from $1,272 in 2012 to $1,113 in 2016, is mainly due to the 50%+ decline in the price of oil.  It takes a lot of energy to produce an ounce of gold.  Oil was trading over $100 in 2012, but fell to $45 in 2016.  Even though the energy cost has fallen significantly, labor costs have not declined all that much in the gold industry.

For instance, Barrick’s labor payroll per ounce of gold only declined from $328 in 2012 to $304 in 2015.  This is only a 7% decline in labor cost even though oil price dropped considerably in 2015:

On the other hand, the lower gold price has put more stress on Barrick’s financial bottom line as their payroll accounted for 26% of each gold ounce produced in 2015 compared to only 18% in 2009.  Investors need to realize it takes a massive amount of energy, labor, materials and capital to produce an ounce of gold.

If we look at the Barrick-Newmont Production Cost vs. Gold Price chart above, we see that the market price was never lower than the production cost.  Which means, the market or Central Banks did not push the gold price below the cost of production.  This is an important factor to understand when you listen to analysts suggesting that the Central Banks can rig the gold price down to whatever level they desire.

That is total BOLLOCKS…..

As, I have mentioned, the Fed and Central Banks can intervene in the market to control HOW HIGH the gold price will go.  That is the big difference.  So, those who continue to believe Harry Dent’s forecast that gold will go down to $700 an ounce, aren’t considering the COST OF PRODUCTION.  Harry Dent spends a lot of money advertising to get people to buy his books or newsletters.  Touting a $700 gold price gets people motivated in buying what he sells.

Unfortunately, Dent, like most analysts, tend to leave out the energy in their forecasts.  This is truly hilarious as energy is the leading driver of our economies… not supply-demand or finance

The Production Cost Of Gold Is Higher When We Consider Capital Expenditures

My Net Income & Adjusted Income approach for determining the production cost of gold (and silver) provides a much more realistic metric than the industry’s “cash costs” or “all-in-sustaining costs.”  However, when a mining company releases its income statements, they do not include their capital expenditures (CAPEX).  Their net income (or adjusted income) does not include capital expenditures.  To find out what they paid in CAPEX, we must look at the Cash Flow Statements.

If we consider what Barrick and Newmont spent on CAPEX and then deducted it from their cash from operations we would arrive at their FREE CASH FLOW:

From 2000 to 2016, these top two gold miners free cash flow was a net $10 billion.  If we compare their free cash flow of $10 billion to the total $220 billion in revenues, it only accounted for 4.5% of their revenues.  Thus, Barrick and Newmont’s free cash flow shows that it cost more to produce gold than was shown in their Annual Income statements.  Which means, these gold miners still enjoyed positive free cash flow during this time.

NOTE:  In order to consider some unwise capital expenditures during the years when the gold price really surged, I subtracted from each company, their lowest negative free cash flow that year.  Actually, this was about $5 billion when we add them both up.  So, in all reality, the free cash flow of $5 billion (half of the $10 billion shown in the chart above) means that Barrick & Newmont only enjoyed a 2%+ free cash flow margin compared to their total revenues.

Regardless, the gold market price was still higher than Barrick and Newmont’s small free cash flow margin to total revenue.  Of course, if we include stock dilution as well as dividend payouts, these two gold miners would have an even higher production cost.  But, that would still not change the overall production cost all that much.

As I have stated in many interviews and articles, the Fed and Central Banks CANNOT push the gold price wherever they see fit.  The algorithms are electronically calculating the gold market price based on its cost of production.  The only way the Fed and Central Banks can control the gold price is on its way UP.  This is by using a massive amount of paper contracts to cap the gold price from moving up too high.

The majority of Fed and Central Bank intervention is controlling where investors put their money.  By funneling the massive amount of money printing into STOCKS, BONDS and REAL ESTATE, 99% of investors (in the market) remain happy, as well as the governments.  We must remember, local, state and the Federal Govt receive tax revenues are based on high stock, bond and real estate values.  Once their values implode, so do government tax revenues.  This would be a complete disaster.

Lastly, the present COMMODITY PRICING mechanism of gold will transition to its high quality STORE OF VALUE when the U.S. and Global Oil industry really starts to disintegrate.  This gold value transition will be the first in history.  Why?  Because gold was still valued the same after the Roman Empire collapsed… due to the fact that it was based on human and animal labor.

Unfortunately, today the gold price is being based on the energy in oil.  However, when the oil industry collapses, there is nothing to replace it.  Thus, the value of most paper assets will plummet.  Gold and silver will become stores of economic energy because the world was brainwashed into believing PAPER ASSETS will always retain their value…. not so.

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With each passing day, and each new financial bubble, it becomes more and more difficult to figure out what exactly is “normal.”  That said, we can say with near certainty that home prices are not supposed to behave like this:

 

Home prices in markets that bubbled over back in 2006/2007, like Las Vegas and San Francisco, got cut in half in 2009 but have since doubled again of their lows.  Meanwhile, markets like Denver and Dallas that didn’t participate as much in the 2007 mania are now surging to all-time highs, with Dallas prices up 55% over the past 5 years.

Even the 20-City Composite Cash-Shiller Index shows that average prices have surged 44% off their lows and are nearly back to their 2007 peak.

 

As the Wall Street Journal points out today, some of the home buying behaviors of consumers, like paying prices well above appraisal values and waiving home inspections, are starting to be eerily reminiscent of 2006.

In some markets, bidding wars are breaking out. Agents said some buyers are kicking in extra cash when properties don’t appraise for the asking price, and some are waiving their right to home inspections.

 

“It can’t be sustained,” said David Berson, chief economist at Nationwide Insurance and a former chief economist at mortgage giant Fannie Mae, referring to the frenzied buying. “It can’t go on forever.”

Per the chart below, homes in a dozen major markets have increased over 50% off their 2012 lows while many have already exceeded their previous bubble peeks.

 

Meanwhile, there are other signs of overexuberance as well including surging levels of licensed Realtors all chasing a quick buck.

The number of licensed Realtors has jumped by nearly 25% since 2012, hitting a nine-year high in 2016 and sitting just 9% below the peak in 2006, according to real-estate consultant John Burns.

 

In Denver, homes are selling briskly. The median number of days that homes spent on the market declined to eight in the first three months of the year from 61 in 2012, according to Redfin. Home prices rose 8.5% in Denver over the year ended in February, according to Case-Shiller.

 

Nicki Thompson, an agent in Denver, said she recently had a listing that was on the market for two weekends at $1.2 million and she received multiple all-cash offers above the listing price.

 

“It’s just crazy,” she said.

 

Martin Mata, a Redfin agent in Denver, said his buyers often will commit to kicking in extra cash if the bank’s appraisal comes in lower than the purchase price. “We’ve got to be coming close to a plateau for prices,” he said.

But perhaps the scariest warning of all comes from the number of economists who were all too eager to reassure the WSJ that all is well.

With little risk of a supply glut in the near future, economists generally expect prices to continue rising quickly in most markets for a couple more years, if the economy keeps expanding.

 

They said it is more likely that overheated markets are headed for a long period of flat or slightly declining home prices, especially if mortgage rates rise or job growth slows, but not an outright crash.

 

The market “is not going to burst, it’s going to contract” with falling sales volume, said Nela Richardson, chief economist at Redfin, a real-estate firm. “You might still see what looks to be a robust market because prices are really strong, but that doesn’t mean it’s a broad market.”

Alas, we’re sure the economists are right this time around.

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Thanks to the influx of migrants, Germany’s Department of Terrorism Crime is expecting 500 – 600 lawsuits related to Islamic Terrorism in 2017. Last year there were 250 such terrorism-linked cases, up from 68 in 2013, according to general prosecutor Peter Frank.

The influx of migrants and refugees in recent years is a major cause of this development , said Frank. “There you can see what has come to us, both in the past few years, as well as escaped or has come from all countries to Islamic terrorists.”

According to this, the proportion of procedures with an Islamic background is explosive: it currently accounts for 85 to 90 per cent, four or five years ago it still lay at 50 to 60 per cent. The rest is attributable to legal or left-wing extremists and nationalists. –T-Online.de (translated)

Moreover, Germany’s President of the Federal Office for the Protection of the Constitution, Hans-Georg Maaßen said that there are at least 10,000 Salafist extremists roaming around Germany, with at least 1,600 considered at extremely high risk for terrorism. Every day, two to four threats are received by the OPC.

Violence among extremists has increased. Maaßen complained that the development culminated last year in five terrorist attacks in Germany. Of the perpetrators, however, only the assassin from the Berlin Christmas market had been noticed before, the other assassins did not. Just a lot of young people often radicalized themselves in secret. (Translated)

Coincidence? Germany’s admission of migrants seeking asylum leads the pack:

And some are saying Angela Merkel has single handedly destroyed German culture by allowing the greatest number of Islamic migrants of any country in the EU:

And surprise, surprise – crime is spiking:

The Telegraph reports that the crime rate in Germany among ‘refugees, asylum-seekers, and illegal immigrants’ rose by more than 50% last year, and had “increased disproportionately” even when the “huge influx” of refugees entering the country under Merkel’s opern-door refugee policy was taken into account.

“The proportion of foreign suspects, and migrants in particular, is higher than the average for the general population.”

Also interesting to note:

While the general crime rate in Germany fell slightly last year, Islamist-inspired crime rose by 13.7 per cent, according to the figures. -Telegraph

This echoes what Breitbart reported last May – migrants in Germany are committing a vastly disproportionate number of crimes, and account for almost the entirety of the increased crime-rate since 2014.

The data reveals that without migrants considered, crime rates in Germany would have remained roughly static since 2014. –Breitbart

It is unclear whether victims in the increasing number of terrorism-related lawsuits are able to sue the German government or just the perpetrators, however the prospect of Germany being held financially accountable for Merkel’s refugee program would add a completely new dimension to the costs of this ill-fated experiment in forced migration.

And as the United States considers the prospect of resettling Syrian immigrants – which “has to be part of the discussion” per the increasingly influential and effervescent Ivanka Trump’s statements this week, let’s consider the best use of resources per Stefan Molyneux (who hosts insightful and often lengthy “Freedomain Radio” podcasts):

For the cost of resettling 10,000 refugees in the United States – 121,797 can be resettled in the Middle East. #MuslimBan http://pic.twitter.com/W6WLMaots9

— Stefan Molyneux (@StefanMolyneux) January 29, 2017

And if you think the spike in German lawsuits over terrorism are bad, just imagine what an influx of migrants would do to the US legal system… Better Call Saul.

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Authored by Daniel via The Mises Institute,

 

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While emoting sympathy for Kim Jong Un's situation, President Trump told Reuters, during a lengthy interview ahead of his 100th day in office, that he'd "love to solve things diplomatically," but warned that "there is a chance that we could end up having a major, major conflict with North Korea."

Putting a somewhat human face on the North Korean leader, President Trump had an interesting response when asked by Reuters if he considered North Korean leader Kim Jong Un to be rational…

"He's 27 years old. His father dies, took over a regime. So say what you want but that is not easy, especially at that age.

 

"I'm not giving him credit or not giving him credit, I'm just saying that's a very hard thing to do. As to whether or not he's rational, I have no opinion on it. I hope he's rational."

And that is perhaps why he stil holds out hope for a path that avoids the military option…

"We'd love to solve things diplomatically but it's very difficult,"

Emphasizing the possibility of new sanctions, and in particular leverage from China..

"I have established a very good personal relationship with President Xi"

 

"I believe he is trying very hard. He certainly doesn’t want to see turmoil and death. He doesn’t want to see it. He is a good man. He is a very good man and I got to know him very well."

Still, as Reuters notes, just a day after he and his top national security advisers briefed U.S. lawmakers  declaring North Korea "an urgent national security threat and top foreign policy priority;"  and one day before Secretary of State Rex Tillerson will press the United Nations Security Council on sanctions to further isolate Pyongyang over its nuclear and missile programs, it's clear where this could lead…

"There is a chance that we could end up having a major, major conflict with North Korea. Absolutely."

U.S. officials said military strikes remained an option but played down the prospect, though the administration has sent an aircraft carrier and a nuclear-powered submarine to the region in a show of force.

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Just days after the US Commerce Department imposed duties averaging 20% on Canadian softwood lumber, accusing Chinese timber companies of getting an unfair government subsidy, on Thursday round two of the trade war between the US and Canada broke out when Boeing asked the U.S. Commerce Department to investigate dumping, subsidies and unfair pricing for Canadian planemaker Bombardier’s new CSeries airplane, a competitor to the Boeing 737, confirming that the trade tensions between the two neighboring countries are set to get far worse.

Specifically, the Chicago-based aerospace giant has asking the International Trade Commission to rule that it has suffered injury to its business at the hands of Bombardier and to recommend that the Commerce Department impose duties on the Canadian jet builder (amusingly, Boeing also complained about the very existence of Bombardier itself, a company which has been aggressively bailed out by the Canadian government as recently as October 2015, when in exchange for $2.5 billion in taxpayer funds, the company fired 7,000 Canadian workers).

In its petition, Boeing said that Bombardier, determined to win a key order from Delta Air Lines after losing a competition at United Airlines, had offered its planes to the airline at an “absurdly low” $19.6 million each, well below what it described as the aircraft’s production cost of $33.2 million. “Propelled by massive, supply creating and illegal government subsidies, Bombardier Inc has embarked on an aggressive campaign to dump its CSeries aircraft in the United States,” Boeing said in its ITC complaint.

A comparable 737-700 model by Boeing has a list price of $83.4 million, with the new 737-MAX 7 priced at $92.2 million. While sales discounts from list prices are typically 40 percent to 50 percent in the industry, another question is just how much of that price is courtesy of the implicit taxpayer subsidy of the Ex-Im bank, but that is a topic for another post.

The spat between the two companies came to a climax in April 2016, whe Bombardier won the Delta order, its biggest yet, for 75 CS100 jets, worth an estimated $5.6 billion based on the list price of about $71.8 million.  And now that Trump has given the green light to challenge Canadian trade competitors, Boeing is certainly not wasting time.

In its complaint against Bombardier, Boeing argued that the CSeries program would not exist without hundreds of millions of dollars in launch aid from the governments of Canada, Quebec and Britain, nor the abovementioned $2.5 billion equity infusion from Quebec in 2015.

Boeing wasn’t finished: the company also took a shot at European rival Airbus, which it accuses of benefiting from similar “unfair” government subsidies in a long-running dispute before the World Trade Organization.

“Evidently taking a page out of the Airbus strategy book, Bombardier has blatantly and intentionally demonstrated its goal of muscling its way into the U.S. aviation market by offering its heavily subsidized planes at cut-rate pricing,” Boeing said.

A Commerce Department spokesman told Reuters that the petition would be given “a thorough review” and further comment was premature.

In recent week, Commerce Secretary Wilbur Ross has taken swift action to protect the U.S. steel and aluminum industries from foreign competition, launching national security investigations that could lead to import restrictions. An investigation could lead to duties on the aircraft to offset any below-cost pricing or any subsidies deemed unfair.

Shortly after the complaint was filed, the Canadian government issued a statement objecting to Boeing’s allegations and noted that the CSeries has many U.S. suppliers, including for engines, and supports thousands of U.S. jobs. “The Government of Canada will mount a vigorous defense against these allegations and stand up for aerospace jobs on both sides of the border,” it said. Full statement below:

The Government of Canada today made the following statement regarding the filing of a petition by Boeing Aerospace Corporation with the United States Department of Commerce, alleging the dumping of Bombardier aircraft in the United States market:

 

“The Government of Canada objects to the allegations made by Boeing. We are confident that our programs are consistent with Canada’s international obligations.       

 

“The aerospace industries of Canada and the United States are highly integrated and companies on both sides of the border benefit from this close partnership. For example, many C Series suppliers are based in the United States and it is projected that more than 50 percent of the components for the C Series, including the engine, will be supplied by American firms directly contributing to high quality jobs in that country. The C Series is a great example of how the North American industrial base can develop and produce a globally competitive product with industry-leading clean technologies.

 

Bombardier also has a significant presence in the U.S. across its aerospace and transportation divisions, directly employing more than 7,000 workers. In addition, the company works with more than 2,000 suppliers headquartered in states across the country thereby generating thousands of well-paid, high-tech American jobs.

 

“The Government of Canada will mount a vigorous defence against these allegations and stand up for aerospace jobs on both sides of the border.”

Curiously, Bombardier’s chief executive conceded the company had been “aggressive” on pricing in order to win, and sources familiar with the deal pegged the discount closer to two-thirds off the nominal list price. It added that it was reviewing the petition and structures its dealings to ensure compliance with all relevant laws.

* * *

In a separate development, Premier Christy Clark of British Columbia, wrote a letter to Canadian Prime Minister Justin Trudeau Wednesday asking him to ban coal shipments from the U.S., sending shares of US coal giant Cloud Peak Energy (among others) tumbling. According to Bloomberg, Clark’s demand was in response to Trump’s lumber tariffs. Trudeau said he would consider the request “carefully and seriously.” Some context: a little over 6 million metric tons of U.S. thermal coal were shipped through the port of Vancouver in 2016.

Needless to say, it would be especially absurd if as a result of Trump’s Canadian tariffs, it is the US coal mining industry – the one which the president vowed to reincarnate – that suffers the most.

And now, we sit back and wait for round three in the increasingly hostile trade wars between the US and its peaceful northern neighbor.

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Presented with no comment…

 

Source: MichaelPRamirez.com

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Authored by Nicholas Colas via ConvergEx,

Yesterday’s announcement regarding the White House plan on tax reform was a little short on details. 

 

We’ll fill in a few of the gaps in this note – not about what the plan should be, but the numbers behind what it has to deliver.  The most important point: corporate tax reform is much easier to accomplish than anything else because these receipts account for less than 10% of Federal government revenue. That’s a notional positive for equity markets. 

 

A more troubling point: CBO baseline expectations for Individual Income Tax receipts over the next 10 years are for +5% (good luck finding a revenue neutral tax reform plan).

 

Also in the “Fact mix”: total taxes as a percent of GDP are remarkably sticky over time and the CBO projects widening deficits over the long term even under their rosy scenario. 

 

Bottom line: investors want to see corporate tax reform (including repatriation relief) succeed.  Individual tax reform is a “Nice to have” but negotiations there could derail the corporate side.

 

[ZH: Which is ironic given that it is the 'personal' rates that appear to need the adjustments…]

 

 

“You are what your record says you are.”  Bill Parcells

Yesterday’s announcement on tax reform was a bit of a miss from the perspective of market expectations.  It was strong on conviction (kudos to Steve Mnuchin and Gary Cohn there), but weak on details. In truth, this is a complex topic. As the Treasury Secretary rightly observed, US tax code is byzantine in the extreme.

At the same time, there are some simple numbers that can illuminate the contours of the debate.  That Parcells quote at the top will guide us in this note.  The record – how the US government actually raises revenues – speaks for itself.

Fact #1: Corporate income taxes are NOT a primary driver of Federal government revenues.  That’s good news for equity markets, since corporate tax reform sits at the top of their Trump-onomics wish list.

• The Congressional Budget Office data shows that last fiscal year (2016), the US government received $300 billion from this source. Total receipts were $3,267 billion, making the percentage of inflows from domestic companies only 9.2%. Expected revenues this year total $320 billion against total revenues of $3,404 billion (9.4%).
• The percent of total Federal revenues from corporate income tax has not been over 15% since 1978 according to CBO data. The highwater mark since 1980 was 14.7% in 2006.
• The fact that corporate income taxes is a relatively small portion of the Federal revenue stream makes it easier to adjust these rates and maintain a neutral long term forecast for the budget deficit. Moreover, a lower repatriation tax on the estimated +$2 trillion of offshore corporate cash could go a long way to filling the hole left by lower ongoing statutory rates.
• All this is good news for equity markets, and I suspect one reason US stocks have been remarkably patient with the debate in Washington over tax reforms stems from the simple calculus I have laid out here. This piece is not that hard.

Fact #2: Where things get sticky is in the CBO’s “Baseline Budget Projections” for future “Individual Income Taxes” and “Payroll Taxes”.

• The CBO’s baseline expectations are that Individual Income Taxes will increase by a compounded annual growth rate of 5.1% over the next decade. The exact numbers (from the January 2017 CBO worksheets): $1,651 billion in 2017(e) to $2,714 billion in 2027. Given that US population growth is less than 1% and wage growth is most likely no better than 2-3%, this is a tall ask.
• Expectations for increases in receipts from “Payroll taxes” (withheld income taxes, Social Security and Medicare) run 3.6% annually over the next decade. The same caveats as the prior point apply here.
• Worth noting: CBO Baseline Budget Projections assume no recession in the next 10 years. And even then, they expect the percentage of “Debt held by the public” to rise from 77.0% to 88.9% by 2027 because of annual revenue shortfalls relative to government outlays.
• This is what makes the tax debate so difficult – any proposed changes to the tax code have to be revenue neutral so as not to increase what is already expected to be a growing deficit. Not only does the lawmaking process essentially require that (unless Democratic senators cross party lines) but the right wing of the Republican Party tends to be deficit hawks.  There simply isn’t much room here.

Fact #3: The relationship between Federal revenues from taxes and GDP is remarkably stable, and we are currently running close to the long run average.

• Over the last 50 years, the average of Federal tax revenues as a percent of GDP has been 17.4%; last year (2016 Fiscal) the percentage was 17.8%, well within the 1.1 point standard deviation of the last 5 decades.
• Since 1967 the all-time high percentage was 20.0% (2000) and the low was 14.6% (2010 and 2011).
• When you consider all the different tax regimes over the last 50 years, this is a remarkable observation. Since the 1960s, for example, corporate taxes as a percentage of GDP have fallen from 4.1% (1967) to 1.6% (2016).  We’ve had numerous attempts to change tax codes and rates over this timespan as well.  And yet that 17-18% seems etched in stone.

Fact #4: The relationship between tax receipts/economic growth/equity market returns isn’t exactly what you think.

• During the 1970s, Individual and Payroll Taxes combined averaged 12.9% of GDP; during the Reagan years this figure was much higher 14.3%. In other words, more tax revenue flowed to the Federal government as a percent of economic output – not less.  The 70s, of course, were a period of parlous equity market returns and economic growth.  The Reagan years were much better, even with a greater percentage of taxes relative to economic growth.
• There were actually 2 rounds of tax cuts in the 1980s, in 1981 and 1986. The first was partially repealed 1982 when revenues declined as the result of recession, and there were several tweaks in subsequent years. The Tax Reform Act of 1986 furthered the reduction of individual taxes started in 1981, but was notionally revenue neutral because it reduced various loopholes and increased corporate taxes.
• The upshot is that tax reform can both increase revenues and economic growth, but the Reagan experience shows this is not a one-and-done process. Even the Gipper had to backpedal a little after the `1981 law passed, but eventually got his agenda across the goal line in 1986.

Fact #5 (Summary):  When it comes to corporate earnings and cash utilization, and hence equity market performance, getting corporate tax reform matters more than anything else.  Moreover, it is relatively simple because the numbers are smaller than Individual/Personal Tax reform.  And the results – greater business confidence driven by certainty on the topic and lower tax rates – would be an unalloyed positive.  Not to mention the onshoring of billions of dollars currently captured offshore….

But – and it’s a big “But” – corporate tax reform seems inextricably linked to individual tax reform.  Here, the story gets complicated.  CBO baseline estimates look unrealistically optimistic and dynamic scoring (taking into account the economic effects of tax code changes) is not exactly a science.  Or an art… Even a tax plan crafted by an omniscient and caring Deity could fail CBO scoring, let alone one created by well-meaning bureaucrats.

In the end, Coach Parcells remains our guiding light on the issue of tax reform.  The record is clear: lower taxes and simpler tax codes help economic growth.  They are not, however, the only driver and other issues like Fed policy and business cycles can hijack the market’s attention (as it did in 1981).  We’ve argued recently that “Trump Trade 1.0” is over (post-election “hope” bump) and Version 2.0 (actual results) is not yet here.  Nothing about the tax reform initiative makes me feel confident that we’ll be downloading a new market narrative any time soon.

via http://ift.tt/2pEGKO2 Tyler Durden

The last time American consumers were this confident about the national economy was August 2001.

As a reminder, the market is not the economy… and a rising economic confidence on the heels of rising stock prices does not 'forecast' the economy…

For those who believe there is more left in stocks to run, we note that economic confidence was rising to these levels in July 1997 – so you have about 30 months until the world implodes by that measure.

There's just one problem with that exuberance…

'Soft' versus 'Hard' Data again!!

via http://ift.tt/2qc8shX Tyler Durden