Hoisington Management

[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.

 

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