Morning Report: Is the Trump Reflation Trade dead? 4/26/17

Vital Statistics:

Last Change
S&P Futures 2384.0 -1.0
Eurostoxx Index 387.2 0.2
Oil (WTI) 49.2 -0.4
US dollar index 89.8 0.3
10 Year Govt Bond Yield 2.31%
Current Coupon Fannie Mae TBA 102.625
Current Coupon Ginnie Mae TBA 103.68
30 Year Fixed Rate Mortgage 3.98

Stocks are flat as markets await Donald Trump’s tax plan. Bonds and MBS are down small.

Trump is expected to unveil his plan for a 15% corporate tax rate today. This rate is a negotiation posture and it will almost certainly increase to 20% or higher. Trump is not only negotiating with Democrats, he is also negotiating with Paul Ryan, who wants to implement a border adjustment tax which will offset the revenue lost from the tax cut. If the tax cut is not revenue-neutral, it will need 60 votes in the Senate, which will doom it. The other option, which would be a temporary reduction in the rate, would probably not influence corporate decision making, especially if it was only for a few years.

Note that our current tax rate of 35% is the highest in the world, and our competitors are in the mid 20s. Germany has been the biggest tax cutter, taking its rate from 42% to 16% over the past 16 years. Does the Laffer Curve apply to corporate taxes? The Laffer Curve (pictured below) basically showed that tax receipts don’t increase monotonically as the rate increases – it is a curve. When taxes are 0% or 100% the government will raise nothing. In between those numbers there is an optimal point. The debate in Washington has been over which side of that point we are on. The curve for corporations is influenced not only by tax policy influencing corporate incentives, it is also influenced by competition from other jurisdictions. The reason why Corporate America has trillions stashed overseas is testament to this. Outsized corporate taxes compared to our competitors incentivizes corporations to maximize overseas income and minimize domestic income. This amounts to a subsidy to foreign governments. While the CBO (who will score the proposal) poo-poos the idea of dynamic scoring, in this case it is probably appropriate, even if you discount the effect on economic growth, simply because it removes this perverse incentive.

Will the potential tax cut breathe new life into the Trump reflation trade? A revenue-neutral tax reform will probably not be massively stimulative (it can’t be, by definition) however removing these perverse incentives will certainly help. If Trump can get some foreign tax repatriation deal, that will help. The left will probably balk if there are no strings attached to it, as they fear it will only go to dividends and buybacks. However, there could be a way to convince them to go along, if some of the savings are applied to things like increasing payroll, increasing training, etc. Infrastructure spending is also going to be a hard sell, both to Democrats, who despise the privatization of infrastructure, and the Freedom Caucus, who despises government spending in general.

Punch line: The Trump reflation trade is probably going to be based on revenue-neutral tax reform and some sort of stripped-down infrastructure spending plan (if one even materializes). The single best effect will be regulatory reform, however none of this should really push inflation higher, which is what the Trump reflation trade was all about in the first place.

Mortgage Applications increased 2.7% last week as purchases fell 1% and refis rose 7%. The average 30 year rate fell 6 basis points. Note last week was a holiday-shortened week, which probably affected the purchase number.

Republicans have floated a bill that funds the government through the rest of the fiscal year without funding the wall. Funding for the wall has been a sticking point and Democrats have vowed to shut down the government over it.

Fannie Mae is rolling out new products designed to help borrowers with student loan debt. This includes cash-out refis that allow a borrower to consolidate student loan debt into a mortgage, Other measures will allow borrowers to exclude debt paid by others, and another will allow lenders to accept student loan information on credit reports. Given the high home price appreciation we have been seeing, the first time homebuyer needs all the help it can get.

24 Responses

  1. Frist! Because reasons.


  2. The Laffer Curve (pictured below) basically showed that tax receipts don’t increase monotonically as the rate increases – it is a curve. When taxes are 0% or 100% the government will raise nothing. In between those numbers there is an optimal point. The debate in Washington has been over which side of that point we are on.

    Not according to progressives. According to most progressives I’ve heard discuss the Laffer curve, it’s some form of lie, superstition, witchcraft, nonsense, propaganda, and completely and totally wrong in every way imaginable. Then they explain how not only can you tax a nation to prosperity, every increase in taxes automatically leads to national prosperity. 😉

    Seriously, though, I always hear progressive explain the Laffer curve as saying that every tax cut, no matter how deep or unconsidered, increases tax revenues. Not that there’s an optimal point for tax rates to be at (at any given time) for optimal tax revenues. Although that’s actually the only real claim the Laffer curve makes, to my understanding.

    I’d see the problem of the Laffer curve as being temporal. I.e., in a hot economy (that is hot for reasons unrelated to tax policy), taxes can be high without discouraging economic activity, leading to high taxes producing high government revenues.

    In a depressed economy, high taxes can discourage what little economic activity there is, and make it hard for/unlikely for companies and individuals to innovate and develop new technologies or markets that might help stimulate the economy into hotness again. So the optimal tax rate in those situations would be different (in regards to maximizing government revenues).


    • Your final two paragraphs on Laffer have always been my take.

      Recall that when the USA was the only giant economy standing after WW2 for many years it could afford both high taxes and management could acquiesce to big union CBAs without denting the economy one whit.

      Just as liberals often bash Laffer, conservatives often use it as a crutch for the argument that lower taxes will always bring higher revenues.

      It seems silly to abuse an almost self-evident reality in either direction, doesn’t it.


      • It’s a proxy for the argument over whether the government should be bigger or smaller. It’s like the argument over global warming, it’s not an argument over the science, it’s an argument over government control.


        • For the left, it is all about who gets the tax cut. Every single Republican tax cut is framed as “tax cuts for the rich” and out comes the analysis from some pinko think tank that estimates that 89.015% of the tax cut goes to those making over the unacceptable income line du jour.

          They don’t care if everyone gets a cut. It isn’t even on the radar.


      • Reagan got the big gains out of it already. I’ve always agreed with Steve Pearlstein’s rule of thumb that once the combined marginal rate goes over 50%, people will make substantial adjustments their behavior to avoid the taxes.

        Something about “half” pisses you off.


  3. Republicans have floated a bill that funds the government through the rest of the fiscal year without funding the wall. Funding for the wall has been a sticking point and Democrats have vowed to shut down the government over it.

    Trump promised me a beautiful border wall, just gorgeous. I’m going to be disappointed if we don’t get it now.


  4. Guess deciding to become The View of sports didn’t pan out so well:

    “Middle America wants to pop a beer and listen to sports talk, they don’t want to be lectured about why Caitlyn Jenner is a hero, Michael Sam is the new Jackie Robinson of sports, and Colin Kaepernick is the Rosa Parks of football. ESPN made the mistake of trying to make liberal social media losers happy and as a result lost millions of viewers.”


    • “mistake of trying to make liberal social media losers”

      which can’t be done, as they’ll just shift the goalposts.


      • They won’t be happy until there is a WNBA channel and guys are forced to watch it Clockwork Orange style..


        • It’s clearly better because their fundamentals are so sound.


        • the media tries soooooo hard to talk up womens’ sports. i remember one USA Today article talking about a female track athlete as “one of the fastest humans on the planet.” I was thinking she probably isn’t the fastest human in her zip code. Most world class female track athletes would have a hard time qualifying for their state’s high school boys championship races.


        • The US women’s soccer team sued US Soccer for better pay, claiming they were getting paid less than the men despite their greater success on the field. “It’s an unequal playing field!!!”

          Well, yeah. The only reason any women get paid anything at all to play soccer is because of an unequal playing field. Create an equal playing field and not one single woman would be able to make any professional team anywhere.


        • Just wait till some drag queen who can crush the ball 280 yards decides to join the LPGA tour…


        • If Tiger makes a comeback as Tigress and wins 5 more majors on the LPGA, does it count as beating Jack’s record?


      • Marvel Comics has had the same problem with “diversity” impacting their sales.

        They also constantly have to “clarify” whenever they tell the truth about the situation.


        • These companies act like there is some unseen entity forcing them to do this and they aren’t allowed to acknowledge it or even question it.

          Is there some army of triggered soccer moms ready to deploy a boycott against companies that aren’t woke enough?


        • “whims are dictated by a specific set of fans who go into the shop and buy individual floppy issues”

          don’t these guys know they’re buying the wrong thing!



    “For those at Berkeley celebrating what they believe to be a moral victory, consider this: As much as you may detest Ann Coulter, she has never used violence or the threat of violence to keep someone from speaking. She is a better citizen than you are, with a deeper commitment to genuinely liberal and humane values. You may call yourselves the anti-fascists, but your black-shirt routine — along with your glorification of political violence and your rejection of liberal and democratic norms — suggest that the “anti” part of that formulation is not entirely appropriate. Perhaps you are only young and ignorant, but if you had any power of introspection at all, you would see that you are the thing you believe yourselves to be fighting. You are the oppressors, the censors, the violent, the hateful, the narrow-minded, the reactionary”

    This IS the left. This is what the left does. This is what the left has always done. They don’t believe in freedom, they don’t believe in free speech, they believe in imposing their will using any legal or violent means at their disposal. They are on a mission to re-define hate speech as anything that wouldn’t fit in the Democratic Party platform.

    Stalin, Hitler, Kim il Jong, Pol Pot, Mao, they are all the same once they get power.


    • i’d like to say this is the point that caused people to say, hmm, this is a crazy person. but perhaps not.


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