Morning Report: Corporate taxes and inflation 12/1/17

Posted on December 1, 2017 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2645.0 -3.0
Eurostoxx Index 386.0 -0.7
Oil (WTI) 57.8 0.4
US dollar index 86.8 0.1
10 Year Govt Bond Yield 2.39%
Current Coupon Fannie Mae TBA 102.625
Current Coupon Ginnie Mae TBA 103.625
30 Year Fixed Rate Mortgage 3.88

Stocks are falling victim to profit-taking (and possibly window-dressing) on the first day of the month. Bonds and MBS are up.

Manufacturing slipped in November, according to the PMI Manufacturing Index. The ISM Manufacturing index moved slightly lower as well.

Construction spending rose 1.4% MOM and 2.9% YOY in October.

Negotiations continue on tax reform as Republican Senators made a lot of progress overnight. Issues about a financial trigger are separating fiscal hawks from conservatives. Probably the best summation of play:“We’re trying to get to a point where nobody is going to get exactly what they want but enough to get the bill passed,” Senator Thom Tillis of North Carolina said. Republicans need to have something to show in 2018, and this is something. At the end of the day, it will probably be more symbolic than substantial, at least on the individual income tax front. Cutting corporate taxes will almost certainly help the economy however.

Here is the thing to keep in mind about corporate taxes: Transfer pricing matters. Transfer pricing is how firms with international arms allocate revenues and expenses. For example, expenses like investor relations, legal, etc are used by the international arms as well and some of those costs should be allocated to them. If the company has operations in high tax and low-tax jurisdictions, they have the incentive to allocate all of their costs to the high tax jurisdiction and all of their revenues to the low tax jurisdiction. This minimizes US income and maximizes foreign income which results in companies making low payments to the IRS and high payments to foreign tax authorities. The US tax code effectively subsidizes foreign governments! It also locks up cash overseas, as companies have to pay US tax on that income once it is repatriated, which is even more of an incentive to shift earnings overseas. We have the highest corporate tax rate in the world, but the effective US tax rate is about what everyone else pays. If we equalize our corporate tax rate to the rest of the world, that incentive to play games with revenue and expense goes away. Which is why you could, at the margin, see revenues increase despite cutting corporate taxes.

After tax reform, the focus in Washington turns to funding the government. Democrats are demanding action on immigration in exchange for yes votes on a continuing resolution. For all the posturing over these things, they invariably get resolved.

Booms don’t last forever, and neither do busts. After experiencing a generation of deflation, Japan is beginning to see the stirrings of inflation. Imported deflation from Asia has been a bit of a free lunch for the US as it allowed the Fed to be about as easy as it wanted without triggering inflation – at least inflation as measured by the Consumer Price Index. IMO, if Japan is recovering for real, and the Chinese economy maintains strength (i.e. their real estate bubble doesn’t burst) then inflation is probably set to return. A Japanese recovery is a bit of a sea change for the Fed, and the return of the world’s second biggest economy will gobble up the glut of capacity we currently have. This could force the Fed to act more quickly than it otherwise would.

What does inflation mean for the US? First of all, more consumer comfort. An economy with low inflation and low wage growth is much more uncomfortable than an economy with moderate inflation and moderate wage growth. While this may seem counter-intuitive (if wages and prices are rising together, who cares what the rate is?) it matters because of debt. Rising wages and prices means that the relative size of a household’s debt decreases over time. While this won’t necessarily apply to floating rate debt like credit card debt, it will apply to things that are fixed, like car loans, student loans, and mortgages. Worries about 1970s style hyper-inflation in the US are also overblown. That phenomenon was largely due to the oil shocks and a host of other issues (capacity constraints) that are no longer applicable.

Of course what is great for a borrower is necessarily bad for a lender (or people who own long-duration assets, like banks and insurance companies). I wouldn’t rule out a hiccup in bank earnings or insurance company earnings, but I can’t see anything systemic like we had in 2008. I do wonder how much this will affect the $4.5 trillion of assets owned by the Fed.

Overall, higher inflation will be good for the real estate market, as it means higher prices and higher employment. Higher inflation is most beneficial to the first time homebuyer.

Filed under: Economy, Morning Report |

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42 Responses

  2. Brent Nyitray, on December 1, 2017 at 10:57 am said:

    So, is this the end for Trump? Has the swamp finally got their man?

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    • Let the mutherfuker burn!, on December 1, 2017 at 11:23 am said:

      The main witness is a now admitted and convicted perjurer?

      I’m no lawyer but this seems problematic.

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    • ScottC, on December 1, 2017 at 11:56 am said:

      Brent:

      So, is this the end for Trump? Has the swamp finally got their man?

      Is there a suggestion that Trump has committed a crime? All i have seen is that Flynn will say Trump had him contact the Russians.

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      • novahockey, on December 1, 2017 at 11:57 am said:

        that’s collusion. or so the internet seems to think.

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        • jnc4p, on December 1, 2017 at 12:04 pm said:

          Unfortunately for the Internet, there’s no actual crime called “collusion”.

          Absent him actually coordinating his campaign messaging with Russian operatives, I think this is more of the same.

          What matters in the end is whether or not Republicans in Congress abandon him.

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        • ScottC, on December 1, 2017 at 12:31 pm said:

          Corked by jnc!

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        • novahockey, on December 1, 2017 at 12:28 pm said:

          i don’t like trump, but removing him from office just seems like the wrong way to get rid of him.

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        • ScottC, on December 1, 2017 at 12:29 pm said:

          nova:

          that’s collusion. or so the internet seems to think.

          Yeah, but collusion over what? As far as I know “collusion” is not a crime in and of itself.

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        • jnc4p, on December 1, 2017 at 12:43 pm said:

          If this is it, then it’s going to backfire:

          “Retired Lt. Gen Michael Flynn has promised “full cooperation” in the special counsel’s Russia investigation and, according to a confidant, is prepared to testify that Donald Trump directed him to make contact with the Russians, initially as a way to work together to fight ISIS in Syria.”

          http://abcnews.go.com/Politics/michael-flynn-charged-making-false-statements-fbi-documents/story

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        • jnc4p, on December 1, 2017 at 12:44 pm said:

          “novahockey, on December 1, 2017 at 12:28 pm said:

          i don’t like trump, but removing him from office just seems like the wrong way to get rid of him.”

          It won’t stop with that. It will escalate.

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        • jnc4p, on December 1, 2017 at 12:47 pm said:

          Why I will never go into politics or government service:

          “Flynn had initially resisted cooperating with the investigation, according to people close to the retired general, but he has been facing mounting legal debts and plans to sell his house to help defray costs.”

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    • markinaustin, on December 1, 2017 at 6:39 pm said:

      I think y’all are missing how many charges and years for Flynn, father and son, were bargained away. Mueller and his team and the FBI are rather obviously convinced Flynn has given them info they believe to be true and that will either allow them to cast a wide net or catch a big fish, or both.

      I do not know who will be in the net, or for what, but the real signal here is that the prosecution gave Flynn a great deal for Flynn.

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      • ScottC, on December 3, 2017 at 10:36 pm said:

        Mark:

        I think y’all are missing how many charges and years for Flynn, father and son, were bargained away.

        How many, and what would the charges have been?

        Andrew McArthy suggested that ordinarily when someone who was involved in criminal activity makes a deal to roll on others involved in the activity, they are required to cop to their role in the activity, and the deal comes from leniency in sentencing. So it seems strange that Flynn is only admitting to lying to the FBI, if he is going to testify to some kind of illegal collusion by Trump or somene else. Is McArthy wrong?

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        • markinaustin, on December 3, 2017 at 11:17 pm said:

          Not wrong but overlooking the kind of deal that the US Atty can and will make in extraordinary circumstances, which I have seen in RICO matters.

          I would bet that there is a sealed indictment on the Turkish deal with the actual conspiracy to kidnap the Turkish-American mullah in PA on behalf of the Turkish government. That Grand Jury was convened in the USDC for the Eastern District of VA. That is a huge case for the Flynns.
          Recall where that began:

          https://www.theatlantic.com/politics/archive/2017/06/mueller-michael-flynn-turkey/529011/

          If Flynn cooperates in DC the EVaDC case will disappear. Why do it that way? Because the presentence report in DC can omit the statement of facts in the EVa case thus permitting the Judge in DC to sentence to 6 months when they get around to it.

          But if Mueller is not satisfied with Flynn, he and his son get slammed on a number of charges that sound like “paid by Turkey to kidnap an American citizen and remove him from the country”, in the other court. That indictment, which I suspect has happened and is sealed, is the sword of Damocles.

          When I say I have seen this in RICO cases, what I mean is using two different courthouses to work the pressure on the deal.

          Did McCarthy consider that? I know he completely missed that Manafort’s was a “b” indictment, and that his “a” indictment remained sealed.

          Turkey deal has nothing to do with Trump of course. It just so happens it catches the Flynns on a very major felony.

          https://www.wsj.com/articles/mueller-probes-flynns-role-in-alleged-plan-to-deliver-cleric-to-turkey-1510309982?tesla=y

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        • ScottC, on December 4, 2017 at 6:27 am said:

          Mark:

          That indictment, which I suspect has happened and is sealed, is the sword of Damocles.

          Why do we know that Manafort has a sealed indictment against him, but we wouldn’t know if Flynn has one against him? (Does “sealed” mean that we aren’t suppose to know about its existence at all, or just the substance of it?)

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        • markinaustin, on December 4, 2017 at 7:51 am said:

          We are not supposed to know about the substance OR the subject. Reading docket lists we can see the numbers of all indictments and for the open ones we can see the names and charges and we can pull a copy. The sealed ones just say “under seal” and cannot be retrieved. No name or charge listed.

          The inference on Manafort’s case is from the fact that the indictment that was unsealed was 201-B, as I recall. The docket shows a sealed indictment at 201-A. A+B indictments are related and have the same defendants. We do not know the substance of “A” but we can assume that Manafort or his co-indictee is a subject, even though we can neither see the charge nor the names involved, nor pull the indictment up to read.

          The docket doesn’t show the names of persons in sealed indictments, only numbers. Sometimes for various purposes the prosecutor tells the defense attorney that his guy is under a sealed indictment, for example, when they are willing to forego the “perp walk” if the defendant shows up at the FBI office at 7AM. If the public knows who/what is under seal it destroys the purpose of the seal, obviously.

          I could be wrong about there being a terrifying case in waiting for the Flynns in the ED of VA – and the DC case on false swearing may be the whole ball of wax – in which case there would be few or no bargaining chips, whatsoever. That seems very unlikely to me.

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        • ScottC, on December 4, 2017 at 8:28 am said:

          Mark:

          Reading docket lists we can see the numbers of all indictments and for the open ones we can see the names and charges and we can pull a copy. The sealed ones just say “under seal” and cannot be retrieved. No name or charge listed.

          Are there any sealed indictments on the docket list related to the Grand Jury that would have indicted Flynn?

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        • markinaustin, on December 4, 2017 at 9:45 am said:

          Scott, IDK ’cause I don’t have any lawyer acquaintances practicing in that District.

          I’ll bet Joe does! Joe, is the bankruptcy court in Richmond in the same courthouse with the District Court? It isn’t in Austin.

          JNC – Richmond is ED; Flynn GJ was in Alexandria in the ED, but I am guessing that Richmond has access to the entire docket from all the ED Divisions.

          Addendum: I have a friend who practices family law in that area but he is never in the fed courthouse.

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        • ScottC, on December 4, 2017 at 7:52 am said:

          McCarthy’s latest. He says Mueller is trying to make a case for impeachment, not a criminal case.

          http://www.nationalreview.com/article/454311/mueller-strategy-obstruction-justice-investigation-leading-impeachment

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        • markinaustin, on December 4, 2017 at 8:11 am said:

          Except [as we all know] it would take a major felony to convince a R Congress to Impeach, not mere never-ever-prosecuted Logan Act violations.

          So I think Mueller is just following all his leads and I doubt DJT is worried about any except financial dealings.

          Flynn lying to the FBI was a known deal from the time leading up to his resignation. If that is the end of that trail then Ty Cobb will prove to have been prescient and this will all be over by the end of the year.

          Again, if Mueller is not following a two courthouse two case strategy as in multistate RICO dealmaking then McCarthy will probably be proven correct.

          So if Mueller can lay down an Obstruction case against DJT I suppose a D Congress would take it up.

          According to the press, the forensic accounting investigators are still hard at work. I am crediting that when I say I think financial matters are all that worry DJT, who as you know goes out of his way to avoid any transparency in his business dealings.

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        • jnc4p, on December 4, 2017 at 12:58 pm said:

          Yes I believe so.

          http://www.vaed.uscourts.gov/locations/ric.htm

          I think all of this stuff is on PACER anyway, although obviously not any of the sealed items.

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        • markinaustin, on December 4, 2017 at 2:08 pm said:

          I don’t think any of the Districts publish the Cr Docket online. I only got the poop on the DC Docket from a lawyer who went to look at it. I think only “permanent” items are published like the local court rules, session days, etc. Dockets change every day.

          You know, the press is lazy. They could easily check but they don’t.

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  4. markinaustin, on December 1, 2017 at 1:44 pm said:

    I think this tax bill is likely to be a big problem for small and medium businesses. I don’t know yet what the statute will look like, but each version is rife with pitfalls for Main Street. NFIB agrees.

    Now, Lindsey Graham, who I admire, knows little about taxation, and has blurted out the idea that Rs must pass this to please their biggest donors.

    I have to wonder if sacrificing the most solid R support in the NFIB and the local CoCs is worth it in dollars. In other words, pissing off oil industry types who are multi-million dollar donors would certainly lead to them propping up their own candidates within the R Party, but abandoning Main Street might lose Rs votes as well as cash. There are, after all, Ds who are friendly to Main Street biz in the midwest and the southwest and the mountain states [not too much on the coasts, of course].

    I think about the Lubbock area cotton growers [biggest worldwide source of raw cotton] who rely upon good trade relations with the Far East and Mexico and their dismay over the sudden R retreat from trade deals. Ds in Lubbock have been dead in the water in 85% R territory since the 90s, but that really might change back as Texas Ds are not going with Sanders and the Trumpians on attacking trade deals. This tax bill which might end up with provisions like taxing personal investment in one’s small corporation as income to the corporation [!] is more of the same reversal of the many good reasons local businesses and high earning professionals identified with Rs forever.

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  5. Brent Nyitray, on December 1, 2017 at 7:09 pm said:

    Could be fake news, but the Feds issuing a warrant for Jose Inez Garcia Zarate… Is this like the Rodney King situation, where the Feds used “violating civil rights” as a tool to overrule a decision they didn’t like?

    http://www.foxnews.com/us/2017/12/01/doj-files-arrest-warrant-for-illegal-immigrant-acquitted-in-kate-steinle-case.html

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    • Let the mutherfuker burn!, on December 1, 2017 at 7:38 pm said:

      Pretty sure it’s for immigration violations. I think he’ll end up in Federal prison for at least a decade for it.

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    • markinaustin, on December 2, 2017 at 9:43 am said:

      Zarate was a four time illegal entrant. He would have been instantly deported if he had been found by someone other than SFPD after an investigation. State criminal charges interfered with and thus delayed the timing of his deportation or whatever else the feds will do to him now.

      This would be SOP in any case where the feds are made aware of a pending indictment in state court against an IA.

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  7. Let the mutherfuker burn!, on December 2, 2017 at 12:52 pm said:

    He’s butthurt because he thinks it will crater the Hentai Porn market.

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  8. markinaustin, on December 3, 2017 at 12:49 pm said:

    New quote is up.

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  10. Let the mutherfuker burn!, on December 3, 2017 at 10:02 pm said:

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