Speaking of puking....
1-26-21: Janet Yellen’s Plan to Pay Down the Ballooning Deficit
by Bryan Perry - January 26, 2021
The shouts from many corners that this market is “grossly overbought” can be heard from a long way off. It’s like investors keep adding risk capital to the market via F.O.M.O. (Fear of Missing Out) pressure while at the same time keeping one hand on the trigger to lighten up (or hedge) in a hurry. As long as some fundamental indicators remain intact, then buying dips remain the path to profits, at least for now.
One cornerstone technical indicator that continues to favor the bull trend is how the advance/decline (A/D) line for the S&P 500 has continued to maintain a very positive chart pattern. At present, there is no disparity between the A/D line and the market’s advance, unlike previous charts I’ve posted here, showing wide disparities of forecasted profits and where the S&P currently trades.
Last week saw a new high for the A/D line that coincides with a new all-time high for the S&P.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The overriding tenor of the market is one where Treasury Secretary Janet Yellen is telling Congress to “act big,” which only overlays the Fed’s dual mandate of doing “whatever it takes” to bring the unemployment rate back down under 5% while bringing the core inflation rate back up to 2%.
It’s music to the market’s ears when the President, the Fed, the Treasury, and the controlling party in Congress all want to generate ballooning deficit spending.
At Janet Yellen’s confirmation hearing last week, much of the time was spent on the subject of how much is too much, in terms of spending. Her answer: Too much is better! “To avoid doing what we need to do now to address the pandemic and the economic damage that it’s causing would likely leave us in a worse place economically and with respect to our debt situation than doing what’s necessary.”
Yellen laid out a vision of a more proactive Treasury that would act aggressively to reduce economic inequality, fight climate change, and counter China’s unfair trade and subsidy practices. (Since when is the Treasury in the “climate change” business? I think we didn’t get the memo on that one.)
Taxes on corporations and the wealthy will eventually need to rise to help finance President Biden’s ambitious plans for investing in infrastructure, research and development, and worker training to improve the U.S. economy’s competitiveness, she told members of the Senate Finance Committee.
Investors know this. The market knows this, and this knowledge is likely priced into the market already.
What isn’t priced in is the cost of introducing new progressive tax policies. She raised the eyebrows of some Senators and some on Wall Street when she said that the Treasury would consider the possibility of taxing unrealized capital gains – through a “mark-to-market” mechanism – as well as other approaches to boost revenues (source: Reuters – January 19, 2021). So, if one is expected to pay taxes on unrealized gains for 2021, does the government provide a refund for unrealized losses in 2022? I doubt it.
This line of thinking is so far off the reservation that it’s hard to imagine it getting to Congressional committee, but desperate governments in dire financial condition will do desperate things to get whole.
Those “other approaches” are what investors need to be on high alert to hear about before they become law. The looming biggie would be the elimination of “step up basis” for inherited assets. With estimates of close to $9 trillion in assets being passed on by 2030, and a projected $68 trillion being transferred in the next 30 years, taxing those assets at original cost basis would generate trillions in tax revenue and force heirs to sell family businesses and family farms for lack of being able to pay the inheritance taxes.
How about the elimination of the mortgage interest deduction? That’s one way to effectively reduce the price of homes by about 15% to 20% overnight while generating hundreds of billions of dollars in new tax revenues. Don’t think it can’t happen. It’s exactly what Canada enacted in the mid-1990’s.
Or how about taxing IRAs and other retirement plans above a certain valuation? That sacred cow might not be so sacred – not if it means “for the good of the nation.” In 2012, the Irish government passed a law which placed a 0.6% levy on assets held in private pensions for four years. The Irish tax on private pensions was made in response to a larger financial crisis and the need to increase government revenues.
Ireland isn’t the only country in recent history to seize portions of private investments. Hungary, Argentina, and France have all overhauled their private and public pension plans in recent years, in some cases seizing them in their entirety, and in others, taxing them into oblivion (source: cashmoneylife.com).
Overall assets in U.S. retirement plans are growing at a smart clip and were projected to be $28.9 trillion as of the end of 2020, up from $22.2 trillion in 2016, according to Jessica Sclafani, director of retirement practice for research firm Cerulli Associates, speaking at the 2018 SVIA Spring Seminar in Orlando.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
These draconian measures of what could well be our future tax policies are not just hearsay but are actively being researched to provide huge future sources of revenue in the event the country doesn’t produce the needed level of prosperity to service the spiraling debt load being run up in this COVID emergency.
For now, the stock market’s A/D line sends a clear message that investors aren’t worried about anything as long as the collective spending spigot is wide open. But when Janet Yellen’s suggestion of taxing unrealized market gains makes its way through Congressional committee, Mr. Market just might take exception to that idea – and all the “other approaches” to resolving the looming debt crisis.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
navellier.com |
