Notes From Underground

The airwaves fill with the narrative of the coming corporate tax cut benefiting profits, growth and higher wages. Each side argues that their data is closer to reality: one being static analysis the other dynamic scoring of increased growth. My view continues to be, REAL TAX REFORM, NOT A TAX CUT. Genuine tax reform would provide tax relief for the middle-income earners and most probably result in a tax increase for the high-income earners. Congress has mucked up TAX REFORM as the starting point OUGHT to have been a return to BOWLES/SIMPSON. The problem with the Bowles plan is that it meant spending cuts as well as an effort to broaden the tax base by closing many tax loopholes. Also, Alan Simpson was in favor of defense cuts so it was a genuine tax restructuring as all “OXES WOULD BE GORED.”

In my OBJECTIVE opinion, the current Senate Plan is laden with various cut and pastes as the TRUMP administration and the Republican Congress try to get a corporate tax while appearing to also cut middle-income taxes. This is a difficult task, especially as the Freedom Caucus doesn’t want to increase the fiscal deficit. Therefore, in an effort to placate the deficit hawks Congress has to find a way to increase revenue by limiting exemptions for the top tax payers, many of whom live in BLUE STATES. The desire to punish the traditional Democrat voting states leads me to name this tax plan: The James Baker Tax Reform Act of 2017. The premise of the “objective” accounting of this tax plan is similar to what Baker said about the Jews when George H.W. Bush was criticized for his stance against loans for Israel: “Fuck ’em they don’t vote for us anyway.” The effort to undermine certain deductions that heavily favor blue state high income earners is pure James Baker. I actually respected Baker for his candor. Too bad the current legislators lack that gumption.

But the bottom line for the markets is that the tax plan has become a prisoner of political posturing. Every day brings news of more amendments in an effort to placate wavering Republicans. The shining lights of the Trump administration, Mnuchin and Cohn, have been touting this for months and promised a bill by Thanksgiving. To quote the Tweeter-in-Chief, “So Sad.” (Do not construe this as political commentary for it is purely an economic and financial perspective.) The bottom line is similar to the Obama health care effort. If you are not at the table you are on the menu, as the best legislation gets lobbied into oblivion. For all the conjecture about economic/financial outcomes of whatever passes, it is NONSENSE for we are not close to a resolution.

***The global equity markets have been under pressure everyday this week. I warned on Sunday night that the German DAX fired a warning by making a major key reversal last Friday as it made all-time HIGHS but closed well below the previous week’s LOW. The German equity markets have been the touted by every sell-side analyst as being a better value play than the U.S. equity markets. This week we definitely saw some liquidation of long positions but tomorrow we could see a reversal to the early week sell-off as politics takes center stage. Chancellor Merkel has presented Thursday as a deadline to form a coalition. If Germany cannot form a coalition there will have to be new elections. The failure of Merkel to preside over a new coalition will render her weak and a new election could result in further losses for the Christian Democrats. The problem for Merkel is that the FDP wants the finance ministry as a reward and Merkel knows that the FDP are opposed to some of the proposals of greater European financial harmonization.

If a coalition can be forged the DAX ought to find a relief rally and the EURO should hold its early week rally. Political uncertainty has not dented the Euro currency as it appears Washington dysfunction Trumps European political uncertainty. But if the FDP prevails in its desire for the finance ministry I will be watching the BUND/OAT and BUND/BTP spreads as a barometer of market sentiment. For the record, as of last Friday the ECB had purchased 25 billion euros of assets with 35 billion remaining to buy for a holiday-shortened month. The ECB can cause a great deal of PAIN for sellers of French and Italian bonds. Be patient.

***This is important for regional and community bank investors. Earlier in the year I had written about the inability of certain banks to participate in the rally of financial stocks. In particular, I expressed concern about NYCB, a significant lender in the N.Y. real estate market and wondered whether this bank was warning about problems in the extremely high-priced market. This week NYCB has rallied off its lows and it caught my attention. It appears that the community/regional banks have all performed well as news broke that the Senate Banking Committee chaired by Republican Mike Crapo had reached a BI-PARTISAN agreement on cutting the number of systemically risky banks.

“The bill would exempt banks with less than $250 billion in assets … from heightened regulatory scrutiny, in a move that could redraw the domestic U.S. banking landscape by reducing costs and unleashing a wave of mergers and acquisitions activity,” (Reuters). According to the Committee discussions, “Banks with assets between $50 billion and $100 billion would be exempt once the bill is enacted, while those with assets between $100 billion and $250 billion would be exempted 18 months later.” Time to focus on the regional banks versus mega money-center banks. This can get bi-partisan agreement. Objectivity is subjective.

Tags: Angela Merkel, Bowles-Simpson, bund/btp spread, bund/oat spread, Congress, ECB, Euro, Freedom Caucus, German Dax, tax reform

This entry was posted on November 15, 2017 at 7:54 pm and is filed under Germany, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.