tax rates

Economic Forecasts: ‘A Step Into the Unknown’

(…) “In the short term, I’m expecting to see a clear and unambiguous drop in business and consumer confidence,” Mr. Shepherdson said. “The joy among Trump supporters will be more than offset by the shock and misery among non-Trump supporters.”

He said a pullback in spending by wealthy households and wary businesses could halt the economy in its tracks. “Is that enough to trigger a brief recession? It could be,” he said. “At this point, I’d say it’s a tossup.” (…)

“Will he be the demagogue from the campaign trail, who threatened to lock up his political opponents, punish the media, build border walls and start a global trade war? Or is he capable of becoming a statesmanlike figure who leads in a more measured manner?” (…)

• Betting on an Uncertain Trump Economy

• The Promises of President-elect Donald Trump, in His Own Words

TRUMP UNPLUGGED

The expression is from David Rosenberg, smartly saying that the GOP is in control of all 3 levels of government, leaving few obstacles to Trump’s goals to implement what the American people said they wanted: CHANGE. There are many uncertainties as to what he will actually seek to do vs what he said he would in many areas (e.g. trade) but there are a few “knowns”:

• He wants to simplify the tax system and reduce the top marginal rate down to 33.0% from 39.6%.
• He wants to broaden the corporate tax base and cut the top marginal rate down to 15% from 35%.
• He will seek to incentivize corporations to bring locked-up profits sitting abroad back to the U.S. and end tax inversions.
• He is pro oil and gas drilling, anti regulation and generally favors less government involvement.
• He wants to expand the deficit with infrastructure spending and bigger defense budgets.

“Because Mr. Trump has made it clear he wants to do tax reform in the first 100 days, House Republicans are going to be ready,” Rep. Kevin Brady, chairman of the House Ways and Means Committee, said in an interview Wednesday. “I’m confident that this blueprint will grow the economy significantly, simplify the tax code for families and lower their tax burden and bust up the IRS, redesign it so it’s focused on customer service.” (…)

Mr. Trump’s plan would reduce federal revenue by $6.2 trillion over a decade, according to the Tax Policy Center, a project of the Brookings Institution and the Urban Institute. The top 1% of households would get a 13.5% boost in after-tax income, compared with a 4.1% rise for the entire population.

Republicans say their plans would spur growth due to the tax-rate cuts and the ability to write off capital expenses immediately instead of depreciating them over time. (…) (WSJ)

Here’s something every analyst should be working on over the weekend: which sectors and companies will be most impacted by the corporate tax overhaul most likely to happen quickly and what is the net impact on total corporate profits.

The U.S. Treasury produced a report with this table last April providing the effective actual tax rate by industry between 2007 and 2011:

The NYU Stern School of Business is kind enough to share this much larger and more up-to-date data set. Professor Damodaran produced this table to aggregate more than 2100 companies for a quick glance ate the tax gaps between industries. Hint: the lower the actual tax rate, the most likely it will rise after the reform, and vice-versa…

WUTBURGERS

• Top 1% of earners’ share of US income growth in 2009-2015: 52% (Washington Center for Equitable Growth, July 2016)

Oaktree Capital’s Howard Marks last week:

(…) In an opinion piece on October 26, starting from the German point of view, Joachen Bittner of the International New York Times described a broad group he called Wutbürgers, or “angry citizens.” I think they’re rising everywhere:

“It is a relatively new expression, with a derogatory connotation. A Wutbürger rages against a new train station and tilts against wind turbines. Wutbürgers came out in protest after the Berlin government decided to bail out Greece and to accept roughly one million refugees and migrants into Germany.”

“Wutbürgers lie at both ends of the political spectrum; they flock to the right-wing Alternative für Deutschland and the socialist Linke (Left) Party. The left wing has long had a place in German politics, and the Linke has deep roots in the former East Germany’s ruling party. And we’ve had a fringe right wing since the postwar period began. But the populist anger of the A.F.D. is something new: Anti-establishment, anti-European Union and anti-globalization. . . . “

“The same thing is happening elsewhere in Europe: Many British Wutbürgers voted for Brexit. French Wutbürgers will vote for Marine Le Pen’s National Front. Perhaps the most powerful Wutbürger of them all is Donald J. Trump.” (…)

“In its pure form, anger is a wonderful force of change. Just imagine a world without anger. In Germany, without the anger of the labor movement, we would still have a class-based voting system that privileged the wealthy, and workers would still toil 16 hours a day without pension rights. Britain and France would still be ruled by absolute monarchs. The Iron Curtain would still divide Europe, the United States would still be a British colony and its slaves could only dream of casting a vote this Nov. 8.”

“Karl Marx was a Wutbürger. So were Montesquieu [who articulated the concept of separation of powers within a government], William Wilberforce [the leader of the abolitionist movement in Britain], the Rev. Dr. Martin Luther King Jr. and the tens of thousands of Eastern German protesters who brought down the Berlin Wall in 1989. . . .” (…)

“Anger works like gasoline. If you use it intelligently and in a controlled manner, you can move the world. That’s called progress. Or you just spill it about and ignite it, creating spectacular explosions. That’s called arson.”

(…) A growing number of voters are going into meltdown because they believe that politicians – and journalists – don’t see what they see.” . . .

“The grievances of white, often less-educated voters on both sides of the Atlantic are often dismissed as xenophobic, simplistic hillbillyism. But doing so comes at a cost. Europe’s traditional source of social change, its social democrats, appear to just not get it. When Hillary Clinton calls half of Mr. Trump’s voters a “basket of deplorables,” she sounds as aloof as Marie Antoinette, telling French subjects who had no bread to “eat cake.” (…)

The point of all of this is that Trump is importantly supported by dislocated, disoriented voters who are angry about a number of unquestionably significant trends that are impacting them and their communities. Regardless of the outcome of the election, they and their sentiments will remain a powerful force. (…)

“On November 7, The New York Times carried an excellent article by Thomas L. Friedman entitled “Hope and Change, Part II.” In it, Friedman did a great job of outlining some of the things Washington will have to do in order for the outlook to improve.”

“The next generation is going to need immigration of high-I.Q. risk-takers from India, China and Latin America if the United States is going to remain at the cutting edge of the Information Technology revolution and be able to afford the government we want. . . .”

“. . . my prediction is that the biggest domestic issue in the next four years will be how we respond to changes in technology, globalization and markets that have, in a very short space of time, made the decent-wage, middle-skilled job – the backbone of the middle class – increasingly obsolete. The only decent-wage jobs will be high-skilled ones.”

“The answer to that challenge will require a new level of political imagination – a combination of educational reforms and unprecedented collaboration between business, schools, universities and government to change how workers are trained and empowered to keep learning. It will require tax reforms and immigration reforms. America today desperately needs a center-right Republican party offering merit-based, market-based approaches to all these issues – and a willingness to meet the other side halfway. The country is starved for practical, bipartisan cooperation, and it will reward politicians who deliver it and punish those who don’t. . . .” (…)

Donald Trump’s Upset Ushers In Economic Uncertainty Donald Trump’s upset presidential win promises to radically reshape the global economic order and usher in a period of intense uncertainty for the U.S. economy and its trading partners.

(…) Mr. Trump’s economic advisers on Tuesday night said businesses’ fears were overblown.Wilbur Ross, a New York billionaire investor who has advised the candidate, predicted Mr. Trump would move “fairly promptly” to announce senior appointees. Business leaders have been “incorrectly worried about what might happen under Trump,” he said. “Just as he comforted a lot of people when he picked Mike Pence as his running mate, they’ll be much more comfortable when they see what the team will be.”

On policy, Mr. Ross said a “No. 1 target” would be to replace the Affordable Care Act. With Republicans likely to retain control of Congress, “that should make it a lot easier.” He also said Mr. Trump could move swiftly to pass a tax-cut plan, which with Republicans in control of Congress “shouldn’t be a very heavy lift,” he said. (…)

In a break from the party’s normal stance, it was the Republican nominee who lobbed the sharpest attacks on big business and corporations. Mr. Trump, in the closing days of the campaign, ratcheted up a critique of “globalist” corporations that he blamed for promoting trade policies that moved factories overseas and sapped the wages of working Americans.

In a national TV ad that aired in the final week, Mr. Trump singled out “a global power structure” that has “robbed our working class and stripped our country of its wealth and put that money into the pockets of a handful of large corporations.” (…)

Trump: high uncertainty

From BlackRock:

(…) Trump’s policy agenda at face value comes with many economic and market uncertainties. If fully implemented, it could lead to a slowdown in cross-border trade and capital
flows, a large deterioration in the budget and sharply slower growth, according to ratings agency Moody’s. We believe this analysis is directionally right, and use it here
simply to illustrate the wide range of possible economic outcomes. See the purple shaded area in the charts below.

A lot hinges on Trump’s ability to carry out planned income tax cuts. These could initially boost consumer spending, but might soon lead to a large deterioration in the budget
and rising rates, Moody’s estimates. Similarly, a plan to deport more than 10 million undocumented immigrants could lead to labour shortages and rising wages. The likely
result: rising inflation and US Treasury yields. If the Fed responded by sharply raising rates, as Moody’s assumes, it might tip the economy into recession.

Yet inflation levels and the Fed’s actions are hard to predict in reality. And the Fed’s board could change significantly over during the next president’s term, including the
chair and vice chair. Trump’s ability to carry out his stated agenda also would be restricted by traditional Republicans, we believe.

We do see a tail risk: any move to raise tariffs on Chinese goods — as Trump has threatened — could lead to retaliation, including a possible yuan devaluation. Ensuing trade and currency wars would hurt commodities and EMs, in our view. (…)

Scared New World

From Gavekal’s geopolitical strategist Peter Zeihan

• Almost everything from the Obama presidency will be undone by the end of January 2017. Obama has shown next to no ability/interest in having conversations with Congress, even with members of his own party. The only large law passed during his entire tenure is Obamacare, so only it cannot be undone without a few strokes of a pen. How that law is modified or unwound requires Congressional involvement, and since Congress remains in the hands of the Republicans, that too is on deck — it will just take a bit more time. Any international treaties negotiated by Obama — whether they be the Paris Climate Accords or the TransPacific Partnership — are dead.
• The World Trade Organization has less than a year to respond to what will undoubtedly be a tidal wave of U.S. cases. Should those cases not be dealt with in adjudication at a pace and in the way the new White House desires, the United States will start taking unilateral moves which will, in essence, obviate the global trade order.
• One of those first moves — which might not even wait for the WTO to try and act — will be to declare China a currency manipulator as well as revoke its status as a free market economy. Any countries that attempt to relabel Chinese goods are likely to be caught in a dragnet. This one push should be enough to throw China into its first recession in 30 years. The question now is whether or not President Xi’s political consolidation efforts have progressed enough that China can weather the resultant internal political and economic explosion.
• NATO is for all intents and purposes dead. Russia’s moves into Ukraine will increase, and broad scale Russian plans for its entire western periphery — everything from Latvia to Poland to Romania to Azerbaijan — will accelerate. The only way forward for Europe is for Sweden and Germany to massively rearm.
• Formal talks between the United States and the United Kingdom on some sort of post-Brexit trade deal will open. (Technically these are illegal under EU law, but what is Brussels going to do? Kick the Brits out?) The only question is whether these talks herald British entrance into NAFTA.
• The alliance with Korea and Japan will no longer require U.S. troops in those countries, and even that assumes the alliance isn’t ended outright. Both countries will have little choice but to beef up their power projection capabilities, which is highly likely to include nuclear weapons. A much more aggressive Japan ends China’s creeping power projection to the northeast.
• Alberta may have just gotten a fresh lease on life. One of those Obama executive orders that will be scratched out is the Keystone pipeline. Its construction will enable Albertan crude to access the U.S. refining network where it will be blended with light/sweet U.S. shale crude. The resultant blend will save U.S. refiners a couple hundred billion in refinery overhauls, resulting in lower cost gasoline for the country. It also just might provide Alberta with enough income to climb out of what would have otherwise been a multi-year recession. The question now is how much of that income will Ottawa take, and how Alberta will respond to the forced transfer.
• Mexico now has no choice but to work with Donald Trump. Since most of the migration that comes into the U.S. actually comes from Central America and not Mexico, the most constructive path forward will indeed be a border wall that Mexico will indeed pay for…but on Mexico’s southern border rather than its northern one. How Mexico City handles this issue will determine the future success of both Mexico and NAFTA.

Yuan Falls to Six-Year Low Amid Concern Trump Will Target China

Official inflation data confirm China PMI survey’s signs of inflationary pressure

Chinese producer prices picked up in October, confirming earlier survey evidence pointing to stronger inflationary pressures. The latest Caixin China Manufacturing PMI highlighted how price hikes are being driven by the need to pass higher costs on to customers.

The annual rate of producer price inflation accelerated to 1.2% in October, according to the National Bureau of Statistics of China, building on a very slight 0.1% uptick in September. The latest pace of increase exceeded expectations and was the highest since December 2011. However, the increase had been signalled well in advance by PMI data, with the October survey showing input prices jumping to the greatest extent since September 2011.

However, the rise in commodity prices was not supported by greater demand. The PMI Suppliers’ Delivery Times Index, a useful gauge of the extent to which price hikes are driven by demand-and-supply imbalance, showed few signs of demand outpacing supply in China. This suggested that speculative buying has provided a major lift to raw material prices.

While consumer inflation rose in October for a second successive month to the highest since April, the annual rate of increase of 2.1% remained below the upper tolerance limit of 3% set by the government. The statistical bureau attributed the rise in consumer prices to higher food and fuel costs.

Nonetheless, consumer inflation pressures may intensify in the coming months if commodity prices continue to rise and producers pass higher input costs on to consumers. October PMI survey data revealed that average prices charged by producers showed the largest monthly rise since February 2011. (…)

  

European company margins under pressure as costs rise

IHS Markit European PMI survey data point to a growing squeeze on corporate profit margins, with potentially significant implications for corporate earnings and dividends (…)

Manufacturers’ profit margins, as measured by the differential between the rates of inflation of input costs and selling prices, are being squeezed across the EU to the greatest extent for four-and-a-half years. While the squeeze for Eurozone manufacturers is worsening, it is merely the tightest since July of last year. UK producers, however, are seeing the fiercest tightening of margins since mid-2008.

Input prices paid by EU manufacturers surveyed have been increasing for the past five months. After the rate of decline touched bottom in February 2016, the EU Manufacturing Input Prices PMI index has risen to its highest since March 2012. The equivalent index for the service sector has also risen markedly, up to its highest since December 2011.

European Union PMI Margin Indicators

Output Prices Index minus Input Prices Index

Markit’s analysis covers 25 sectors, all of which are experiencing a “margin squeeze” as defined by output prices rising more slowly than input prices. Pharmaceuticals and Media are the only two sectors where the “squeeze” remains very minimal.

Yesterday’s NFBI survey shows a similar trend in U.S. small companies when considering labor compensation and selling prices. The strong USD could be helping U.S. based companies on imported input costs however.

IEA sees global market awash with oil in 2017 if no OPEC cut

In its monthly oil market report, the group said global supply rose by 800,000 barrels per day in October to 97.8 million bpd, led by record OPEC output and rising production from non-OPEC members such as Russia, Brazil, Canada and Kazakhstan.

The Paris-based IEA kept its demand growth forecast for 2016 at 1.2 million bpd and expects consumption to increase at the same pace next year, having gradually slowed from a five-year peak of 1.8 million bpd in 2015. (…)

“If no agreement is reached and some individual members continue to expand their production then the market will remain in surplus throughout the year, with little prospect of oil prices rising significantly higher. Indeed, if the supply surplus persists in 2017 there must be some risk of prices falling back.” (…)

The IEA said it expects non-OPEC production to grow at a rate of 500,000 bpd next year, compared with a 900,000-bpd decline this year, meaning 2017 could see inventories building again if there is no cut from OPEC.

Supply outpaced demand by as much as 2 million bpd earlier this year and this excess appeared to have all but vanished during the third quarter of 2016.

However, OPEC pumping oil at a record rate of 33.83 million bpd last month, along with increases in production from non-OPEC rivals such as Russia, Canada and even the North Sea, threatens to reverse this rebalancing.

“This means that 2017 could be another year of relentless global supply growth similar to that seen in 2016,” the IEA said.

Furthermore, slower global economic growth and more modest demand in previous consumption hot spots such as India and China mean overall demand for oil will likely not pick up next year, the IEA said.

“There is currently little evidence to suggest that economic activity is sufficiently robust to deliver higher oil demand growth, and any stimulus that might have been provided at the end of 2015 and in the early part of 2016 when crude oil prices fell below $30 a barrel is now in the past,” the agency said. (Chart from the FT)

EARNINGS WATCH

Amid all the surprises, corporate earnings continued to flow to now total 445 companies of which 71% beat EPS forecasts. According to Thomson Reuters, the surprise factor is +5.7% which pushed the Q3 blended EPS growth rate to +4.0% from –0.5% on October 1. Q4 EPS estimates are +6.5%, down from +8.3% on Oct. 1.

Trailing EPS are now $117.21 per TR, potentially reaching $118.90 after Q4, taking us back to the full 2014 EPS level.

Based on today’s pre-opening of 2175, the Rule of 20 P/E is 20.8 on the known trailing EPS and inflation variables and 20.5 if we plug in full 2016 EPS assuming Q4 earnings estimates are met.

Market forecasters and users of forward earnings will now struggle with all the uncertainties, especially with respect to the all-important forward tax rates. We have not had the usual valuation euphoria that typically happen at market peaks when the Rule of 20 reaches 23-24. Investor sentiment is pretty fickle these days. Most were scared by the prospect of a Trump win after the second FBI emails affair. Now that he won, everything is good…Tough to be a rational investor these days.