Tax cuts are wrapped, waiting on Trump to sign the card

Both branches have now approved the Trump tax cut bill, which is now just waiting on Trump’s signature. His signature didn’t come immediately, with the suggestion that Trump may be holding off to delay some of the spending cuts until 2019.

My view continues to be that the tax cuts are a short-term sugar hit for the US economy, the “trickle down” economics will not work and the US economy will be in a worse place in two years when the benefit wears off.

The world is suffering from a demand deficit – which in my view has a root cause in inequality (see our primer for full details). Basically, give a poor person an extra $1,000 and they spend it, give a rich person an extra $1,000 and they save it. The irony is that some Keynesian spending will help – increasing government debt to invest in infrastructure would be a step in the right direction as it would create jobs and wage inflation for the poorer segments of society.

So Trump’s tax cuts get the increasing government deficits part right, they then mis-allocate the spending side so that all of the money goes to worsening the inequality. In the short term, this won’t matter – there is going to be enough new money sloshing around the economy to hide the weakness. Once the immediate effect of the new money washes through (probably about 18-24 months) the US economy will be left with structurally higher deficits, a vastly eroded tax base and nothing to show for it.

However, don’t let the moralist in you affect the investor in you. Every day, all over the world, politicians make short-term decisions to improve the short-term at the risk of the long term. If you sold equities every time this happened you would never invest. For the next year or two, there is likely to be a debt-driven economic boom that will temporarily help to relieve the demand deficit that the world is facing.

The problem as an investor is that markets have already priced a lot of growth in. While I’m expecting some consolidation over the next little while or a pullback in equity prices before they grind higher, I’m trying not to be too cute with the timing – there is a major stimulus coming.

With all that said, markets largely shrugged overnight with very little movement in the dollar:

or the AUD:

or US stock markets:

European markets fell:

But Dr Copper signalled its approval:

Oil extended its recent rally (although this is probably more based on inventory drawdowns than economic stimulus):

 

While US gas prices fell

Bond yields up around the world:

Other than that, the financial press continues to be fascinated with the comings and goings of various cryptocurrencies. I won’t bother linking for you, if there is one thing that approaches the bubble in prices of cryptocurrencies, it is the bubble in drivel trying to report on them.

Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

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Damien Klassen

Damien has a wealth of experience across international equities (Schroders), asset allocation (Wilson HTM) and he helped create one of Australia’s largest independent research firms, Aegis Equities. He lectured for over a decade at the Securities Institute, Finsia and Kaplan and spent many of those years as the external Chair for the subject of Industrial Equity Analysis.
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Comments

  1. Historian in future will remember this as an important waypoint in the decline of the US hegemony. But who cares? there is money to be made!!

    If the Democrat cannot flip the House next year, and Trump goes at the end of his first term, a US default followed by a switch to RMB as the global currency can happen.

  2. “The world is suffering from a demand deficit”

    The ghost of Keynes lives. This nonsense never seems to die off, no matter how many rounds of debt driven fiscal stimulus and monetary easing end up being nothing more than a ‘sugar hit’.

    Where is the global growth since the massive stimulus of 2008 ? Was it sustainable ? All that is left is a pile of unproductive debt.

    Evidence and reality completely elude these Keynesian scum.

    The idea that supply constitutes demand, and that you cannot consume that which you have not produced first, is completely foreign to them.

    • What fiscal stimulus are you referring to?

      All I’ve seen is fiscal austerity, and a bent for monetary stimulus via the rentier class. None of the current policies have been designed to generate real economy wide demand (core tenet of keynes), but to widen wealth gaps under the guise of a trickledown based demand (a hoax).

      The post-war period proved Keynesian economics worked, it was when they abandoned it that we found ourselves in the current cesspit.

      • A good vid, though he is a little too anarchist for my taste; believes no model will ever be good enough (true), but then what is the alternative? Seems altogether nihilistic. My take-away, if Keynesian was a base measure (“moronic”), then each successive model has been progressively (exponentially?) more moronic. As such, a return to a Keynesian based model is preferable. Blyth certainly offers no workable solution here, only criticism of other men’s work with the omnipotent power of hindsight and the wit of comedic belittlement.

      • @Brenton

        That may well be the case, and I wish *he did* have some answers. Perhaps the fact that he doesn’t have an answer is an answer in itself. My view is that whilst it would be great to be able to explain the reasons why we are where we are and and have a solution, I will settle for the first half and work on the second half.

        Comedic effect – yes – perhaps because otherwise quite a few of us would feel like taking the leap of the ledge – with despair in our hearts.

        Nihilistic? Hmm.. dunno – I don’t read it that way.

        To each their own, it’s not gospel, and as far as this goes – it adds to my knowledge of the world and forms a better view of it.

    • Yr correct, the essence is this line:
      “Basically, give a poor person an extra $1,000 and they spend it, give a rich person an extra $1,000 and they save it.”
      that is the universal law of wealth accumulation, as outlined in “The Richest man in Babylon”
      the principal is eons old.
      The frictionless transfer of money has accelerated its effect to warp speed.
      It going to be warp speed on the way down as well
      Its Gunna be huge.
      PS, the wealthy are now betting on the issuance of money to the poor, as the bread and butter inflow to their businesses, the loop is now closed.

    • The idea that supply constitutes demand, and that you cannot consume that which you have not produced first, is completely foreign to them.

      How long would you watch widgets nobody wanted or could afford piling up at the end of a production line, shouting “MOAR widgets ! Supply creates demand !”

    • Indeed. What cunning trick can we conjure to make people demand more? The beatings will continue until the people DEMAND more! (etc)

      You can’t make this sh!t up — but you’ll swallow it whole if you’re as dim as the average Keynesian economist.

  3. It’ll be VERY interesting to see how the cancellation of the SALT deduction plays out.

    And the mortgage interest capped at a mere 3x the median house price.

    The biggest taxing states will suddenly have to face their asset rich, cash poor voters.

    • >… The biggest taxing states will suddenly have to face their asset rich, cash poor voters.

      Awwww!!! Poo pothums! 😛

      Jump Sell, you F*ckers!

  4. Same game. Little real growth. More redistribution upwards. 100% right Damien. Expenditure should have been invested in capability development/essential infrastructure.

  5. Britons had the same terrible choice – A) vote for the Tories and enjoy immigranton cuts but suffer corporate tax cuts or B) vote for Corbyn and get better services or even a UBI

    Clinton almost had UBI in her manifesto!

  6. Take it from a small business owner in the USA. That $1,000 will be used to grow my business create jobs including management roles. Note that in Houston right now small businesses are not paying minimum wage with low unemployment we pay higher wages to attract and retain good staff. It is very interesting areas that have low taxes and low regulations have low house prices and the low income earners are much better off. This needs to be compared to the higher taxes and higher regulations areas having real estate out of reach of the average person. The average person in Texas has more opportunities and a better standard of living than those in California and Australia. I have meet a cleaning lady in The Woodlands in Texas that charges $600 a day and she has a waiting list. She is a great cleaner and does many million dollar homes and exit cleans for rentals. These are examples of the free market allowing average people to become wealthy, the high incomes and success of an area helps everyone in that area. The difference between left and right is who do you think is better to have those dollars. Either the productive sector=small businesses or the public sector = unproductive.

    • Prom69, I thought we all had made a gentleperson’s agreement never to mention that little dynasty again.