fiscal stimulus

Gridlock May Be Disinflationary

    The future of politics is that Congressional Republican leaders don’t want Trump to boss them around or gain control so these leaders will maintain the status quo of the Senate filibuster and thus allow it to help the Democrats to block legislation, thus creating gridlock that is coming from inside of the Republican party but which can be blamed on Democrats.  Then Trump will be unable to create dramatic fiscal stimulus and will end up being a do-nothing president. House Speaker Paul Ryan doesn’t want to unite with Democrats to create a majority voting block that can bypass the Freedom Caucus. By announcing that policy he is basically refusing to play politics with Trump and is allowing the Freedom

April 4th, 2017|mayflowercapital blog|Comments Off on Gridlock May Be Disinflationary

Will Tax Cuts Create Inflationary Stimulus?

    The Trump administration seeks massive tax cuts to stimulate the economy. The textbook economic response is that tax cuts stimulate the economy and cause inflation. However generic textbooks assume debt loads are much lower than today’s debts. High debts act to slow down consumption so the extra after-tax income from a tax cut may simply go to debt service instead of simulative consumption. The other problem is that the political will by Congress to cut taxes is lacking. When Reagan was elected in 1980 the tax code had no inflation indexing and thanks to the horrific inflation of the 1970s tax rates for moderate income workers were pushed into high brackets thus creating an unearned windfall for the IRS

March 28th, 2017|mayflowercapital blog|Comments Off on Will Tax Cuts Create Inflationary Stimulus?

Tax Cuts and Import Duties: How Will They Affect Investments?

The Trump administration seeks tax cuts on personal income and tax increases on imports. Assuming a taxpayer gets a three percent tax cut but also loses the deductibility of state income tax (which is 9.3% to 13.3% in California) they may not get a net income tax cut. If a consumer earns $100 and gets $67 after-tax and spends 20% on tangible goods subject to the Border Adjustment Tax they may pay 35% in hidden taxes (paid by the corporate importer) on the 20% that they spend on goods. That’s 7% of their after-tax income or about 4.6% of before-tax income, enough to wipe out the personal income tax cut benefit. If someone owns a corporation they will experience lower

January 24th, 2017|mayflowercapital blog|Comments Off on Tax Cuts and Import Duties: How Will They Affect Investments?

The New Administration: Will It Be The Man With The Pin?

Today Trump is inaugurated as president. Trump said stocks are a bubble. I agree. I remember Jeremy Grantham saying no leader wants to be the one with the giant pin who pops the bubble, which explains why the bubbles keep getting bigger. But Trump, who sold off his stocks recently, may end up doing society a favor and be “the man with the pin”. In Dec., 1989 in Japan there was a massive bubble and central bank governor Meino popped it, leading to a horrible but much needed crash. The possibility exists that similar things may happen in the U.S. Our society will be better off. Once people realize it is foolish to play with bubbles then people will focus

January 20th, 2017|mayflowercapital blog|Comments Off on The New Administration: Will It Be The Man With The Pin?

Rising Tariff Taxes To Start Recession

If consumers have a choice between paying 22% more (because of new tariffs) for imported goods or paying far higher prices for domestic goods then they will continue to use imported goods. If workers in EM counties get $2 an hour versus $22 in the U.S. and labor is half the cost of domestic goods and services then EM labor has an unbeatable advantage over domestic labor, even with a 45% tariff. I doubt the new administration’s attempt to bring back the lost jobs will work. Instead, people will have to put up with higher costs and they will be forced to cut something else out of their budget, thus creating unemployment for the unlucky producer of goods and services

January 12th, 2017|mayflowercapital blog|Comments Off on Rising Tariff Taxes To Start Recession

New Year’s Message: Invest In Risk-Off Assets

The New Year will have increased volatility and surprises. This will reward patient risk adverse investors who operate in the area of risk-off assets such as investment grade bonds. The risks to bonds are a rising level of economic growth and rising inflation. I doubt that the global economy will increase its rate of growth in 2017. The problems of Japan, China, the EU, UK outweigh any hope of growth from the US. The rising dollar hurts the finances of EM countries and hurts the ability of U.S. manufacturers to export which could contribute towards creating a recession. If Trump succeeds in helping workers to get higher pay and restricting imports this would reduce corporate profits. The key paradigm of

January 3rd, 2017|mayflowercapital blog|Comments Off on New Year’s Message: Invest In Risk-Off Assets

Rising Stocks And Sinking Bonds: Is This The Bubble Top?

Some experts like Jeremy Grantham have warned a few years ago that the current stock market cycle is not big enough to become a true bubble until it is at least 2 Standard Deviations which would be 2,250 for the SP. It is now there. Typically a stock top is a blow off formation on a chart where prices go parabolic and then collapse, like an airplane going into a stall because it went up at too steep of an angle. The enthusiasm over Trump’s policies are causing investors to make an emotional leap of faith that the economy will receive fiscal stimulus that will enable a new era of growth which will help stocks. As long as people believe

December 9th, 2016|mayflowercapital blog|Comments Off on Rising Stocks And Sinking Bonds: Is This The Bubble Top?

Corporate Tax Cuts Effect On The Economy

If corporate taxes are cut from 35% to 15% that will help stimulate the economy. However many giant companies have fully utilized offshore tax havens for their subsidiaries which will now be outlawed. For those companies their effective tax rate will actually go up. This will reduce net income for the aggregate of publicly traded companies since many small caps that don’t operate offshore are so small that they are miniscule compared to the Fortune 100 or Dow 30 companies. Thus the cuts could actually make large cap stocks slightly less attractive. The stimulus will come from the benefits that companies that are not publicly traded and that are “C” corporations (meaning they are not a flow-through entity) get from

December 8th, 2016|mayflowercapital blog|Comments Off on Corporate Tax Cuts Effect On The Economy

Fiscal Stimulus Programs To Backfire, Leading To Recession

Don’t expect Trump to significantly increase economic growth or inflation. The shock of governing that Obama experienced when he was inaugurated with minimal experience made him seek out advisors who were more moderate than him and inspired him move towards the center. I expect the same thing will happen with Trump. No one wants to fail and the pressure to succeed drives inexperienced new presidents to slash their ambitions and move towards more practical centrist programs. Trump will be different from a mainstream Republican because he intends to retaliate against businesses that export jobs overseas. But that is something which will be negotiated and there may be room for compromises. It is entirely possible that when a giant company wants

December 7th, 2016|mayflowercapital blog|Comments Off on Fiscal Stimulus Programs To Backfire, Leading To Recession

Fixing the Economy: What Needs to be Done?

The global economy needs to be fixed and the best way is to slowly muddle through with incremental improvements. It may be tempting to think that a massive infrastructure program, massive debt forgiveness, or tax cuts are needed, but those would create a new set of problems. Things are not so bad that radical program of massive debt forgiveness or extreme infrastructure projects is needed. The unemployment rate is 4.6%.  The average worker’s income is $55,000, far higher than any other country with a population over 6million. Trump may have gotten elected because of economic distress but he also was 2million votes behind Hillary who lost because she had a spectacular amount of scandals that made it irrational for her

December 6th, 2016|mayflowercapital blog|Comments Off on Fixing the Economy: What Needs to be Done?