Posts Tagged ‘Donald Trump’
Not a good sign….
The International Monetary Fund (IMF) tracks gross domestic product (GDP) both globally and by nation. Their metrics are generally quite good. They’ve downgraded the 2017 expectation to 2.1% from a prior forecast of 2.3%, in no small part to the abysmal 1.4% the U.S. turned in during the 1st quarter. They’re currently projecting 2.1% for next year as well. This is a far cry from the 4% annual rate the Prez promised on the campaign trail, and the 3% he promised after taking office.
Admittedly, a president can’t be judged on the economics of his first year. That said, a principal driver of the lousy 2018 forecast is the amazing lack of understanding this administration (and Congress, for that matter) has about the power of fiscal policy to drive the economy. This lack of understanding can trace its roots to the early Reagan days and the GOP’s enamor with Milton Friedman. The Chicago economists (and this is a wild oversimplification) preached monetary theory, holding that the entire economy was driven by the money supply, which could be improved with tax cuts. This was in contrast to the Keynesians (and again, a wild oversimplification) who held that targeted fiscal policy was the order of the day. Since the Kennedys were Keynesians (or at least Harvard graduates), then they had to be the enemy of all that was good.
Of course, many of us have been forecasting a recession for 2018 or so. Why? From a simple cyclical perspective, we’re long overdue. My own thinking was that the Congress would enact a tighter budget which would be felt in the short-term, but that tax cuts wouldn’t be felt (if at all) until father out. As it turns out, I was an optimist. The budget cuts are draconian, and the tax cuts proposed will do nothing to add to consumption or investment. (The former is patently obvious. Give Bill Gates an extra million a year in tax cuts, and he’s not going to eat better or buy nicer clothes. As for the investment side, money is already essentially free — overnight LIBOR is actually negative — and yet cash lays around on the sidelines looking for a new merger to fund.)
I’m presently not an optimist. Neither are the economists at the IMF. For a great synopsis of their report, read Rishi Iyengar’s report on CNN Money.
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Trump’s Tax “Reform”
Mark Twain is usually — and incorrectly — quoted with the phrase “No man and his money are safe while Congress is in session. (The actually quote goes to 19th century NY politico Gideon Tucker, but I digress.) There’s little to be said, in general, about TheDonald’s proposals yesterday, simply because there’s little substance to analyze. However, I’m old enough to remember the last tax overhaul, in the early stages of the Reagan administration, and perhaps I can offer a few observations. I’ll limit my mental meanderings to real estate for now.
First, the Reagan tax re-hab (the 1986 Tax Act) was a disaster for real estate investing, particularly at the individual, atomistic investor level. One of the “loopholes” to be cured was the elimination of deductibility of passive losses on real estate investments. The real estate community reluctantly supported the tax act, in trade for increases in the deductibility of home mortgage interest and a guarantee that passive losses on then-existing real estate deals would be grandfathered. Indeed, in the run-up to passage, there was a flurry of investing (by Main Street USA folks — the kind of folks who still, amazingly, support Trump) in just such “grandfathered” investments. At the last minute, the grandfathering was removed, costing Main Street USA investors tons of alternative minimum tax payments on now-sour investments. Some pundits suggest that this grandfathering-revocation, alone, led to the downfall of the Savings and Loan industry, but that excuse is a bit to simplistic. It did, however, shut down the time share industry for a while.
Today, according to news reports, single family residences are enjoying record demand (which may or may not be good news). The hottest market is among first-time buyers, and the demand is greatest among starter homes. The Trump proposals would double the standard deduction for a married couple filing jointly. While, on the surface this seems like a good idea, it will drastically shrink the number of tax payers who itemize mortgage interest and property taxes. In short, for the biggest tranche of homebuyers, the biggest differentiation between ownership and renting would be effectively removed. As a guy who invests in rental property, that’s nice, but the home building industry won’t react well.
Otherwise, I don’t see lowering the marginal tax rate on corporations as having much of an effect on real estate investing. For one, most of those projects are either done thru tax-advantaged REITs or thru other pass-thru entities, like partnerships and LLCs. Even if it did, the demand / supply of investment grade real estate depends on other factors, and slight changes in the tax rate may have an impact on the debt/equity mix, but not on the aggregate output of new commercial construction. The ONE area most affected will be low income housing, which is funding in no small part by tax credits. The value of those credits will be slashed, requiring a complete re-thinking in the finance side of low income housing. The last time such a tax cut went into effect, it was a real mess for low income housing.
If I was the government, and I wanted to create good paying construction jobs, I’d embark on a long-term infrastructure redevelopment plan. That would probably require actually raising tax rates a bit, but would have marvelous returns on investment for middle America. But that’s just me….
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Strong vs weak dollar
Ahem…. this may or may not be the truth, but in the words of my fellow Low-Country South Carolina expat, Stephen Colbert, it’s certainly “truthy”. Reportedly, according to Huffington Post, The Donald called his national security advisor, Flynn, at 3am, to ask whether a strong dollar or a weak dollar was good for the economy. Reportedly, Flynn told The Donald to ask an economist. Since then, economists of all stripes have offered advice, because, well, this is important stuff for a President to know, along with “war is bad” and “full employment is good” and stuff like that.
So, here we go. I’ll take a stab at it. Whenever the world roils, investors of all stripes look for stable currencies in which to invest, and the dollar is the “mother of all stable currencies”. Until Brexit, the same could be said of the Euro and the Pound. Now, not so much. Anyway, paradoxically, the election of The Donald roiled the world’s zeitgeist, causing investors to seek the dollar, and thus strengthening our currency. Now, what’s the impact? Well, a strong dollar makes it tough to export stuff, but it makes it easy to import stuff. That wrecks the trade imbalance, and costs jobs in exportive industries. Conversely, a weak dollar suggests lack of faith in the American economy, but helps with American jobs, albeit makes American consumption more expensive.
ALSO, a strong dollar makes it easy to borrow. As America runs deficits (both fiscal and trade), we have to borrow and much of this borrowing occurs in foreign markets. Conversely, a weak dollar drives up the cost of borrowing.
In short, if The Donald wants to bring American jobs home, he’ll opt for a weak dollar, but that will inevitably drive up the cost of consumption as well as the cost of borrowing. Ironically, the way to achieve a weak (or lets say, “less strong”) dollar is to achieve some sort of stability in the world, and that doesn’t seem to be in the offing.
From a small northwestern observatory... 