- Who’s in for a tax hike?
Hiking taxes is something that Biden has said he would do, and his first proposal is a hefty increase, but this is just the start of a long negotiating and horse-trading process.
The US President’s proposal to hike capital gains tax on the millionaires to pay for the hefty stimulus spending bills triggered a sell off in asset markets. Stock indices were down nearly 2% as the headlines hit the wires and traders hit the sell button instinctively.
Hiking taxes is something that Biden has said he would do, and his first proposal is a hefty increase, but this is just the start of a long negotiating and horse-trading process. He’s trying to raise money to pay for the spending that will be concentrated in a few sectors (green initiatives, infrastructure spending). This results in outperformance in these sectors over the longer term.
In the shorter term, risk sentiment took a dent, but markets will soon acclimatise to these talks and it’s going to be a long, arduous process to get the Congress behind this. From what we’ve learnt from the crisis, many of the congress members are big investors of stocks themselves. (Given that it will be sometime before the tax hike, if any, will be implemented and tax hikes can’t be retroactive, investors can always sell and repurchase their holdings to increase the cost price for future tax bills.)
The market that took the biggest hit was in the cryptocurrencies where ETH led the way with a 20% fall from the highs. This too is just par for the course for this turbo-charged market. Hold onto your hats and stay the course.
Tax Gains Because Of What’s To Come?
If President Biden plans to pay for everything with increased capital gains tax and/or wealth tax, then the US stock market just officially became the most systemic, too-big-to-fail public utility on the planet. Taxes on capital gains investment is an indirect way for the US government to harvest inflation which is best expressed through asset prices. The Biden Administration may be setting the stage for what they know is to come (it’s within their means to create it), an unprecedented multi-year bull run for capital markets.
By raising taxes, the government has painted themselves into a corner that makes easy monetary policy (politically expedient i.e. friendly interest rates) a necessity, which is good for asset prices in the long run (otherwise the US is draining out of the system what they pumped in, leading to tight fiscal policy and tight monetary policy, which inevitably pushes the US debt cost overboard — remember that foreigners are no longer keen on financing US debt, evidenced through weak Treasury buying).
In the grand scheme of things, we think there is little chance the bill will pass this early in the cycle.
US, EUR — A slew of PMIs from EU countries and US will be released today, but are unlikely to have much of a market impact unless they are huge surprises vs expectations.
1. Currencies : Keep short USD and long NZD, & CNH. The resistance for USDCNH is at 6.55–6.57. Stay short USD and look for chances to add.
2. Commodities : Uranium — Long Uranium stocks. Find out what’s in our TrackRecord Model Portfolio .
Key risks: Spikes in US bond yields may lead to a stronger USD and weaken risk sentiment. US-China tension could dent risk sentiment if continues to risk.
3. Equities :
Equity Index: : Long Nasdaq futures. A small pullback on the headlines of Biden’s capital gains tax increase proposal. Stay long.
Single Stocks: Fundamentals continue to favour the continued rally of risk assets in the weeks ahead. Don’t miss out on the asymmetric opportunities we have highlighted in our TrackRecord Model Portfolio.
Key risks : Higher US yields and inflation fears are the key risks.
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As of New York Close 22 Apr 2021,
- US Initial jobless claims for the week ending April 17 decreased by -39,000 to 547,000 (expected 600,000). That is the lowest initial claims have been since the week of March 14, 2020. Continuing claims for the week ending April 10 decreased by -34,000 to 3.674 million. That is the lowest continuing claims have been since the week of March 21, 2020. The absolute level of claims is still high, yet there are clear signs of relative improvement that continue to support favourable recovery-minded views for the labour market and the economy.
U.S. Treasuries finished little changed in a relatively muted session. The US 2-yr Bond yield increased 1 basis point to 0.16%, and the US 10-yr Bond yield remained unchanged at 1.57%. The U.S. Dollar Index rose +0.1% to 91.29. Turkish markets suffered under the weight of expectations that U.S. President Joe Biden will formally recognize the massacre of Armenians by the Ottoman Empire during World War One as an act of genocide. This was coupled with questions over Turkey’s forex reserves. The Republican People’s Party, known by its Turkish acronym CHP, says the government blew through $128 billion in foreign-exchange reserves over two years — coinciding with the period Erdogan’s son-in-law Berat Albayrak was treasury and finance minister. The TRY lost -1.64% versus the Dollar at 8.31. The RUB rose +1.78% against the dollar after Moscow signalled an end to military drills near the Ukraine border, easing some of the geopolitical risk premium. WTI crude futures increased +0.2% to $61.45/bbl.
S&P 500 declined -0.9% on Thursday. The selloff from the highs of the day began when reports that President Biden will propose increasing the capital gains tax rate for wealthy Americans hit the newswires. The Nasdaq (-1.2%) and Dow Jones Industrial Average (-0.9%) declined in-line with the benchmark index. The Russell 2000 declined just -0.3%. Specifically, the S&P 500 went from a +0.2% gain to a -1.2% decline in about an hour after Bloomberg reported that the tax plan would boost the capital gains rate to 39.6% from 20.0% for those earning $1 million or more. The rate would be bumped to 43.4% when including the 3.8% tax on investment income that funds the Affordable Care Act. It would be even higher when including state taxes.
Biden to float historic tax increase on investment gains for the rich
Notable Snippet: The plan is part of the White House’s push for a sweeping overhaul of the U.S. tax system to make rich people and big companies pay more and help foot the bill for Biden’s ambitious economic agenda. The proposal calls for increasing the top marginal income tax rate to 39.6% from 37%, the sources said this week. It would also nearly double taxes on capital gains to 39.6% for people earning more than $1 million. That would be the highest tax rate on investment gains, which are mostly paid by the wealthiest Americans, since the 1920s. The rate has not exceeded 33.8% in the post-World War Two era. Any such hike would need to go through Congress, where Biden’s Democratic Party holds narrow majorities and is unlikely to win support from Republicans. It is also unclear if it would have the unanimous backing of congressional Democrats, which would be essential in the Senate where both parties hold 50 seats each.
THEMATIC CONTEXT: “We believe there is more than meets the eye in this development as America embarks on the grandest monetary experiment in the form of Modern Monetary Theory (MMT). In the grand scheme of this experiment, taxes are not needed to pay for the deficit spending (because in MMT, a government with a sovereign printing press can issue as much fiat currency as it wants), it is instead a feature used to control the after effects of such money printing. There are predominantly two ways to quell inflation if it runs hot. 1. Raise Interest Rates, making Government Bonds more attractive so money gets sucked out of the private sector, 2. Raise Taxes. 1. is politically inexpedient given that no one is more short USDs and bag holders of USTs than the US government itself with current Debt/GDP of more than 100%. This leaves the US with choice number 2. when push comes to shove and higher taxes in the US alone will cause a brain and talent drain as companies will find more friendly pastures to set up. The conversation that Yellen is having with the rest of the world is showing that the US on a sovereign level is systematically fragile at the moment and the release valve will have to be a much weaker USD.” — 6th Apr 2021
India posts world record COVID cases with oxygen running out
Notable Snippet: India recorded the world’s highest daily tally of 314,835 COVID-19 infections on Thursday as a second wave of the pandemic raised new fears about the ability of crumbling health services to cope. Health officials across northern and western India, including the capital, New Delhi, said they were in crisis, with most hospitals full and running out of oxygen.
THEMATIC CONTEXT: “Countries should not rest on their laurels because viruses do not take days off. As countries with successful vaccine drives continue to open up while those who are slow to inoculate and are nonchalant about safety practices fall back into the doldrums, we will see a bifurcation in economic activity even across developed world economies and we suspect this will show up in FX rates.” — 20th Mar 2021
“This was the reason for the selloff in cyclicals and risk assets. Poor vaccination drives have been Europe centric so far. Nonetheless the virus has no partiality and the world is only as strong as the weakest link, Europe’s vaccination drive will be a crucial barometer for recovery in the developed world and will be one of the pace setters for cyclicals.” — 24th Mar 2021
U.S. to double public climate finance to developing countries by 2024
Notable Snippet: The United States said on Thursday it would boost public climate finance to help poor countries reduce greenhouse gas emissions and adapt to a changing climate, doubling funding by 2024 from high average levels hit during the Obama administration. The White House said it was embracing “ambitious but attainable goals” for international aid to developing countries, given the urgency of the climate crisis and to compensate for a sharp drop in U.S. funding during the Trump administration.
THEMATIC CONTEXT: “In the early months of the crisis, we have been postulating that countries will “build their way” out of this crisis via unlimited fiscal policy. We believe China to be the frontrunner of this playbook and that western economies will be following behind. This is extremely good for asset prices and positive for commodities. We remain bullish on the economic trajectory and industrial demand only reaffirms it.” — 16th Feb 2021
Phan Vee Leung
CIO & Founder, TrackRecord
- Date of publication:
- Thu, 04/22/2021 - 21:38
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