Comments on: Is the stock market pricing in U.S. fiscal tightening? http://blogs.reuters.com/felix-salmon/2010/08/23/is-the-stock-market-pricing-in-u-s-fiscal-tightening/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: DanHess http://blogs.reuters.com/felix-salmon/2010/08/23/is-the-stock-market-pricing-in-u-s-fiscal-tightening/comment-page-1/#comment-17564 Mon, 23 Aug 2010 16:58:39 +0000 http://blogs.reuters.com/felix-salmon/?p=5044#comment-17564 A much higher tax burden for companies makes a lot of sense.

On the other hand, large corporations are run by groups of very smart people that can quickly adjust to changes in tax law.

If taxes locally get too high for example, corporations can just keep money growing and snowballing overseas for not just a year or two but for a generation. We have already seen this on a large scale in the last decade as US corporations have been furious engines of job creation… just not at home where tax policies aim to soak corporations while most individuals pay almost no taxes.

Warren Buffett and Berkshire Hathaway have shown that, tax wise, it is possible for a corporation to act like a submarine and stay submerged (by growing without realizing profits) for not just a year or two but for fifty years. Can Uncle Sam wait that long for his tax money or will he begin to look elsewhere?

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By: OnTheTimes http://blogs.reuters.com/felix-salmon/2010/08/23/is-the-stock-market-pricing-in-u-s-fiscal-tightening/comment-page-1/#comment-17563 Mon, 23 Aug 2010 16:46:34 +0000 http://blogs.reuters.com/felix-salmon/?p=5044#comment-17563 The NYT reported that “Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year”, and when that much money is taken out of the market, it will force prices down as sellers are forced to lower their prices to liquidate their positions.

Now you can say the reason why people are fleeing mutual funds is because they think deficits will drive down valuations. Or maybe its because more and more people just don’t trust the equity markets. Stock prices rise and fall for no apparent reason, and often with no correlation to a company’s performance. Couple that lack of accountability with the realization that a handful of giant financial firms still manage to “earn” record profits from their trading operations, and maybe the smaller investors feel they can’t win in a game like this.

So if I agree with Cynic above that the markets don’t pay attention to political moves, does it mean I’m cynical also?

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By: randymiller http://blogs.reuters.com/felix-salmon/2010/08/23/is-the-stock-market-pricing-in-u-s-fiscal-tightening/comment-page-1/#comment-17562 Mon, 23 Aug 2010 16:29:50 +0000 http://blogs.reuters.com/felix-salmon/?p=5044#comment-17562 CBO projects 2011 budget deficit of 1.3 trillion. Allowing Bush tax cuts to expire would reduce it to 1.07 trillion.

Defense spending is parasitic on the economy. We currenly spend 9 times what the Chinese spend on defense, and we have troops all over the world. If we reduced defense spending from $600 billion to $200 billion over the next few years, we would still have a defense budget 3 times the Chinese, but that $400 billion could go to deficit reduction. Deficit reduction would put us in a much stronger position vs…..the Chinese.

Seriously, if you took the $300 million we spend on each F-22 and used it for wind generators, we would lower our dependence on foreign oil, which means we would have to spend less money on defense. Virtuous cycle.

By the way, the F-22 never gets used in combat, because nobody wants to risk losing a $300 million jet.

The George HW Bush/Bill Clinton deficit reductions of the early 90’s led to a strong, growing economy. Whether the government taxes the money or borrows the money, it still gets sucked out of the private economy.

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By: Cynic http://blogs.reuters.com/felix-salmon/2010/08/23/is-the-stock-market-pricing-in-u-s-fiscal-tightening/comment-page-1/#comment-17560 Mon, 23 Aug 2010 15:29:33 +0000 http://blogs.reuters.com/felix-salmon/?p=5044#comment-17560 Dugger’s argument strikes me as too clever by half. In support of his thesis, he cites “market chatter.” That’s the Wall Street equivalent of the journalistic “many believe,” a quick and easy way to offer one’s own opinion without bothering to test it against the evidence or find a source for it. And that’s doubly troubling here, because Dugger writes, later in the same piece: “Have analysts quantified the size of these off-balance sheet FAC liabilities? To my knowledge they haven’t.”

Either these concerns are weighing on the market – in which case one might reasonably expect that the analysts who follow the market for a living would start paying attention – or they’re not. Dugger can’t have it both ways. If he wants to argue that they *ought* to weigh on the market, that’s fine. But that’s not the same as arguing that they are.

If you’re looking for an explanation what we’re seeing, simpler is better. Markets are inefficient, particularly in the short term. People tend to overreact to recent experience, projecting it forward. So corporations aren’t issuing new debt for the same reason they’re hoarding cash and holding off on hiring – having passed through a sharp upheaval, they’re simply nervous. There’s comparatively little risk to a CEO in sitting on a pile of cash, even if there’s a steep opportunity cost; getting caught out in a second credit crunch seems scarier.

Investors, right now, tend to feel the same way. They’re still scarred by the losses they took two years ago, and are shying away from going back into the still-volatile market. (And that’s not wholly irrational – a point you’re fond of making.) They’re willing to accept lower yields in exchange for greater security. Corporate equity seems riskiest; corporate debt somewhat less so (how much faith would you put in a AAA rating?); and treasuries safest.

The theory that markets are paying attention to potential political moves years down the road is cute, but almost never plays out in practice. To see evidence of this, one need only look at the market (over)reaction when such changes are either on the verge of passage, or actually pass. The sharp impact they tend to have, in the short term, is prima facie evidence that they weren’t really priced-in in advance. And, besides, it’s almost always misplaced. The stock market *loved* the Bush tax cuts, and *disliked* the stimulus. If it was really pricing in the impact of these policies on earnings, it should have gone the other way.

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