Taxes are going up, but we knew that already.

We have a vague idea what this will look like:

  1. Marginal rates will go up some. The top tax bracket will go from 37% to 39.6%. There is a chance that another bracket, at a higher level of income, is added after that. The Senate is too closely divided to raise rates more than that.
  2. The corporate income tax will rise from 21% to something close to 28%. At 28%, our corporate taxes will still be high relative to the global average, but not as high as they were pre-Trump.
  3. Long-term capital gains taxes will rise for rich people, perhaps by a lot. Biden wants to raise it to 39.6%, which would put capital gains taxes at pretty much the highest levels ever, going back to the late 1970s. It would also turn us all into day traders since there would no longer be a preferential rate for holding investments long term.

And…

I am hearing rumblings that the estate tax threshold will come down a lot, perhaps to estates as small as $3 million. The word on the Street is also that the Yellen Treasury department is taking a hard look at trusts.

Currently, the estate tax affects virtually nobody. But that might not be true for much longer.

Before we go any further, let’s just say that none of these tax increases have anything to do with deficit reduction. This tax package is supposed to raise $2.1 trillion over 10 years. That’s $210 billion a year.

Last year, our deficit was $3.1 trillion, and it will be even larger this year. It doesn’t come close to covering the deficit. In fact, if we raised all taxes on every single person to 100%, it wouldn’t come close to covering the deficit.

Jeffrey Gundlach said on Twitter

 

 

Jeff Gundlach has made this point a few times on Twitter—tax revenue is now basically incidental to how we finance the government. We are funding the government now from the printing press of the central bank. We spend more than twice what we take in—which means that the deficit is now bigger than the revenue we collect.

We are in a modern monetary theory world and under MMT, taxes don’t really matter. You have taxes for purely ideological reasons. That’s about where we are today.

You can see this with the upward explosion of M2 money supply numbers starting on 2018.  See below:

 

 

World Vaccine Progress

 

Vaccinations may be our exit from the pandemic, but the world will exit at different rates. This chart shows doses delivered per 100 people in some select countries. As you can see, Israel is far ahead of some much larger and more powerful countries. To a lesser degree, so is the United Arab Emirates.

 

 

Those two have some similarities: They are relatively small, wealthy countries with populations concentrated in easily accessible areas. But the larger and more diverse UK and US are also well ahead of the European Union and Canada. Japan has barely begun vaccinating but also has relatively few cases. Places like Brazil and China need to vaccinate, too. That’s going to take time.

 

US Economy

 

  • Consumer sentiment bounced this month amid soaring stock market, vaccine progress, and falling COVID cases. The improvement topped economists’ forecasts.
  • Households showed interest in purchasing large durables.
  • But consumers seem to be concerned about their financial situation in a year (presumably when government support ends).
  • The political gap remains wide.
  • Consumers are increasingly bullish on stocks and housing.
  • Producer price gains accelerated in February.
  • The PPI increase points to higher core PCE inflation (the Fed’s preferred measure).
  • According to Morgan Stanley, business conditions have improved markedly in recent months.
  • In the next few years, government debt is poised to reach a record level of 135% of GDP based on IMF forecasts – twice as high as in the 1990s. But financing costs are about 50% lower as a share of GDP.
  • By 2050, the nation’s federal debt is projected to reach 200% of the GDP.
  • The NY Fed’s manufacturing report (Empire) showed robust regional factory activity this month.
  • Hiring expectations hit the highest level in years.
  • More factories are planning to boost workers’ hours.
  • Input price gains have accelerated pointing to stronger PPI growth ahead.
  • When it comes to the recent spike in factory input costs the US stands out against other world economies.
  • The ratio of household liquid assets to liabilities is now the highest in decades.
  • And it is expected to climb further as households plan to save a substantial portion of government money.
  • Job postings on Indeed continue to rise amid signs of labor shortages in some sectors.
  • The minimum wage by state

 

 

  • The US government’s COVID-related expenses in perspective:

 

 

  • The February deep freeze took a toll on retail sales. The declines were more severe than expected.
  • Online spending also fell, due in part to power outages.
  • Only gas stations saw an increase in retail sales last month
  • Capacity utilization dropped.
  • However, the deep freeze boosted utilities’ output.
  • After the economic releases (above), the Atlanta Fed’s GDPNow model sharply downgraded the Q1 growth projections.
  • Homebuilder optimism was a bit lower than expected due to somewhat softer sales and near-record lumber prices.
  • New housing units are massively undersupplied. The US will increasingly face housing shortages in the years ahead.

 

 

  • Inventories of homes for sale are at extreme lows.
  • According to the AEI Housing Center, home price appreciation is currently running close to 14%.
  • Working from home means working longer hours.
  • 23% of US workers want to keep working remotely.
  • Housing starts dropped sharply last month due to a spike in mortgage rates and the deep freeze in Feb.
  • Residential construction report coming in well below forecasts.
  • Here is a map of home affordability.

 

 

  • Homebuyers are increasingly making offers without seeing the house in person.
  • The Philly Fed’s manufacturing index soared to multi-decade highs.
  • Employment and hiring expectations indices surged.
  • Supply chain bottlenecks remain a problem.
  • Gains in input prices accelerated. This does not look like an economy that needs zero rates.
  • Higher mortgage rates are expected to cool US housing activity.

 

Jobs

 

The listings on job search site Indeed.com have been a handy source of nearly real-time data during this strange time. Their data has limits, mainly that it shows advertised job openings rather than actual hiring. But it does give us some sense of where the activity is, and how it has changed over time. This table shows some sectors relative to the whole economy, ranked by the % change since February 2020. The extremes are what you might expect. Pharmacies are hiring in anticipation of mass vaccinations, while logistics and construction are growing.

 

 

At the bottom we again see what’s expected. Hiring is way down in service industries like hospitality (hotels, restaurants) and beauty, but has picked up a little in the last four weeks. The real takeaway here is that we probably shouldn’t talk about “the” jobs market. It is really a bunch of different markets in different stages of recovery or growth.

 

Home Building

 

The homebuilding segment is booming. One would think that, since homes are so expensive, people would buy carefully. Not so. In fact, buyers are making sight-unseen offers at a record pace.

 

 

Now, this isn’t entirely folly. With COVID it hasn’t been easy (or wise) to travel extensively and view possible homes in person. Sellers are also offering virtual tours and other ways to “see” a property without physically going there. And with e-commerce maturing, people are simply more comfortable buying online. Even so, the fact that so many people are making these giant financial commitments so casually might be a warning sign… and not just for real estate.

 

Inflation History

 

This chart talked about the way official inflation benchmarks measure housing prices. They look not at actual prices, but an implied “owner’s equivalent rent.” The Consumer Price Index began using OER in 1981. You will see CPI inflation climbed in the 1960s and 1970s, then fell sharply in the early 1980s. This wasn’t entirely due to housing; some of it was energy prices and the effect of Paul Volcker’s tighter interest rates. But home prices did surge in the 1970s at a time when they directly affected CPI. Then CPI fell when they began using OER instead.

 

 

Roll forward to the present. Now we have home prices surging, as they did in the 1970s, but inflation has been mostly tame. What would CPI look like if we measured it that way now? Probably a lot higher. How we measure things matters. Sometimes, it matters a lot. The market, in the forms of TIPs and similar instruments, projects inflation higher than the government measures. They can’t both be right. We could see both rising rates and rising inflation, with the Federal Reserve behind the curve.

I can’t remember one instance where rising inflation and/or rising interest rates were good for the stock market in general.

 

Debt

 

 

I expected a $50T number by 2030. Since the $1.9 trillion stimulus has just passed, I would expect it to rise over the next few weeks. Plus, there is an infrastructure bill going through Congress that will be in the Trillions too. We are now on track for $50T in Debt by……..March 2025.

 

Thought of the Week

 

“All that is necessary for the triumph of evil is for good men and women to do nothing.”
― Edmund Burk

 

Picture of the Week

 

My and my daughter Heidi dancing at her wedding.

 

 

 

All content is the opinion of Brian J. Decker