Ad Hoc Commentary – Pump and dump Dow? Huuuge business tax cuts, farewell labor.


“…The Dow Jones industrial average has gained about 1,200 points over the past month. And interestingly, nearly half of that advance has been produced by just three stocks. Leading the field by a wide margin is Goldman Sachs: That stock’s 26.5 percent rally over the past month has added about 320 points to the Dow. In second place is UnitedHealth, which is up about 15.7 percent, and has consequently tacked about 150 points onto the 30-stock index. Finally, Caterpillar’s 17.3 percent run had added about 95 points, just ahead of JPMorgan’s 90-odd point contribution…”


Yours truly had always believed that Trump is good for the markets:

“…a Trump presidency coupled with US dollar strength will cause the S&P500 to jump, doubling or even quadrupling. This is mainly because the Donald has the willingness to default. For now, we will be patient, and enjoy the summer holidays. Mr. Markets will eventually give us the buy signal…”


And, Trump had been good for the markets:

“…Since the election, all the major indexes have been hitting record highs. U.S. equities rose Friday, with the major indexes on pace for strong weekly gains. The S&P 500 has risen more than 4 percent over the past month, but the S&P information technology segment has lagged the broader market, gaining only about 1.8 percent. In the same period, financials and energy have rallied 13 percent and 7 percent, respectively. Health care, consumer staples and utilities have struggled to join the rally as well…”


However, the concentration on Goldman Sachs is curious, and bewildering. Yet, there are many reasons for a broad based rally under Trump.


First and foremost, the selloff in the bond market (chiefly driven by the Donald’s willingness to default) would stoke the great rotation from bonds into equities. We had talked about this when US10y Treasuries, the foundation of all bonds, was at 2.34%. It had worsened another 12 bps since to 2.46%, and could probably take a breather here:

“…With more central banks forced to dig into their savings in the form of US Treasuries, Janet Yellen’s problem had just gotten bigger…”


Secondly, the tax policy. Everyone is talking about the ‘huuuge business tax cuts’. Very few are paying attention to ‘farewell depreciation’:

“Huuuge Business Tax Cuts; Farewell Depreciation.

Corporations currently pay tax at a rate of 35%, which President Trump likes to point out is the highest rate in the industrialized world (It’s not). His proposal would cut the rate to 15%, while eliminating most business deductions. Businesses would be permitted, however, to immediately deduct the cost of asset acquisitions, a monumental divergence from current law, under which businesses have to depreciate the cost of purchased assets over a number of years, greatly reducing the tax benefits. Those businesses that fully deduct asset costs will not be permitted to deduct interest expense on any borrowing, a provision that’s intended to reduce corporate dependence on debt…”


Frankly, Forbes should change it to: “Huuuge Business Tax Cuts, Farewell Labor.” The commentary should also change to: “Business would be permitted to immediately deduct the cost of asset (e.g. robots) acquisitions, a monumental divergence from current law, under which businesses have to depreciate the cost of purchased assets (e.g. robots) over a number of years, greatly reducing the tax benefits of robots over people.” Perhaps, many years from now, President Trump would be fondly remembered by technocrats as the catalyst of The Second Machine Age. A major side effect of this, if not mitigated by policymakers, is the acceleration of inequality:

“…Since there is generally no financial recognition of the social consequences of commoditization of labor, the benefits of automation will accrue to possessors of capital…”


Lastly, the potential rollback of financial regulation over-reaction. In all likelihood, President-elect Trump probably wants to rollback over-regulation to stimulate infrastructure investment:

“…Too often we hear pundits complaining that regulatory overreaction is not friendly to infrastructure investment. However, the beauty of banking is that we boast a strong tradition of innovation. Let’s innovate around today’s realities…”


All those who had been buying up investment banking stocks on the belief that we are going to return to reckless banking are probably going to be disappointed. Dodd-Frank would likely be repealed, but a new version of 1933 Glass-Steagall (which Bill Clinton repealed in 1999 which some say led to the creation of Citigroup) would probably be reinstated. It is unlikely that Trump’s team had suffered collective amnesia of the 2008 financial crisis. Beware a pump and dump.


Good luck in the markets.