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Tax Cuts & Deregulation – It’s Really That Simple

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We’ve witnessed the greatest creation of value the world has ever experienced.

$8 Trillion in value and counting.

It was always there – it was just waiting to be released. Government simply needed to get out of the way.

The market is now over 26,000 – just two short weeks later.

On the day of our Presidential election, I sent out a text with the following simple message:

“Sell the rally if Hillary wins. Buy the Low if Trump wins.”

When Trump won the election, market futures nosedived.

I sent that same text again.

My advice was predicated on nothing more than Trump’s promises for deregulation and lower taxes.

On December 8, 2016, I said this:

President-Elect Trump is laying the foundations of growth through the application of reduced governmental burdens.

And the American economy is going to respond. Get ready for quite a ride. It’s gonna be a great eight years.

On February 19, 2017, I made the following statement:

I think we are in the midst of one of the great Bull Market runs – as long as President Trump can get his policies enacted.

President Trump has killed nearly 1,000 regulations since taking office – and the economy and financial markets have responded.

It’s simple really.

If you tell me we’re going to experience lower taxes and reduced regulation, I’ll tell you the economy will improve, GDP will move up, the jobless rate will fall and the stock market will move up.

Every. Single. Time.

Financial markets hate regulations even more than they hate taxes.

For two primary reasons:

  1. Regulations are costly – the hidden costs of regulations exceed even those of taxes.
  2. A regulatory-heavy environment introduces uncertainty – which corporations, CEOs and markets abhor.

Obama personally ushered in the greatest level of needless regulation this country has ever seen.

Which is exactly why Obama never saw 3% GDP.

The Federal Register is the depository of rules and regulations.

Of the ten all-time-highest annual Federal Register page counts, seven occurred under President Obama.

In 2016, Obama shattered his own previous record by issuing 97,110 pages of regulations – 15,705 pages more than the previous all-time high of 81,405 pages that Obama “achieved” in 2010.

Obama stated it himself:

The profit motive can be a powerful force for the common good, driving businesses to create products that consumers rave about or motivating banks to lend to growing businesses. But, by itself, this will not lead to broadly shared prosperity and growth. Economists have long recognized that markets, left to their own devices, can fail.

I guess he actually believed that nonsense. His policies directly reflected those sentiments.

And Obama’s policies were holding the markets – and our economy – back.

Now, those same policies are either dead or dying.

Meanwhile, President Trump’s tax cuts added fresh fuel to the economic fire.

The lifting of nearly 1,000 useless regulations has been a boon to the markets.  Couple that with individual tax cuts, a lower corporate tax rate and a move towards a much more rational territorial tax system and you have all the makings of a sustained bull market.

It’s all about expectations of future cash flows. And those expectations are up.

The sustained rally in stocks reflects the market’s forward-looking outlook for a much stronger operating environment. Business began to invest immediately, and in force, which is why we are now looking at the prospect of eclipsing 4% GDP in the 4th Quarter and perhaps reaching 3% GDP for the year.

3% GDP for 2017  – or anything even close – was considered absolutely unthinkable at the beginning of the year.

Everyday workers are already seeing the benefits – upticks in their paychecks, many receiving unanticipated bonus checks. Corporations are repatriating offshore earnings and investing domestically. Capital expenditures have been steadily increasing from the start of the year.

Our Business Environment has fundamentally changed for the better.

Consider this simple scenario:

You have $1,000 cash. You’re unsure of your job stability. Money’s on the tight side.

Do you take that $1,000 and put it into the stock market through your retirement account; consider pursuing that college degree; invest in yourself.

Or do you simply hold onto that cash for a rainy day.

Same starting point:

You have $1,000 cash. You’re unsure of your job stability. Money’s on the tight side.

But then this:

You suddenly notice your paycheck has gone up – your taxes have fallen.

And this:

Your employer gives you an unexpected bonus of $1,000 and tells you it’s due to tax cuts – and the bonus is for retention purposes.

My guess is you’re going to feel a bit better about doing something more productive with that initial $1,000 cash.

Companies are no different.

They hate uncertainty above all else. Reduce the uncertainty – the unexpected and burdensome governmental impacts – and businesses will unleash domestic investment.

It’s really that simple.

From Apple’s announcement:

Apple, already the largest US taxpayer, anticipates repatriation tax payments of approximately $38 billion as required by recent changes to the tax law. A payment of that size would likely be the largest of its kind ever made.

I’ve written about repatriation before:

A further twist exists as part of our worldwide tax code. Corporate profits are not actually taxed until they are repatriated to the U.S. This incentivizes companies to keep cash from offshore operations in the place it was generated – offshore.

The new Tax Bill shifts us from a worldwide tax system to a far more rational territorial tax system.

Estimates vary but there appears to be at least $2.5 Trillion in cash profits residing overseas. This is a staggering level of capital that could be going toward economic investment, production and growth domestically instead of boosting the capital availability and growth of other nations.

Expect more announcements like the one made by Apple.

The Americans for Tax Reform have created a List of Tax Reform Good News – pay raises, bonuses, expansions, 401(k) increases – arising from tax reform.

They are constantly updating the list which is already in excess of 160 companies.

And growing.

Leading to a rise in wages:

Which is exactly why Democrats were so up in arms about President Trump’s Tax Bill.

They knew it was going to work.

 

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