One of my favorite books is the Tao of Pooh – seriously! Have you heard of it? It teaches the Eastern philosophy of Taoism through the story of Winnie the Pooh. Most of us know Pooh as a simple-minded bear. Mostly he just wants to fill his stomach with honey. But, he’s actually very observant and his “go with the flow attitude” is in harmony with the world around him. Despite all his adventures he usually ends up on his feet.
One of the chapters in the book is titled “The Bisy Backson,” and it describes people that operate at a frantic pace. They stay so busy at being busy that they get very little done. Christopher Robbin was in such a hurry that he didn’t even write “busy, back soon” on his door correctly – thus, “bisy backson.”
The author Benjamin Hoff wrote the book in the early 1980s. Today the book reads like a dark premonition. I know you’ve seen this scene: two people out to dinner (or a whole family, even) with heads’ down and eyes fixed on their phones. There’s no end to impatient text messages resulting in car accidents. Everyone is so busy trying to stay busy and connected that they don’t take any time out to smell the roses.
And because we are so busy at being busy, everything in life has now been reduced to 140 characters or less. That means there’s little time to actually do any research or argue anything with nuance. As a result, there are some huge misconceptions about the world.
You can see this dynamic at play in regard to the economy and the markets, in my opinion, because there continues to be some huge misconceptions and overreactions over the impact of some of the incoming administration’s proposed policies. Investors are simply reacting to headlines and not doing much depth of analysis.
That could be very dangerous for your wealth.
Let’s take a moment and calmly break down infrastructure spending, the repatriation of money held overseas, and tax cuts, which are three big topics that have been in the headlines recently and deserve more than 140 characters worth of explanation.
Investors are giddy at the prospect of major infrastructure spending. Trump’s plan calls for $100 billion in spending a year for 10 years. Even these days, a trillion dollars is a lot of money! That all sounds well and good on the surface. After all, if you listen to talking heads on TV you’d think we were a third-world country with roads, bridges, and airports crumbling into oblivion.
To be sure, our infrastructure needs some tender loving care. But, did you know we spent $416 billion on infrastructure in 2014 across federal, state, and local governments? Total transportation infrastructure was $279 billion. Of that highways saw $165 billion in spending. Water infrastructure was over $100 billion alone.
So, where’s the beef? Trump’s plan is not transformational; it’s incremental at best. Add in the fact that Republicans are generally against this sort of spending – not to mention there isn’t enough skilled labor in the U.S. to work on these projects – and the implementation of the plan looks far from certain.
While it may help some companies, it’s hardly a magic bullet in my opinion. Take Deere & Co (NYSE: DE), for example.
John Deere’s stock is up a lot recently because investors are excited about the grand infrastructure plan that Trump has in place. But, if you look back to 2014 when spending was $416 billion, Deere’s revenues are down 27% since that time. So, why would investors expect them to all of a sudden increase dramatically from here? Trump’s plan is incremental at best. The notion that all these companies are going to see huge revenue increases is way overblown as their business has been in decline despite massive infrastructure spending in recent years.
Repatriation of Currency
This is a good one. Word on the Street is that there’s over $2.5 trillion held by U.S. companies overseas. If they just didn’t have to pay a massive 35% tax on that money, job growth would explode and more money in the pockets of workers would spur economic growth.
It doesn’t really work that way. Let’s go back to 2004. There was a major bill aimed at cutting taxes. It was called The American Job Creation Act, but it did little to actually create any jobs – no jobs, fact! Rather, companies used the excess cash flow created by the policy to buy back stock and pad their own wallets with fat bonuses. In my opinion, it was a colossal failure.
The other problem with this theory is that it assumes the money is locked away in some safe box somewhere and cannot be accessed by the company. But, in recent years, companies have taken on huge amounts of low-cost debt to finance investments and increase productive capacity.
On the positive side, the low-cost debt has reduced the overall cost of capital and in turn can raise the return on invested capital on projects. The bad news, however, is that the money has already been spent. So, bringing back this capital will do little to create jobs. If new tax breaks pass Congress, I suspect that, just like in the past, it will mostly be used for financial engineering and buying back stock.
Independent analysis of proposed tax cuts show that nearly 50% of the tax relief will go to the top 1% of earners. I stayed up until 3:30 a.m. the night of the election. I watched all of the election results come in that night. The top 1% didn’t get Donald Trump elected president. The bottom 50% did.
By some accounts he appears to have tremendous appeal to working class voters, particularly in the Midwest. Unfortunately, his tax plan won’t help them much. Middle-income workers would take in an extra $1,000 – or about 1.5% of their income. Meanwhile, the poorest 20% would get about $100 in annual tax relief.
That, folks, is not going to move the needle.
Meanwhile, the top 1% will benefit by more than $214,000. Since wealthier people tend to be older (that additional time allows them more room to accumulate wealth), this group of people is now past their prime spending years. That’s bad news for the economy. That money isn’t going back into mom-and-pop shops and big box stores. It’s likely that additional personal tax savings will simply get saved and invested. So, while the benefits may really help the 1%, it might not do much for the economy.
This is much in the same way that the stock market is at all-time highs and has had a huge run overall since 2009 while, simultaneously, we have experienced one of the worst economic recoveries in our history.
The stock market has been on a tear since the election. But I fear that investors are only reacting to headlines. That’s the world we live in today. They may be sorely disappointed after the first 100 days of the next administration when very little gets done and the benefits are not what they thought they would be.
John Del Vecchio
Editor, Forensic Investor