The Dividend Cafe - Earnings, Exports, and Tax Reform Sausage

Episode Date: November 8, 2017

Earnings, Exports, and Tax Reform Sausage by The Bahnsen Group

Welcome to the Dividend Cafe, financial food for thought. Well, hello. Welcome to this week's Dividend Cafe. You know, we're back in the mode of all things tax reform. I'd love to talk a little bit about Japan. I'd love to talk a bit about monetary policy. There are certain things, I guess the oil prices getting up near $58 this week, really pushing up towards $60, where just a couple months ago we were wondering about $40. So there are certain things happening in the world outside of the legislative process around tax reform,

but there are very few things anyone is talking about or worried about at this point. And I am more and more in the camp right now that I believe a bill, I still believe a bill is very likely to get passed around tax reform. And I'm more and more in the camp that it may not end up being the bill that a lot of people will want. So let me break this down for you real quickly as it pertains to markets. I'm kind of talking to people right now listening under the assumption that they're interested in how this would impact them from an investment standpoint, which is different than as a taxpayer. In other words, you could have a

situation where as a taxpayer, there are things you really do not like about the bill. Others, as a taxpayer, there are things they may really like about the bill. But I think that all investors probably like the bill as it stands now. To make those that are taxpayers who are unhappy in the present draft, I believe that one of the things they're going to do is neuter or marginalize some of the things that make us happy as investors. So hopefully you follow the tension points as I'm laying them out. Fundamentally, the corporate tax reform side of this is essentially what I think markets mostly wanted. I personally am a big advocate of it as a supply-side, growth-oriented, productivity-enhancing reform package. It does a lowering of the rates. It does

a decrease of the deductions and loopholes, most of which I can't stand. And it does a lot of good around the territorial tax system in terms of multinational companies with foreign business, enhancing global competitiveness, and it allows for a repatriation of earnings that are held offshore right now to come back. That's all that I think the market would really want to see. Right now, with hindsight, I think it's easier and easier to say that it was politically a mistake to try to bundle the individual tax reform and the corporate tax reform together because squaring that circle is leading to a lot of complexity and I don't think we know exactly how it's going to unpack politically in the weeks ahead. As it stands now, if the Senate,

and by the time you're listening to this, the Senate may have already come out with what their package will look like. It's going to be very different than the House package. It may spare the House a very difficult vote because you have a lot of congressional Republicans that do not want to be the people to vote against a President Trump tax reform bill, but also have very big problems with the bill. And more importantly, their local constituents have big problems with the bill. So if the Senate ends up presenting a bill and it keeps the House from voting on their own, and then they end up turning the knobs and getting to a point of palatability, then it could be that they pass something before the end of the year

and that the House just says, we're not going to take it to conference. We're not going to then try to go reconcile the two bills. We'll just vote on the Senate bill and move forward. That all depends on what the Senate bill looks like. And if I were a betting man, which I'm not, I suspect the Senate bill will become more politically passable and much less efficacious, much less potent, much less effective in what they're trying to do. That's what I suspect could happen. much less effective in what they're trying to do. That's what I suspect could happen.

But in terms of the business tax side that I think benefits investors, right now it's being offset by a lot of things in the individual code that as we've unpacked more and more of the House bill over the last week represents a lot of problems. And then it represents a lot of opportunity for certain people as well. But this is the nature of the political sausage making. All that to say we're going to know more in the weeks ahead, and that's obviously true by definition. But as it stands now, I think there's going to be volatility

between now and the end of the year around getting the bill done, and I don't think the market cares. The market has had very low volatility so far this week anyways. But politically a lot of volatility because moving parts and certain degrees of horse trading and a lot of gamesmanship because I think there are some folks who want to be able to vote no

but not deny it its passage. And that is leading to a situation where until we know what the Senate's going to do, the House is kind of stuck. All things being equal, I'd love to see them just go put forward the tax bill as a 10-year plan that sunsets, that goes away, a la the Bush tax cuts of 2001-2003. I don't think that's going to happen. I think that that ship has sort of sailed a bit, but that may have been a better way to get it done politically. It would have given them more leeway

around the reconciliation process. So more than likely, the Senate's going to have to do something that satisfies some of these different groups that are upset. And what that will look like, we'll be able to talk more about next week. That's the lay of the land of tax reform. I know it's on your minds. I know a lot of you care about it as taxpayers and as investors. But again, as it stands now, the good news is I think that the investor implication to the present business tax reform bill is very positive. And I think it's very likely to become somewhat less positive as they go about making it more palatable to a more democratic base of taxpayers. Hope you follow all that. I'm happy to take any questions by email. Thanks for listening to Dividend Cafe.

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