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Follow the Money

Where does a corporate tax cut go? Let’s follow one billion dollars as it gets diverted from the IRS into the financial system.

Megacorp gets a billion dollar tax cut. However, on the same day as the money arrives there are no billion-dollar opportunities waiting for investment. Company management invests in new product lines and billion dollar capital investments such as factories with an outlook and schedule of years of planning. A tax cut could be taken away by the next administration – it isn’t a reliable source of funding.

It isn’t reliable, but it is a windfall. Found money goes into quick return financial shenanigans such as stock buybacks and retiring corporate debt. This what happened to the Bush tax cuts in 2004.

OK, Megacorp spends 800 million on stock repurchase and 200 million on retiring corporate debt. Where does the money go?

Most common stock is held by funds – retirement funds, pension funds, and insurance funds. Most corporate debt is held by similar funds. So almost the entire billion dollars is injected as cash into the funds. Funds have rules for what to do with the cash from non-recurring sources – reinvest it. (The same for recurring sources such as dividends and interest payments. The point is that it won’t be a direct or immediate distribution.) So one billion dollars is almost immediately invested into the financial markets.

The money will eventually find its way out of the funds in the form of distributions to individuals at retirement. At this point, many years after it was given to Megacorp, it starts to turn into consumer spending that benefits the pensioners and retirees and the larger economy. During that time inflation and management fees have cut into the amount, though general market growth may have offset that.

And, of course, it will be taxed. But the tax will be paid by a retiree, not by Megacorp.

Bottom line: Corporate investment uses reliable funding sources and has a long timeline. Tax cuts don’t fit that description. The money does eventually trickle into the consumer economy years afterward. Infrastructure investment would create more jobs, immediately, than any tax cut.


A former boss of mine once said that the worst word to find in the Management’s Discussion and Analysis section of a financial report is ‘unexpected’.

It appears that Donald Trump’s victory is the result of peeling off a longstanding part of the Democratic Party coalition and adding it to the existing Republican Party coalition. The Midwestern white working class has shifted into the GOP column.It will probably stay here for quite some time.

Very much will depend on how Trump governs. In business terms, Trump has done so-so with ‘going concerns’ – existing companies on a solid footing, such as the apartment empire he inherited from his father. His hubristic expansions have been the source of his multiple bankruptcies. In this sense, the US is a going concern, and what happens to it depends on what Trump decides to change.

Trump will need to staff his administration and it is not clear today whether the burn-it-down crowd will triumph over the manifest opportunities for self-aggrandizement. Why kill a cabinet position when you can put your friend in charge? Much of the fear on the right has been that Trump has no roots in conservatism, and will be willing to go with the status quo in DC.

For example, will Trump repeal Obamacare? The GOP-controlled Congress has not been able to put even symbolic bills on the President’s desk for veto, so can they do better now? I expect Trump wants something that can be called Trumpcare, and what that will be is anyone’s guess.

Globally, the burden of Trump will fall on the poor if the US retreats from any meaningful action on climate change. It will fall on the already miserable Middle East if Trump tries Bush-era aggression or plays into the culture-war rhetoric of ISIS. It will fall on the people of the former Soviet Union and Warsaw Pact as Putin is given a free hand to reassemble an empire.

Don’t worry is does get worse. The mid-term election is usually a reaction against the President, but 2018 is going to be a hard year for Democrats in the Senate, and no particular hope for swinging a lot of gerrymandered House districts. Trump will have a full four years of a Republican Congress. The only bright spot there is the coming civil war in the House.

Supreme Court? McConnell’s bet pays off. Trump gets at least one pick, Obama’s last one. I expect Harriet Miers quality choices from a man that has reveled in manipulating the legal system his entire life.

Machinists in Waukegan, no soup for you. Your job is not coming back. But is was a convenient thing for a billionaire to say, wasn’t it?


The French way

Sorry, this article is not free to read. Basically, it says French banks are taking advantage of a difference in regulation to become dominant players in the US Treasury repo market. (The data behind the article was sourced from the OFR, my employer.) Dominant, that is, until quarter-end window dressing forces them out.
US banks have to report balance sheets every day, while the French banks only report quarterly. So the French banks play big in the repo market until the last day of the quarter, when they close out all the trades and pretend everything is fine and no, there is no gambling in this establishment.
Not that repo is gambling, it is the exact opposite – about the safest thing you could do with money. Safe, that is, until your counterparty evaporates every 90 days, or has come to rely on repo and then very inconveniently can’t access the repo market because it is quarter-end. Liquidity squeezes can take many forms.
Aligning regulatory regimes across the globe is absolutely necessary in a global capital market. Post-crisis regulatory reform still has far to go, even as people start to forget what all the shouting was about in 2008 (so long ago!) and why can’t I gamble with other people’s retirement funds?

Is Crowdfunding a good model for capital formation?

Soon you will be able to raise capital and float shares using sites like Kickstarter. The effective date for the SEC’s Reg Crowdfunding (they gave up on finding a single letter) is close upon us. I’ve funded things on Kickstarter, but color me skeptical about using it for capital.

Like many things, it sounds good in theory. Going back to Michael Millken and the junk bond empire of Drexel Burnham Lambert, there is a theory that backing lots of risky businesses will succeed because the few winners will more than make up for the many losers. For example, I could have invested in every PC maker from 1977 onwards and made up for all the losses with one winner, Apple.

Wash, Shrink, Repeat.

If it worked for small and risky companies, the theory goes, it will work eversomuchmoreso for even smaller, riskier companies. Never mind survivor effects that have already winnowed the field, etc.

Also running in favor of the idea is the desire to even out income inequality. Very large fortunes are made today by being in on the start of small companies that grow big. Crowdfunding capital formation would spread that opportunity across many more individuals than have it today. This is a very positive and valuable goal.

The SEC stripped me of investor protection, and all I got was this lousy T-shirt

The fly in this ointment is that capital formation has historically been a way to rip people off. It is easy to forget that the SEC set up all the rules about floating shares in the first place to protect potential investors, not prop up investment banks. (Full disclosure, I used to work for one.)

Go public without audited financial statements? Fine! Who needs independent confirmation of facts when we want rampant speculation?

No. No. No. The rules are there for a reason. We learned our lesson, and I would rather not unlearn it.



Putin Rides the Tiger

There was an interesting misalignment in Putin’s clownish attempt to disguise his takeover of Crimea, and it tells us something about what is going to happen next. Thousands of troops show up in unmarked uniforms, but they are using trucks with Russian military license plates. One is an attempt to disguise (in the most threadbare fashion) the origin of these soldiers, the other plainly tells everyone who they are. Here is how I see it. Continue reading Putin Rides the Tiger

“When you look up at the thousands of stars in the night sky, the nearest sun-like star with an Earth-size planet in its habitable zone is probably only 12 light years away and can be seen with the naked eye. That is amazing.”A green and red Perseid meteor striking the sk...