The political slicing and dicing that went into the creation of the OBBBA was banned on METAR.
Now that the OBBBA has been signed into law it becomes open to discussion since it will have enormous fiscal impact on the economy and will impact our investments. During discussions, please avoid partisan politics and focus on the economic/ investment aspects.
This article has several illuminating charts.
We already know that the OBBBA shunts government spending away from the poor and middle class toward the wealthy and businesses. That will favor the stock market since the wealthy tend to invest more.
But the chart that stands out to me most is the one that shows the scale of the bill.
All government spending (whether helicopter money or tax cuts) counts as fiscal stimulus. As investors we need to determine whether the money will go into the hands of consumers (in which case it will cause consumer price inflation) and/ or into the hands of investors (in which case it will cause asset price inflation).
The lower 40% income groups pay very little federal income tax. (Although they do pay other taxes.) They are the heaviest users of Medicaid and SNAP. They will suffer fundamentally since they will lose food and medical care. Knock-on effects may include closure of rural hospitals and poor school performance of children who lose nutrition.
The middle 40% will benefit from the tax changes. They are likely to spend much of this on consumer goods, stimulating the economy and potentially causing inflation (if supply doesn’t keep up with demand).
The upper 10% will probably invest a proportion of their windfall. This will increase asset prices as the earlier stimulus bills did.
The government’s debt will increase dramatically as a result of the OBBBA. This may or may not increase bond yields – depending on demand from investors. The long-term bond yields may climb due to uncertainty about future deficits.
As others on this board have said “they’re getting it, good and hard”.
The interesting thing is the tax cuts that can benefit middle income people all have a short sunset. That means another opportunity, in a short time, to push another huge “JC” tax cut through, with a few, temporary, sweeteners for the Proles.
So to understand this you will have to ask yourself where will the Rich put their money. I would think they would invest in Crypto and in the Private Markets where we will not have access to or even if we do, we might not want to invest because we do not understand the valuations or our money would be locked up for years.
So then we have to look at the public markets and where all the funds are putting their money to understand where to invest. I would look at the top Sectors to see where the money is flowing. The top sectors right at this moment are.
Steel- specialty alloys (ATI)
Energy alternative (ENLT)
Leisure-Movies (CNVS)
Electric-Contract (CLS)
Mining Gold Silver Gems (ASM)
Auto-truck (STRT)
Computer software-EDU (SPOT)
Aerospace Defense (Atro)
Retail Discount (FIVE)
Telecom Infrastructure (Comm)
These are just examples not investment advice. All sectors are on the NYSE and the Nasdaq.
One problem I see with this bill is that the velocity of money will slow. You give a poor man 10 dollars he is going to spend it. You give a billionaire a milliion dollars he is going to hoard it.
Quibble. If he has something to invest it in, he’ll invest it. But if things are going badly, he’s going to shelter it. The rich are rich, in general, because they (or their advisors/accountants) are smart with money. If there’s money to be made, they’ll invest that million dollars. If not, they’ll protect (or “hoard”) it. As I recall, most of the tax cuts under Bush Jr, and then under the Felon, occurred when things were contracting, and there was nothing to invest in (from the rich person’s standpoint). So, they hoarded it. As you or I would if we didn’t need to spend it (like the poor person would need to).
But in spending it, the poor person is doing more to help the economy. He’s creating demand, and enabling money to flow through the economy. Without that flow, we get bad things (like depressions).
Everyone thinks they are smart with money but it could be they just were lucky, or inherited it. My point is that more middle class people making more money will move that money around the economy than a few billionaires making another 100 million a year will. Sure they could invest it in land by buying another ranch or a beach front home but will that move as much money around as giving that same 100 million in raises to middle class people who are trying to get by? When you go from making 50 thousand a year to making 65 thousand a year your are still spending that money on surviving and raising a family.
I think this is a great two sentence summary on consumer vs asset inflation. Can help explain appetite for crypto, as just one example.
I’ve been trying to understand asset inflation and low interest rates and low CPI inflation since 2008. Because, except for covid inflation which has now run off, I think we are still in this pattern.
And remember, advances in AI, robotics and automation all fall into the asset bucket, and these are deflationary.
When the wealthy get wealthier, they buy every asset; stocks, art, homes, etc, even businesses via private equity, driving the prices up and making these assets unaffordable for others.
Since they have most of the money and can only consume a small amount, jobs and business go away, forcing people to work for only the wealthy, where the competition is fierce for small pickings.
Where does that leave the working and middle class? Well, I think you know.
It’s a snake eating its own tail.
What’s the solution? Regulated capitalism and progressive taxation, a strong government that provides a safety net for the health and well being of all.
We can do it, again, we just have to focus on that and work together.
This seems an outlandish claim. The richest ppl i know are horrible with money. No clue about the inflows or outflows or monthly spends. Just depend on employees. The poorest ppl i know can make a dollar stretch and save/invest everything they can. It just doesnt really matter how good you are if your starting with 100 bucks. Double 6 times in a decade and you still basically have nothing.
I know ive become worse with money as ive become more financially secure (forget budgeting or worrying about any rules like save 30% of your income), and spent less and less time worrying about investments and indeed take fewer and fewer risks with my investments. The indexes just kind of take care of themselves.
The point of being rich is that you dont need to worry about money.
Or, he/they could speculate. We old phartz remember when the Hunt boys tried to corner the silver market. Everything went according to plan, until “regulation” constrained their margin buying. Even worse, they were held accountable for market manipulation. Think anything like accountability would happen now? Or will crypto speculation soar to the moon, sucking up all the capital in the country?
You sorta supported my assertion when you said “or they depend on employees”. That would include advisors and accountants.
Some of the most generous people I have known were middle class or poor. Some of the stingiest people I have known were the wealthier people I have known.
I also have become a little looser with money. I’m more “if we need it, buy it” than I used to be (I used to wait for a sale or coupon, or sometimes just go without). Agreed that I am utilizing more index funds than I used to, and I’ll probably continue that trend. I have enough to last the rest of my life, and I’ll never be able to afford a Migaloo sub (no matter how much risk I take), so better to be relatively safe with growth that usually exceeds inflation.
I haven’t looked in the academic economic literature, but there must be papers and models on this, I would think, but Stevenson says it’s not really covered.
Maybe one day I can look it up, but in the meantime we can just watch it unfold in real time.
It does help explain asset prices.
I’m still trying to understand how the gov debt might be handled. In a sense it is just the wealthy lending to itself (if most gov spending eventually flows to the wealthy anyway - healthcare spending, defense spending, retirees spending their SS), so it feels like it can just continue.
Some years ago, when the annual deficit was “only” $1T, I found a way to balance the budget. The US would have had all the warmth and charm of the Soviet Union, but it would have been solvent. But the US has continued to dig the hole much deeper since then.
This is just the latest version of trickle down economics. We generally know how this plays out. Asset inflation from stock buybacks and the wealthy finding new and exciting ways to make more money. The middle class will continue to shrink and the poor will struggle. One big difference from past efforts lies in the gutting of social safety net money for the poorest among us. This will turbo charge continued wealth inequality.
Healthcare prices will likely increase for all, putting further pressure on the middle class.
I’m long pitchforks and expensive home security systems.
That has always been the stated objective. I have commented before on hearing “supply side” shill Jack Kemp nattering on about “capital formation”. He insisted with words to the effect: “the rich do all the saving and investing, so the rich should have all the money”.
Here’s one “talking point:”
“We need low taxes on capital gains and dividends to incentivize productive investment.”
Counter:
“Uh no. You are swimming in $, with way more than you can spend. You don’t need an incentive to invest.”
“Instead, we need low taxes on wage and salary income to incentivize productive work. And these taxes should be no higher than taxes on investment income, because: fairness.”
Counter-counter:
“We are going to keep working people poor, that will incentivize them to work for lower compensation.”
“We are going to tie health insurance to employment, that will incentivize working people to keep working so as to not go bankrupt on health care costs.”
Top 10% median income is $160,000. An increase of 2.3% on average comes to $3,680. That may increase asset prices a bit, but I’m not sure how meaningful it’ll be.
The upper 10% weren’t eligible for those earlier individual stimulus payments. So this wouldn’t be an apt comparison to those earlier stimulus payments. The PPP, however, did add TONS of money into the system, much of it to small businesses, many owned by the upper 10%.
