Will Repatriation Of The Offshore Cash Hoard Lead To A Dollar Surge: Goldman's Take On A Second Homeland Investment Act

Tyler Durden's picture

With Goldman's economic team having been subsumed by the Koolaid borg, lately we have been largely ignoring their once must read critical pieces, as the all out onslaught to prevent the ponzi collapse was started in November (we expect Hatzius to pull another 180 in April, just ahead of the May market crash which will lead right into QE 2+, but that is another story). This is a shame, because the team of Hatzius et al used to have insightful things to say. Alas, now all they do is cheerlead every single data point no matter how superficial or ugly the behind the headlines story is. Which is why we were pleasantly surprised to read the following research report by Goldman's Robin Brooks which discussed the consequence of the now seemingly inevitable tax holiday allowing multinationals to repatriate their cash without paying taxes. Following Obama's latest Wall Street corporatocratic hiring spree, we are now convinced that it is merely a matter of months if not weeks before this is announced. As such it will be a replay of the Homeland Investment Act of 2005. Oddly, this event has not be actively priced by the market. Goldman is correct that in all likelihood this will have a very dollar positive result, which likely explains precisely why the dollar has been allowed to drop so much against the euro, as the next leg will likely push the greenback well into the 1.20 range, if not lower. That this will happen just as the second round of European stress tests will only feed the flames of the EUR's collapse. The below piece examines Goldman's thinking of how this event will influence the EURUSD. Goldman, which is very client bullish on the EURUSD (and is therefore selling selling EURs in droves) states that it believes the likelihood of a HIA part 2 is very small, even as it frames the major strength the dollar would experience as a result. We agree with the latter and disagree with the former: one way or another, the Obama administration will need to get the $1+ trillion currently offshore. When that happens, watch as the EURUSD plunges to multi-year lows.

From Goldman's Robin Brooks and Alec Phillips

Another HIA as a possible catalyst for USD strength

A central part of our FX forecasts is that USD needs to fall on a broad trade-weighted basis, by between 4-5% by year-end. That said, we have been fielding a growing number of questions on whether there could be a new instalment of the 2005 Homeland Investment Act (HIA) and if this could be a catalyst for USD strength. Indeed, a number of US multinationals look to be pushing for another round of tax cuts for the repatriation of overseas profits. In today’s Daily, we discuss the potential for another HIA, or HIA2 as we call it here, as a source for USD strength.

We break the problem down into two three parts. First, we review the first HIA episode to see whether – empirically speaking – the 2005 HIA was a driver of USD strength. Once we control for interest rate differentials, which capture rising rate support for USD from a hiking Fed, HIA-related flows are not associated significantly with USD moves into end-2005. That said, we at the time observed sizeable FX flows on the back of HIA. These flows were quite concentrated and may indeed have moved USD in ways our empirics may not capture. We therefore do not dismiss HIA flows as a potential USD driver, and point here only to another possible driver for USD strength back then (a tightening Fed). Second, given this empirical evidence, we assess the potential for HIA2 to start another round of repatriation flows by US multinationals. Even allowing for the possibility that some (perhaps even a majority) of earnings retained overseas may be held in USD, the scale of US multinationals’ retained earnings abroad is such that HIA2 could result in potentially large repatriation flows. Third, and finally, against this backdrop the question becomes whether HIA2 is at all politically likely at this point – and here our reading is that it is not. Indeed, those members of Congress that made a push for the HIA in 2005 are in our understanding focused elsewhere, and – a December visit by US CEO’s with the President aside – there appears to be little political momentum in this direction.

3. A quick refresher on the 2005 HIA

We can proxy for repatriation flows by US multinationals due to the 2005 HIA by looking at repatriation flows in the US balance of payments. There is an element of judgement here, since it is unclear how much US multinationals would have repatriated in the absence of the HIA. However, if one allows for the fact that US multinationals’ distributed earnings flows averaged around $20 bn per quarter prior to the HIA, distributed earnings flows in Q1 2005 exceeded this amount by $13 bn, in Q2 by $23 bn, in Q3 by $77 bn, and in Q4 by 106 bn, for a total of estimated repatriation flows from the HIA of around $220 bn (Fig 1).

On the face of things, the associated spike in distributed earnings is indeed associated with a drop in EUR/$ (Fig 2), though this FX move could also be – empirically speaking – due to the rate differential between the US and the Euro zone moving in favour of USD, a reflection of a Fed embarked on a hiking cycle while the ECB only began hiking end-2005 (Fig 3).

Which of these two drivers matters more in explaining the USD rise into end-2005 is an empirical question, which we address here using simple regressions. We regress quarterly percent changes in EUR/$ on changes in the two-year swap rate differential and changes in the profit repatriation flow. This regression reveals the expected sign on both coefficients – stronger repatriation and higher US interest rates boost USD – but only the interest differential is significant. This result holds true whether we allow for lags in the link from FX to repatriation flows, or whether we run the regression in levels (where the sign on repatriation flows is wrong). That said, the explanatory power of all these regressions is low, and thus we put little weight on them. Indeed, back in 2005 we observed sizeable FX flows on the back of HIA. These flows were quite concentrated and may indeed have moved USD in ways our empirics may not capture. We therefore do not dismiss HIA flows as a potential USD driver, and point here only to another possible driver for USD strength back then, in the form of a tightening Fed, not to mention of course also the rejection of EU referenda in France and the Netherlands, and positioning, which may also have worked against EUR.

4. Large potential for another round of repatriation flows

US companies have accumulated substantial retained earnings abroad since the last round of repatriation in 2005. Estimating the stock of retained earnings that (a) could be repatriated in the event of HIA2 and (b) would be FX relevant is a heroic exercise at best. That said, cumulative retained earnings of US multinationals since end-2005 are around $1.2 tn. The previous HIA legislation limited repatriation to earnings reinvested abroad listed on corporate balance sheets as of roughly 1.5 years prior to enactment, in order to avoid corporate gaming of the incentive. If such a restriction applied again, for instance limiting eligible profits to those on record at the end of 2009, this would reduce the potential amount to $925 bn.

However, most firms that might repatriate funds under HIA2 are Dollar functional and tend to keep the vast majority of cash assets in USD, regardless of the tax jurisdiction. Thus the actual FX transactions resulting from repatriation would only be a fraction of total repatriation flows, and we think 10% could be a reasonable assumption based on past HIA flows. Moreover, US firms would likely not repatriate all their retained earnings overseas, even in the event of HIA2. One limiting factor that could come into play in any future repatriation regime is a stricter limitation on eligible uses of funds. In the 2004 episode, firms were required to demonstrate that eligible payments to US parent companies were used to invest in plant, equipment, research, hiring or training. However, there was no requirement that this requirement be incremental to normal investment patterns, and in most cases the requirement was not a binding restraint.  If Congress were to consider another round of repatriation incentives, it seems likely that some type of incremental investment requirement would be required. This could significantly dampen appetite for profit repatriation, given that the same large US corporations that have earnings stranded overseas face minimal financing restraints domestically and thus are unlikely to want to increase investment based on the availability of funds.

But even allowing for these various things, at least conceptually the potential for sizeable repatriation flows is clearly there.

5. HIA2 is not on the political front burner

Against this backdrop the question becomes whether HIA2 is at all politically likely at this point – and here our reading is that it is not, for three reasons. First, most of the members of Congress that made a push for the HIA in 2005 do not appear to be particularly focused on it this time around. Instead, most of the recent discussion of a repatriation tax holiday appears to be generated by companies seeking another round of relief—including CEOs meeting with the president late last year—rather than by interest on Capitol Hill.

Second, although the fiscal effects of allowing a repatriation holiday are certainly debatable, the official estimate is likely to imply a significant cost to such a proposal. For instance, the original HIA was estimated to reduce corporate tax receipts by $3.2 bn over ten years, which was comprised of a revenue increase of $2.8 bn in the first year, followed by $6 bn in reduced tax receipts in the following years. This implied flows of at least $50bn ($2.8bn/5.25% tax rate).  Even if the revenue loss is offset by other factors (for instance, use of foreign tax credits would be limited if a repatriation holiday were granted), this still implies a revenue effect in the tens of billions. This could create difficulty in the current fiscal climate.

A third and somewhat related factor is the growing interest in corporate tax reform taking hold in Washington. President Obama appears likely to identify tax reform—and particularly corporate reform—as a priority in his State of the Union address on January 25 and in his budget that will follow mid-February. Likewise, congressional Republicans have also highlighted tax reform as an important issue.  While corporate tax reform could create an opportunity for greater repatriation of profits on an ongoing basis, with tax reform on the horizon legislators appear less interested in near term tax changes. Indeed, in testimony in the US House this week on the subject a representative of the Business Roundtable (an umbrella group representing corporate CEOs) indicated that the group prefers to focus on a permanent reduction in the statutory corporate tax rate and reform in the treatment of overseas profits rather than another temporary repatriation tax holiday. While some individual companies hold a different view, our sense is that the appetite for one-off changes will diminish further as the debate over wholesale reform picks up.


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buzzsaw99's picture

If I saw this coming it is priced in already. Even if they repatriat all that cash to the usa tax free the people won't see one thin dime. Debt repayment, bonuses, stock buybacks, advertising, political bribes, m&a. That money won't create one working class job nor will it do jack shit for anyone below CFO.

unky's picture

Thats not the point. The point is to keep the ponzi going for a while...

TheProphet's picture

Not the point. This money is not stored overseas in dollars. They will need to convert it into dollars and out of something else in order repatriate it.

If the amount is as high as $1T, this will certainly drive a short term demand for dollars.

I am sure The Bernank will take credit, saying this was his plan all along.

DosZap's picture

According to the article IT is in USD's.(Bulk)

My question,is repatriatng this many notes, would play holy hell with the M3 #'s.

How is that NOT Inflationary as all get out?.

oygevalt's picture

If more is not being printed solely to meet demand, would it, really?  It is a kind of genius if this could actually work... run the presses, and just when dollar supply was overwhelming dollar demand, introduce billions in EUR/JPY/ whatevs that want to buy dollars to repatriate at comparatively low tax rates - which by definition will feed the Treasury's receipts.  This makes sense to me.  Whether it's a sustainable long-term policy is quite another question.

JohnG's picture

"However, most firms that might repatriate funds under HIA2 are Dollar functional and tend to keep the vast majority of cash assets in USD, regardless of tax juristiction."

Not according too this analysis.  I should think that would be the case for US concerns in any case.

pcrs's picture

you would say that if these companies hold these dollars abroad, but invested in US treasuries, all a tax holiday would do is that they sell the treasuries for dollars, repatriate the dollars and buy treasuries in a domestic vehicle, waiting for the tax rates to be increased again for that vehicle.

This is no extra demand for dollars and no extra demand for treasuries. Only when these companies had their foreign held money lend to foreign governments or invested in foreign companies, and they were waiting for an opportunity to borrow it to uncle Sam or invest it in an american company, only then would a tax holiday create extra demand for dollars. Otherwise it would just shift the title papers from a non US entity to a US entity.

nope-1004's picture

USD strength?  Sure.... could happen.  In relation to what?  Some other failed currency?  I guess that's where Goldman is coming from.


Quinvarius's picture

I don't know why everyone has such a hardon for a strong Dollar.  Simple math tells me it is going to lose another 50% of its value based on what we did last year alone.

cxl9's picture

50% of its value relative to what?

Chappaquiddick's picture

The error account of humanity - PMs 

plocequ1's picture

I dont know, Will it? 

Dr. Doom's picture

I'm pretty sure the story about the "Great State" of California declaring a fiscal emergency never made news today.



pslater's picture

Didn't make the news because its old news....

buzzsaw99's picture

yep, heard it all before.

Rockfish's picture

Now let the stealing begin in earnest.

Atomizer's picture

IMF pitchman made another two year credit extension offer to Poland. FYI http://www.leap2020.eu/GEAB-N-51-is-available-Systemic-global-crisis-201...

gwar5's picture

Strength in dollar should be dip in PM. Buy the dip

Cdad's picture

My guess is that you will see a perfect USD buying dip on Monday  morning...based on some totally ginned up nonsense headline...which will be nothing short of the perfect lie.

This is one trade that is going to be, dare I say, very easy to put on.


Cdad's picture


This is so spot on...it is scary.  I was going to initiate the short Euro position at 1.36 per USD stud man.  However, the perfect catalyst is there...so the volatility will be perfectly clear.

This is good stuff....much obliged.


Drag Racer's picture

Social-networking company Facebook Inc. said it raised $1.5 billion, a transaction that included a controversial private placement led by Goldman Sachs Group Inc. (GS) that values the company at $50 billion.


DosZap's picture

one way or another, the Obama administration will need to get the $1+ trillion currently offshore.

As the USD's are currently being converted, into other currencies, and assets, I am SURE, that any fool would be more than happy to repatriate those dollars.

Plus, bringing  them home, would allow for future seizure,a fact we all expect to happen now.

The Swiss fiasco, tipped the US Gvt's hand to me,if they are strong arming foreign banks to get info on Americas deposits abroad,I just KNOW I would trust them, if they came home.

What would be the purpose of this?, A Grand Mall Seizure?.

We still have not been body slammed on the 401k's, and IRA's yet.


living on the edge's picture

It's ironic that the multinational corporations are desperately trying to bring this cash back to the USA while I am trying to get mine out of the USA. Does that make me a contrarian?

Quinvarius's picture

The Dollar dead enders are really grabbing at straws.  China, the EU, and Japan got wise to our beating on the Euro to paint the DXY trick.  It is over.  You had your unsustainable bounce. 

beastie's picture

This guy gets paid for this shit? Although he convolutes his sentences unecessarily if you boil this down it's no better than a high school essay.

Does he know how much the corporations hold in dollars outside the USA?

Does he know how many of those are likely to repatriate hold dollars?

Does he think it's likely that those who hold other currencies would buy US Dollars or stay where they are?

Unless he can tell us those answers then it could be either inflationary or deflationary.

He is correct in thinking that repatriation is likely. Is there any other reason Steve Jobs was meeting the the Prez.The Prez wasn't asking Steve for tech support on his iPad. He was asking what would it take to bring that money home and invest it.

God Damn this is fucking rubbish.

Grade: D-









TheProphet's picture

The reason they are talking about it right now is because the dollar is weak against the Yen and even against the Euro and if the EU raises interest rates the dollar will become even weaker. Favorable exchanges and favorable tax provisions meet to produce a sudden urge. My guess is that they will scramble to get this together before the Euro finally collapses.

Buck Johnson's picture

There's another reason also, If the Euro collapses and other countries are in dire straights what happens to those billions sitting in those foreign accounts?  They may either get repatriated or get taxed 90% to keep the money in the country.  The businesses want to get their cash out in order to protect it in the US.  Because they know that the US govt. is bought and paid for.

the grateful unemployed's picture

i would like to see the Tea Party bust their balls, wanta repatriot that money, pay up Steveie boy

grey7beard's picture

>> i would like to see the Tea Party bust their balls,

Big money owns the Tea Party.

Printfaster's picture

Big money owns the Tea Party.

Bigger money owns Obama, Reid, and Pelosi.

grey7beard's picture

>> Bigger money owns Obama, Reid, and Pelosi.

So that makes whatever the Koch brothers do ok, eh?  The Tea Party was corrupted from the day Santelli's scriped act brought it all on.  The fact that those you mentioned are beholden to big money doesn't negate the fact that the Tea Party are corruped also. 

Oh regional Indian's picture

The thing to pay attention to is the strange naming.

Homeland Investment. Read that again. Homeland Investment. Homeland Security.

Fatherland would have been too much of a give-away.

Be very aware of the fascist wording. It always begins that way. 

And companies, look at their free lunch. First, you get to keep a lot of un-taxable money outside, gettign all kinds of benefits from Host governments. Then you arm-twist the Homeland government to give you tax breaks to bring it all back in.

Perfect. Perfectly sickening that is.



JW n FL's picture

why should anyone pay a tax on the way back in?

it was taxxed going out...

it was taxxed offshore...

then re-taxxed coming back in?

why not just fucking take it all then?

RockyRacoon's picture

Perfect plan! That combined with all the 401Ks will solve the deficit crisis.

Miles Kendig's picture

Nice snack Tyler.  Thanx

Grand Supercycle's picture

As mentioned numerous times - US dollar strength keeps recurring because USD larger time frames are bullish and continue to warn of a significant dollar rally.

My proprietary indicators can identify trend changes before they occur.


RockyRacoon's picture

I predict that what you predict will always predict what you predicted.

snowball777's picture

Doesn't create any jobs here and encourages more offshoring of same...too fucking stupid for words.

Jonathan E's picture

Wouldn't another HIA (coincidentally) tip China over the edge?

ie. As US companies repatriate, China's hefty $ reserves deplete because a massive swathe of those dollars belong to US companies, therefore the PBoC has to reduce the corresponding RMB liabilities (the results of maintaining the $ peg) by removing RMB from the system, cue cash hoarding, credit collapse, defaults, chaos, big trouble in big China.

Or not?

Printfaster's picture

Just how are dollars going to be repatriated from China?  As I recall, there is now no way for businesses to convert.  Unless China sells them their hoard of Ts.  Hmmm.  The perfect deal.  Bernanke will finally be able to end QEII and take a vacation.

Just where are all those overseas dollars?

Inflation is just money printing by another name.  Dollar liquidity is created by creating dollar debt instruments, whether they be greenbacks or Ts.  Dumping stores of Ts onto the market is another way of increasing dollar liquidity.  In the end, it just causes the dollar to drop in value, since it is being rejected (China) and more (Ts) are being circulated.

Augustus's picture

The problem with the "repatriation" scenario is that the companies have no use for the funds in the US.  Why send more money into the roach trap that is being created.  Everyone with a half brain is trying to figure out how to get it out, not in.


banksterhater's picture

ACQUISITIONS with ZIRP. Take over the competition. It actually cuts jobs.

banksterhater's picture

Bush did it and attached an "American Jobs Act" name to it, pure bullshit, it's like Obama to pull the same crap. They were told they couldn't use it for stock buybacks, that's wher it went. They paid 3.5-5% corporate tax on it. It will goose the market just on buybacks alone. They won't create one fucking job. And most is not in China I suspect, it's in countries like Vietnam, in shell corporations they created in cheap labor tax havens. They are also using it for acquisitions, as Tyler posted here about the drug companies.

Sudden Debt's picture

Unless there is a major incentive, the repatriation will not happen. Just look to the China investments.

Also, by repatriating all the money, they would put all their hopes on the dollar, something that isn't that smart these days.

topcallingtroll's picture

You can count on a corporate tax holiday of some sort. A kinder gentler version of qe.