Over the past few months my thinking on what global leaders should be doing in the face of the rapidly growing problems has morphed in an entirely different direction. For some time now I’ve been banging on the table that interference with market forces in an attempt to kick a can down the road are the worst kind of policies. My concern has been that the costs of this interference will ultimately be greater than the cost of letting chips fall where they may.
My revised thinking is driven by one factor. "What’s in my best interest?", is what it's come to. Enlightened self-interest is all that matters to me. To hell with everyone else.
To that end, I want to make a strong recommendation that a financial market tax be implemented in the US and Europe.
What I want to see is a plan along the following lines:
Fee for stocks and options = ½%. (This would be applied to both the buy and sell side so that the cost of a “print” would be 1%)
Fee for all other transactions = .005% (FX, bonds, CDS, Swaps, Futures and all other derivative transactions.
Dean Baker, from CEPR, is strongly behind this type of thinking. It doesn’t matter that Dean has never been close to a financial market in his life. He actually thinks that transaction taxes could raise $100b++ a year (for ever). Dean does admit that there may be some consequence to this. He is aware that a proposal along these lines would destroy liquidity across all markets. He thinks this is not important at all. His thinking:
Well, that’s what I’m looking for. Let’s dial back the markets so that the level of liquidity is back to the “early” nineties. That would be perfect for me. I don’t care that people who actually know what they’re talking about have to say about this. For example, Ken Rogoff, former chief economist at the IMF, (a guy who’s opinion I normally respect). His thinking on a transaction tax:
Let me explain my thinking. Upfront, I want to address the criticism I’m going to get. I’m a 10 percenter. I wanna be a 5 percenter. I don’t give a damn about anyone else in the system other than myself. I have financial resources. I have investment skills and experience that the vast majority of small investors don’t have. My goal is to make a pile of money off of those folks that don’t have what I have. Fairness and economic consequence is of no concern to me. I just want to get richer.
If we do get a Fin Tax that has some teeth, it will destroy liquidity. The vast amount of intra-day trading of equities is not able to generate a net 1% cost of transacting. The typical profit targets are far less than 1%. A transaction tax would wipe out the HFT crowd. That group accounts for as much as 70% daily turnover. Take out the rest of the day traders and jobbers and we would get turnover down to about 20% of what it is today. That would put guys like me in the catbird seat.
Should we get a transaction tax, I would anticipate a enormous ramp up in daily volatility. Intra day swings of 5% on the big indexes would be a common event. Individual stock names would be subject to even more violent swings. Small cap stocks would be the worst hit. There I’m anticipating daily swings in the 10% range. On days where there is company specific news that intra day swing could widen to 20%. Cha Ching for me!
On an annual basis I would expect very big swings. 30-40% changes in the S%P index would be a normal event. Over all, the ramp up in volatility would be very bad for equity valuations. Today there is a great debate as to whether the S%P should trade at 13Xs earnings or should it be 15Xs? In my view a year after the implementation of a transaction tax the market would be wondering if the “proper” multiple is not 5 -10Xs earnings.
That outcome would suit me just fine. I want to buy assets very cheap. That the suckers who believed in the “Buy and Hold” were puking after a 50% correction wouldn’t bother me at all. I want to own Dean Baker’s stocks at 50 cents on the dollar.
I want the IPO market to dry up. I want any company to pay through the nose for new equity money. I also want secondary stock issuance for big companies to fall apart. Today, the cost of a secondary is a temporary reduction in a stock’s price of 3-5%. I want that to widen to at least 10%. I’ll make a fortune that way.
Bonds have always been a specialty for me. I’m certain that spreads would widen by big amounts. I would just sit back and make a bundle. Some poor sap wants to sell $100k of an obscure Muni bond? Screw them. My bid will be 5% down from the last trade. I think that bond trading for off the run issues will just be a cash machine for me.
I’m pretty good at distressed investing. Given that just about everything would be distressed I would have a field day.
The financial sector of the US (and the globe) would see their earnings go out the window. This, coupled with the fact that the same sector represents about 30% of current GDP, there would have to be a depression. A big one.
Once again, this would suit me just fine. I would buy real-estate at 25 cents on the dollar. Cash, and only cash, would talk in these conditions. There would be no mortgage market left.
The Fed would be printing money like mad in these conditions. Hyper inflation would follow. I’m as certain as I can be that I would be a big winner (versus everyone else) should that be the result.
I’m half serious and half joking this morning. I’m looking at the TV and all of the OWS stuff that is happening around the world. This is gathering speed very quickly now. Anyone who thinks this is going to go away in a few days is just nuts.
One global response from the “Deciders” to the current protests could be a transaction tax. That would be “popular”. It might just be something that is done as a way of appeasing the crowds. Whatever one thought of the possibility of a transaction tax a month ago, those estimates have to go up today. The bigger the protests, the greater the probability that the tax is implemented.
A transaction tax would be like Prohibition. The Volstead Act just made crooks rich. It cost the government billions in lost revenue. The population came to hate it. It was bad policy that was adopted because of a visible protest movement of that time.
The left side of my brain is with Rogoff. A transaction tax would kill liquidity/capital formation. That would result in a huge spike in volatility. This, in turn, would result in broadly lower equity multiples. The connection between stocks and the economy is too tightly correlated. A very sharp downturn in the economy would have to follow. For these reasons, I’m violently apposed to a transaction tax.
The right side of my brain says, “Bring it on”. I’m confident that I can survive and thrive in that environment. Fortunes were made in the 30’s. What may come will be no different.
I do want to be clear about this. The 99% have been pushing the transaction tax. They may get what they think they want. But in the end it will result in more pain for the 99’ers. The concentration of wealth in America will just get higher and higher up the ladder.
A transaction tax that limits liquidity will not create jobs, it will end up costing the government net tax dollars. But guys like me will do just fine.
Be careful of what you wish for.