Blain's Morning Porridge, by Bill Blain
Will the agreement on global tax ever become a reality? and the real threat of financial asset inflation!
“The stock market is a very expensive place to discover you know nothing…”
This morning: The G7 agreement is being hailed as a great step forward, but will it ever happen? Janet Yellen’s call for higher rates is a clear sign the problem of financial asset inflation will finally be addressed – the question is how painful the treatment and taper tantrum will be? Not addressing financial asset inflation is a far bigger risk than the debt crisis many monetary traditionalists perceive has grown from government pandemic spending.
Welcome to another week of consequences, mayhem and fun on global markets…
What a great time to be a tax-accountant! The G7 agreement on a “minimum corporate rate of 15%” will have accountants, tax-planners and bankers in a euphoric state as they anticipate dissecting the deal’s underpinnings with a fine comb, look for the back doors, engage lobbyists to push for advantageous clauses, and get set to arbitrage every facet of it – if it ever happens and becomes a reality.
If any European country ever receives anything close to a check for 15% of the profits made by a big digital tech company selling in their borders, I shall eat my hat. I’ve already heard there is a note from an accounting firm suggesting Amazon can wriggle out because of the marginal cost calculations… whatever… something to with governments getting “the right to tax 20% of profits exceeding a 10% margin” – which sound much less than 15% of profits to my mind.
But, of course, it’s a win/win for everyone.
The Sherpas of global finance – like Janet Yellen – are on the wires saying it’s a revival of “multilateralism” as nations come back together in the post-Trump era to solve “critical challenges facing the global economy”.
The Politicians are all over it like a rash – looking forward to all that loverly US tech money to spend… while claiming to have righted a massive historical wrong in the lack of cash paid by many firms. The French, of course, are complaining 15% is not enough; Macron looking to demonstrate his fraternity with the working class voters by pushing for more.
And the corporates…? They will be delighted.. A chance to show they support the good cause, while behind the scenes they keep emptying our wallets.
National tax agencies won’t bat an eyelid. They know better than to go for the big tech firms. To heavily tooled up with the best tax-lawyers.. much easier to go from small businesses who tend to cave quicker to HMRC threats…
But will the agreement ever happen?
On the face of it, the Irish should not be happy. They aren’t even a G20 member – except as being part of the EU. They are putting a brave face on it, with comments like their low-tax economy will continue to attract jobs, and why would any already established there leave? Many corporates won’t feel any urgency to move their operations. Many may decide to beef them up in the expectation any tax deal is still years away from full ratification by all the members of the OECD, and that it may not happen at all… ever. Dublin office space may still be a good bet…
The reality is the new G7 minimum tax proposal is going to struggle to get through the slough of despond that is deepening US political gridlock. The Republicans are already parroting Trump that such a deal can’t be good for US Company revenues, therefore should be rejected.
What will the G7 tax deal mean for markets?
It’s going to be a busy time for the credit agencies, figuring out if the shock horror of corporate’s actually paying taxes in countries where they sell stuff, pushes a few names down a credit notch or two because paying taxes comes before paying bondholders. I’d be surprised if they find many lame ducks – but the credit agencies won’t miss the opportunity to be relevant, and will no doubt start pumping out research for bond managers to fall asleep over.
What about company profits – the stuff that (once) so excited Equities? As one wag once pointed out: “if you’re paying taxes on profits, you ain’t doing it right.” Better spend the money on acquisitions, on infrastructure, etc… heaven forbid paying staff better. But company spending is an economic multiplier – so it’s a good thing.
That leaves an interesting thought: what about all the US Tech firms now sitting on enormous cash piles, built up from untaxed profits channelled through corporate headquarters in nations willing to charge zero taxes – like Ireland? Retroactively taxing these untaxed gains isn’t on the agenda, and will never ever happen….
Meanwhile, a much larger issue looms in terms of taper-time….
Over the weekend we had a very interesting intervention from Janet Yellen as she toed the President Biden line, supporting $4 trillion of infrastructure spending – even if it does trigger inflation, and called for higher interest rates. “If we end up with a slightly higher interest rate environment it would actually be a plus from society’s point of view and the Fed’s point of view.”
Yellen’s comments struck me as a very Significant Moment. It’s an acknowledgement the Biden Administration understands the need to taper the monetary excesses of the past few years. Sure, that will trigger a taper-tantrum – which everyone believes is nailed on when rates edge higher. A market collapse would cause a massive blink in confidence – but … so what? Everyone knows markets are overpriced – so why not acknowledge rates should normalise to levels where it might make sense for investors to start buying US treasury bonds, rather than just the Fed?
The reality of the last 12 years is there has already been massive and uncontrolled inflation in financial assets on the back of experimental monetary policy. Zero interest rates and essentially unlimited money via QE and pandemic money, has pushed up stocks and bonds to massively elevated levels – levels which now spell danger for market stability, yet continues to drive the massive game of “chicken” that the markets have become.
(By “chicken” I mean the explosion in speculative investment; in names unlikely to ever make significant profits, in meme stocks, in zeitgeist funds, and fantublations like Bitcoin – every single one of them is founded not in future investment values and profits, but the belief that a greater fool will emerge to buy them at a higher price.)
Meanwhile, we’ve got monetary traditionalists screaming foul at the apparent fiscal excesses that have occurred since the Pandemic began last year. Governments and Central banks correctly understood the need for massive fiscal stimulus and handouts to sustain economies in immediate crisis, and built springboards for the spectacular growth we are now seeing in the UK economy and US jobs. The fiscal carpet bombing has worked saving the economy, but debt has ballooned.
But what do we hear from the Right? That all that debt is crushing confidence in fiat money, that state handouts are causing lazy workers to withdraw their labour, and the devaluation of currencies will cause the collapse of the west. It’s become the clarion call of Libertarian Cryptocurrency supporters – who perceive that their mythical digital asset’s being free of government control is it major advantage…
Markets love to panic about the worst possible outcomes – which never ever occur. The reality is global markets, interest rates, currencies and dent levels are in an awful mess – but that’s not unusual. It’s just the way it is.. We will undoubtedly muddle through. … but it might be bumpy at times.
Rather than the amount of national debt, the massive inflation we’ve seen in financial assets has become the real major problem – because its thrown so many aspects of the economy out of line. Because financial assets are now so expensive they cause investors to seek better returns from cheaper assets, pushing up the prices of real assets as a result.
We can see that clearly in property markets where is it now inconceivable that a normal worker can ever afford a house. That then changes economic behaviours – millennials and GenZ give up on acquiring homes, and without the pressure of mortgage payments or kids, don’t see the need to work as hard… etc etc.. That has consequences for the future in terms of demographics – who pays?
I don’t particularly fear the debt-driven monetary apocalypse many observers increasingly fear. All countries have been fiscal inflating their economies to drive pandemic recovery. If confidence in a particular currency is rocked it will occur because of reasons like political failure – which is my concern about the US. Meanwhile, there is no shortage of capital to fuel growth – it’s a question of how much of its squandered on things like stock buybacks and other drivers of inequality.
My concerns are much more about real threats; like just how deeply entrenched financial inequality across society has become because of financial asset inflation – and how that eventually damages and destabilises societies. The instability is being fueled by polarisation magnified by social media – which is what’s fueling all the libertarian conspiracy theories about mind-stealing aliens, big-government failure, and the safety of the crypto-con.