Wednesday, December 13, 2017

Foreign earnings repatriations by US corporations

Investors are salivating over what the $2.6 trillion stashed overseas by U.S. companies will do for the economy when much of it is returned home once the code is overhauled and repatriated earnings are taxed at a low 14 percent to 14.5 percent rate. In their heads are visions of sugar plums dancing over high wages and consumer spending, and more capital spending aiding plant and equipment suppliers as that money is spent domestically. But don’t get carried away.

My firm’s analysis shows that domestic plant and equipment spending isn’t being held back by a lack of money. Far and away the biggest driver of capital spending is the level of operating rates. When they’re low, there’s plenty of excess capacity and little need for more. In October, the Federal Reserve reported the nationwide rate at 77 percent, far below the low 80 percent rates that triggered capital spending sprees in past years. Consequently, plant and equipment spending in this business recovery has been centered on cost-cutting and productivity enhancement.

Another misconception is that more capital spending leads directly to a surge in productivity. Our analysis reveals that the correlation between year-over-year changes in plant and equipment outlays and productivity changes is very low. The strongest relationship between capital outlays in a given quarter and productivity is four quarters later, but that correlation is only 15 percent.

Why is this? Adding more machines that are similar to what’s already on the factory floor doesn’t do much for increasing output per hour worked. Also, the productivity fruits of new technologies can take years or even decades to ripen. In my judgment, today’s productivity-laden new technologies such as biotech, robotics and self-driving vehicles will spawn huge productivity gains in future years, but are not yet big enough in relation to the overall economy to move the productivity needle significantly.

Sure, corporations get three-fourths of the $1.4 trillion in proposed tax cuts over the next decade. The current system is antiquated in a globalized world where the top U.S. tax rate of 35 percent is above other developed economies, which range as low as 14.5 percent for Ireland. Also, the Internal Revenue Service taxes all profits earned at home and abroad while foreign countries tax only domestic earnings, the territorial system which the House and Senate bills move toward. That will end the incentive to keep profits overseas.

Repatriation of foreign money won’t affect pretax earnings since those profits are already booked on consolidated statements. Reserves for tax liabilities may decline, however. Earnings brought home could be used for stock buybacks and dividend increases, but most of that money is already invested in the U.S. - 95 percent, according to a Brookings study of 15 companies with the largest cash balances.

That money resides in Treasuries, U.S. agency securities, U.S. mortgage-backed debt and dollar-denominated corporate notes and bonds. Apple, with $246 billion domiciled abroad, stated in its annual report: “The Company’s cash and cash equivalents held by foreign subsidiaries is generally based in U.S. dollar-denominated holdings.” Microsoft’s annual report says that more than 90 percent of its $124 billion in deferred cash was invested in U.S. government and agency securities, corporate debt or mortgage-backed securities.

Those funds held abroad can’t be used to compensate U.S.-based employees or for capital investment without paying U.S. taxes, but if Apple wanted to do so, it easily could do just that from its U.S. cash hoard, by issuing bonds or taking out loans from banks that are only too happy to lend to a firm with such substantial assets, be they at home or abroad.

Investors may benefit from repatriated earnings via stock buybacks and high dividends. But don’t expect a high wage-led burst of consumer spending or a surge in plant and equipment outlays.


via bloomberg.com/view/articles/2017-12-11/markets-risk-overvaluing-earnings-repatriation

Monday, December 4, 2017

Trump has helped reduce government regulations


"Reducing government regulation is tough. It’s resisted by all those who benefit, including government employees who administer the many programs. Every president since Jimmy Carter has attempted to lower the cost of regulation. At best, any cuts have been tiny and mostly centered on trimming paperwork. But less regulation is one campaign promise made by Donald Trump that is coming true. With tax and health-care reform problematic and given the president's protectionist leanings, deregulation is probably a major driver of the stock market rally.

The size and scope of the federal government give the president immense powers. In relation to gross domestic product, federal spending rose from 16 percent in 1946 to 22 percent in the 2017 fiscal year. Executive orders give the chief executive, in effect, legislative powers. President Barack Obama issued many in his waning days, especially affecting power plants and oil pipelines. The Competitive Enterprise Institute last year found regulation cost American businesses $1.9 trillion, dwarfing the $344 billion in corporate taxes. About 56 percent of CEOs see overregulation as a major threat to their organization, more than cybersecurity (50 percent), rising taxes (41 percent) or even protectionism (27 percent). 

Whenever a new regulation is made or changed, it must be chronicled in the Federal Register. In the last years of the Obama administration, regulatory activity went parabolic, hitting almost 97,000 pages in a year. The annualized pace under Trump through July 31 was 61,330 pages, the fewest since the 1970s. This year through June, the federal government had made 1,731 preliminary, proposed or final rules, the least since 2000 and down 40 percent from the 2011 peak under Obama. Many actions taken under Trump are reversals of earlier rules made under Obama. Of 66 completed actions at the Environmental Protection Agency, a third were rule withdrawals.

Shares of banks have benefited, as those with more than $50 billion in assets are now able to merge without increased scrutiny. Scaling back the Volcker Rule would allow big banks to resume proprietary lending. The delay and likely alterations of the fiduciary requirement would aid brokers and insurers. The House has already approved a widespread rewrite of Dodd-Frank. A bipartisan group of senators recently agreed to exempt banks with less than $250 billion in assets from the “systemically important financial institutions” group that is subject to much stricter oversight, including higher capital buffers. Previously, the threshold was $50 billion. Congress also shut down the Consumer Finance Protection Bureau rule that would allow consumer class-action suits against banks as opposed to arbitration

Drug producers are gaining from faster Food and Drug Administration approvals. Miners and other dangerous companies now have relaxed accident-reporting requirements. The Interior Department indicated it would rescind proposed rules on oil and gas fracking on federal land. The Federal Communications Commission is reversing the Obama-era decision to regulate internet service providers as utilities. In another reversal, the Equal Employment Opportunity Commission will stop the scheduled collection of data from employers on how much they pay workers of different genders, races and ethnic groups. Meanwhile, the Occupational Safety and Health Administration is reducing its reporting of workplace fatalities.

Within days of taking office, Trump signed two executive orders supporting the construction of two controversial oil pipelines -- Keystone XL and Dakota Access -- that Obama had refused to back, due mostly to environmental concerns. The Trump administration is also considering reducing the size of some national monuments to free the land for ranching, hunting and fishing, mining and other commercial uses. This, too, can be done without legislation.

Using the 1996 Congressional Review Act, Congress and the president have repealed 14 of Obama’s final regulations. About 29 of Trump’s executive orders and White House directives have reduced regulations, executive branch agencies have issued additional deregulation directives, and Congress is considering 50 more. 

In some cases, private sector companies wish regulations weren’t instituted in the first place, but they’ve spent so much time and money to comply with them that reversals wouldn’t be worth it. A case in point is the fiduciary standard. The Labor Department delayed its rule that investment advisers be held to the fiduciary standard of putting their clients’ interest above their own on retirement accounts. But many firms have already made the switch. Similarly, large banks that have spent huge amounts to comply with the 2010 Dodd-Frank financial regulation law don’t want it to be dismantled."


via bloomberg.com/view/articles/2017-11-28/trump-deserves-some-credit-for-the-rally-in-stocks

Monday, November 13, 2017

Here is what Gary Shilling would do to fix the Fed

"First thing I would do at the Fed is to get them out of the forecasting business. They’re lousy at it. The Fed did not forecast up until the early 90s. They didn’t even tell you what their federal funds target is. Their interest rates.

Guys would get this data every Wednesday night and they would massage the data the wee hours of the morning trying to figure out what is the target that the Fed has? Because they didn’t announce it.

More recently they’ve gotten bitten by the transparency bug and I think that was a product of the financial crisis. A lot of things were not transparent and these guys running the Fed are mere mortals and they saw ok transparency is the in thing to do so we’re going to be transparent. We’re going to tell the world what our plans are.

Well, the problem is that all their targets are data driven. And they admit this, but they’re very, very poor forecasters of the data. I mean they have perennially forecast more inflation than we’ve had. Perennially forecast sooner and more interest rate increases than they’ve put in. Perennially over forecast inflation. Economic growth.

I would just say, “You don’t have to forecast.” The Fed’s charter is that they’re supposed to promote full employment and price stability and they define as they want to. But it doesn't say anything that they have to forecast.

Matter of fact we did a study, we looked back in 1993, the Fed was not telling you what they were doing then. And quite out of the blue, starting in February they raised interest rates they raised them from 3% to 6% in a matter of seven months. Huge shock to the economy.

We looked at that relative to what they’ve done since December of 2015 when they started raising rates now. And they’ve only gone up 100 basis points, 1%. But they’ve told everybody what they’re going to do. The volatility back then with much greater interest rate increases compared to the volatility now was much less.

Now there are other things at work there but I think you can say that forward guidance has not been a success and it has strained the credibility of the Fed so I’d get out of the forward guidance, I’d get out of the forecasting business, publicly forecasting, sure they got to do it internally but I’d keep their mouth shut publicly."

via http://www.businessinsider.com/gary-shilling-fed-chair-stop-forecasting-transparency-data-rate-2017-10