Yesterday Ken Griffin, CEO of the massive local hedge fund Citadel and a major player in state and local politics, sat down with CNBC’s Leslie Picker to talk about the current markets. Picker brought up the GOP tax cut, which has passed the House and cleared the Senate budget committee yesterday—giving it more momentum than the failed health-care reform effort—as the party desperately looks for a major legislative victory within the first year of the executive and legislative branches being under GOP control.
Griffin, a longtime backer of business-friendly politicians, was… lukewarm. In the video below, the discussion starts at seven minutes in, but there’s important context about the markets before that.
Griffin’s logic is significant. Picker asks, basically, when the market is going to stop rising. The fact that it’s been rising steadily for a long time is nice, but it’s starting to get unsettling, which is why Goldman Sachs calls it a “Goldilocks” market. I mean, jeez:
US equities surged higher on Tuesday, posting their best one-day gain since September despite a ballistic missile launch by North Korea and an apparent breakdown in bipartisan budget talks.
That’s CBS’s Anthony Mirhaydari speaking. He continues:
But now, even the Fed is adding its voice to the chorus of Wall Street analysts worried the market has gone too far and is ripe for a nasty turnaround. In the minutes of its latest policy meeting, Fed officials expressed concerns about market “imbalances” and the possibility of a “sharp reversal” in prices.
Another way of looking at it is this: The Chicago Board Options Exchange’s market-volatility index has been at historic lows, but there’s also “stealth hedging,” which means that there are more people betting that things will get more volatile soon.
So things are calm, but so calm that the markets aren’t calm… if that makes sense.
Griffin says, “There’s no doubt that valuations are somewhat stretched, but remember the backdrop: low rates, low inflation, reasonable growth in revenues, the ability to bring profits to the bottom line.”
In short, the economy’s not great for everyone, but in terms of the relationship of the economy to the stock market, Griffin sees a logic in the latter’s rise.
Picker then asks Griffin about the GOP’s tax cuts, and he’s like, yeah, given all that, the timing’s pretty odd: “To the extent that this is a move that would be stimulative in nature, you would usually reserve a tax reform of this nature for right in the midst of a recession… It would be contrary to what you would traditionally do from an economics perspective.”
He likes some parts of the proposal, like getting rid of the alternative minimum tax and cutting corporate taxes. But even Griffin is surprised at how far the corporate tax cut would go:
Bringing in our corporate rate down to a level more competitive with the OECD is good for corporate, capital formation here in America. Do we need to cut taxes as much as we are? Probably not… If we look at the OECD means, which are in the mid-20s [in terms of the corporate tax rate], I don’t understand why we’re not closer to that number. I would have thought we would have landed somewhere around 25 percent for our corporate rate, not 20 percent, but probably not worth splitting hairs over.
As The Atlantic’s Derek Thompson pointed out today, the Obama administration wanted to go down to 28 percent back in 2012, but got rejected by the GOP. Griffin comes in lower than that, but higher than the GOP proposal. And he’s correct that a 25-percent rate would put the U.S. in the middle of the pack.
It’s also significant that Griffin notes the tax cuts are more appropriate for an economy in recession, because it’s possible that the GOP plan would turn that logic on its head. Not only would it cut taxes in a relatively strong (in many if not all ways) economy, there are vague plans for a trigger mechanism that would roll back the cuts if the economy didn’t grow as strongly as the tax-cut plan assumes and thus inflate the deficit. As Matt Yglesias puts it, “the trigger proposal is sharply at odds with the conventional economic wisdom that a period of disappointing growth is the worst possible time for tighter fiscal policy.”
And the Booth School’s panel of economic experts is in virtually complete agreement that the tax bill, as it stands, would make the debt-to-GDP ratio “substantially higher a decade from now,” while they’re either uncertain or don’t believe that the tax cuts would grow GDP.
Meanwhile, this happened.
VIDEO: CEOs asked if they plan to increase their company’s capital investments if the GOP’s tax bill passes.— Natalie Andrews (@nataliewsj) November 14, 2017
A few hands go up.
“Why aren’t the other hands up?” Gary Cohn asks.#WSJCEOCouncil pic.twitter.com/TD2oAlN27S
Conservatives have long argued that corporate tax cuts are good for the country as a whole because it allows companies to make capital investments, thereby pumping more money into the economy. The video above suggests that won’t be the case, and in recent days even more evidence has emerged. Multiple corporate leaders as well as the chairwoman of the Federal Reserve have agreed that the primary beneficiary of corporate tax cuts will be shareholders:
Instead of hiring more workers or raising their pay, many companies say they’ll first increase dividends or buy back their own shares.
Robert Bradway, chief executive of Amgen Inc., said in an Oct. 25 earnings call that the company has been “actively returning capital in the form of growing dividend and buyback and I’d expect us to continue that.” Executives including Coca-Cola CEO James Quincey, Pfizer Chief Financial Officer Frank D’Amelio and Cisco CFO Kelly Kramer have recently made similar statements.
“We’ll be able to get much more aggressive on the share buyback” after a tax cut, Kramer said in a Nov. 16 interview.
At the very least, it goes a long way toward explaining why the GOP’s current tax cut proposal is even less popular than the Clinton and George H.W. Bush tax hikes. But for the GOP, what seemingly matters is how popular it is in the Senate, and there, it’s looking just popular enough to pass.