This ad has popped up several times over the course of the year, and it’s now running again with a slight variation — mostly to change the “urgent” trade date from April 15 to November 9… so I thought we should take a quick look.
The basic idea is that Robert Williams has a team of trading experts who he says will be able to provide huge returns for you if you subscribe to Extreme Alpha ($2,000 a year, nonrefundable) — but in order to discourage you from thinking too carefully about how these kinds of hypothetical returns are generated, he implies that this is somehow a secret thing that most traders don’t know about, and he pours a giant pitcher full of math on top of the hype. Agora’s website notes that the analysts for Extreme Alpha are Louis Basenese, Martin Hutchinson, and Jonathan Rodriguez… presumably the ideas pitched are theirs, but none of them are actually named in the ad, so we’ll just use publisher Robert Williams’ name to keep it simple.
The opening is a promise that President Trump will sign the “biggest tax cut in U.S. history” … and that what’s in this new tax plan “could turn every $2 into as much as $6,000 in a matter of weeks.”
Huh? Picking the right roulette ball would only turn $2 into $70… how does a bet on the tax plan being approved turn $2 into $6,000?
Essentially, what Williams is promoting is that Trump’s tax plan will be passed, and that corporations will bring back a huge slug of cash that they’ve been holding overseas because of the “repatriation tax holiday” that’s part of the plan, and that this will spur those corporations to make huge stock buybacks and pay big special dividends to shareholders, which will make the stock market surge higher.
And he’ll recommend some kind of super-levered bet on that surge, either in some individual stock that will benefit more than others, or on the broad market. Here’s a taste of the ad so you can see the general idea:
“… the minimum up-front investment is peanuts. Just $2, actually.
“But that $2… placed with any broker in less than 2 minutes… could create a lifetime’s worth of wealth by November 9th.
“Because the world could be in for a BIG surprise starting that day:
“In Washington DC, political elites will be STUNNED when they realize Donald Trump has completely ‘hacked’ our tax system.
“On Wall Street, hedge fund managers will be SHOCKED as the stock market starts a massive bull run
“And on Main Street — and more importantly on Your Street — 300 million Americans are going to feel the bitter sting of REGRET
“Because they all missed out.”
So that’s obviously absurd — but does the Trump tax cut actually mean the market will rise? Will Williams’ trade generate a big profit and actually make sense? Well, sort of — until you get to the math.
The “H.E.I.S.T. Moneybomb” calculation does something very familiar — it takes a win, layers some wins on top, and multiplies it by other wins, and, before you know it you’ve turned things that sound individually like they might be possible into 3,000% returns in the blink of an eye.
Newsletters do something similar all the time in promoting their options trading or penny stock strategies, using past price spikes to show examples of times when you could have turned $100 into $1,000, then used that $1,000 to turn it into $150,000, then bet that $150,000 on yet another crazy high-risk investment that returned 20X… and before you know it $100 is $3 million. Woohoo!
Except, of course, finding a string of wins like that in the present and the future is an entirely different game than finding them in the past. The former is fortune telling, which hasn’t really been perfected by anyone just yet… the latter is data mining, which any computer can do for you (“Alexa, find me a stock that went up by 1,000%”).
What Williams is doing is slightly different than cherry-picking past stock winners to give you daydreams of wealth — he’s cherry-picking the market impact of two tax changes from the past 15 years, the “tax holiday” under George W. Bush and the dividend/capital gains tax increase under Barack Obama, and predicting that both of them, with a shockingly huge dose of extra juice, will hit the stock market in very short order after Trump’s tax plan is passed… and that his levered options bet on that happening will further explode the returns.
I guess the only thing to do is go through the H.E.I.S.T. stuff line by line, even though it gives me a bit of a headache. So here we go… this is the basic pitch:
“HOW YOU COULD WIN BIG: Our proprietary trading formula shows how this historic “moneybomb” could soon be worth up to 3,436x what you put in — or more….
“President Trump has left the backdoor open for ANY American to piggyback off of this new tax policy
“Will you personally profit $442 million yourself? ….Are you getting our free Daily Update
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“Probably not, since the majority of Americans don’t have the same start-up capital as the corporations who stand to benefit….
“But according to my team’s proprietary research, by putting up the ABSOLUTE MINIMUM:
“You could turn every $2 you invest into as much as $6,872
“And every $292 you invest into a cool million
“While paying lower taxes on your profits than you EVER have before….”
So do note that even if we assume the balderdash will work out as they promote, they’re saying that $2 “could create a lifetime’s worth of wealth” but also that the very most optimistic and balderdash-y possible return on your $2 is $6,872. That’s lovely, of course, and an unheard-of windfall return on any trade, but it’s not “a lifetime’s worth of wealth.” The newsletter costs $2,000 (nonrefundable), so obviously anyone who thinks $6,872 is a ‘lifetime’s worth of wealth’ shouldn’t be even thinking about spending “30% of their lifetime wealth” on an overhyped options trading newsletter.
I’m being a little silly there, I suppose, in taking any of that seriously — but copywriters know that we are simple beings and we’re easily manipulated, and that language of “lifetime wealth” permeates all of these kinds of ads and it helps to put a veil over our eyes, so it’s worthwhile to stop and think about them for just a moment. Exaggerations and inducements that are repeated over and over lodge themselves in your brain, and after a while you start to believe them on a subconscious level, and suddenly some kid with a $50,000 salary and $10,000 in hard-gathered savings gets talked into blowing $2,000 on a newsletter subscription.
Sorry, back on track now…
And then we get into the details, which are mostly focused on a new tax holiday that brings “stranded” overseas profits for US companies back “home.”
How the President will “supervise” from his penthouse at Trump Tower, as the world’s biggest boatload of cash comes home to port… and that “Congress will have plenty of time to pass this legislation before their NEXT recess on Nov. 9.”
We’ll let that just sit there for a moment while you double check, if you like… but no, Congress does not start a meaningful recess on November 9. They do have recesses planned around the holidays, so there will be the Thanksgiving recess from November 20-24 if you want to put some extra weight on that particular date. (Neither the House nor the Senate is expected to be in session on November 10, but that’s just a long weekend, which they take with some regularity to go home and get yelled at by their constituents or, if they’re not up for reelection anytime soon, to take boondoggle trips elsewhere — they’ll be back on the 13th.)
So on or around that date, Robert Williams is telling us to expect huge gains from his H.E.I.S.T. trading strategy… here are what those letters mean:
“H” is the “Historical baseline” — that’s the number that was “repatriated” during the 2004 “Money Bomb” tax holiday, $275 billion.
You might remember that, it let companies like Pfizer and HP and IBM pull back lots of foreign income — which they used for stock buybacks and other priorities, helping to boost some of their stock prices. That $275 billion is an estimate for what was “repatriated” over the year while that “holiday” window was open, lots of folks have studied that particular tax holiday and the estimates I’ve seen more recently put the repatriated cash hoards in the $300-312 billion range now, though those studies also provide ammunition for repatriation holiday opponents (since the intent of repatriation was to “invest in America” and “bring jobs home,” but many of those companies, like Pfizer and IBM, spent the subsequent years doing large layoffs and stock buybacks instead of investing in or expanding US operations).
“E” is what he calls the “Extremity factor” — he estimates that the pool is just a lot bigger now, which is true. He says there’s $2.75 trillion in overseas cash now, but that there’s also a “worst case” for $1.61 trillion being the amount that will “come back” in a new tax holiday for overseas corporate earnings. That’s 5.84X what came back last time, so he thinks that the 8% move the market made when the last tax holiday was announced should be multiplied by 5.84. Here are his words:
“What this means, conceptually, is that the market should go up by 5.84 times as much as it did during the last repatriation tax holiday.
“From today’s levels, that would be a return of 47.12%.
“Which would make for the best month in the HISTORY of the stock market.
“I’d call that extreme, wouldn’t you?
“And my research shows it will all happen before November 9th.”
OK, I’ll take the ‘under’ on that one — if your research predicts that a tax holiday on overseas profits is going to make the market go up by 47% next month, that’s when I stop giving any credence to your research.
But we’re not even halfway through the acronym, so I guess I’d better keep moving. And it gets nuttier — what’s the “I?”
“I” is “Incentive factor” — he says that because companies know that any tax holiday will be temporary, they will immediately borrow as much money as they can to prepay their profits to shareholders for some reason, somehow conflating “earnings” and “dividends.”
He uses as his rationale here the dividend tax increase that was part of one of the “fiscal cliff” deals under Obama — since the dividend tax rate went up from 15-20%, companies at the end of that year (2012) paid out huge special dividends, essentially prepaying either part or all of their dividends for the coming year to help investors get their dividends at a lower tax rate.
That’s true, it did happen — both accelerated and special dividends were common that year, partly because the deal to raise them from 15-20% didn’t get signed until there were just a few days left in 2012, and a lot of folks feared that dividends could lose their preferential tax treatment altogether (so companies that could do so prepaid some of their 2013 dividends late in 2012, when they feared the tax would jump a lot more — and some also paid special dividends, but they didn’t do it because the rate was going from 15-20%, they did it because they feared it might to from 15% to 39.6% for high earners, which was then the highest marginal income tax rate).
But beyond that, we’re not talking about dividends here — we’re talking about overseas cash (that’s the first number, the H — remember? Everything we’re doing here is multiplying that number.) And if there is a repatriation deal, it’s not going to be something that requires companies to pay something to shareholders in the next month.
Here’s an attempt to explain that logic, from the ad:
“Since a small 5 percentage-point increase from 15% to 20% in just a few individuals’ taxes caused name-brand companies like Costco and Jack Daniels to pay an average of 5 years worth of dividends immediately…
“Then a sudden increase from 0% to 35% in every American company’s taxes could easily bring in seven times that much. Putting the next 35 years of profits into play right now.”
I don’t know where to begin with this. Even beyond the cherry picking of a few companies that reacted most aggressively to the dividend tax hike at the end of 2012. His argument is that US companies will somehow pre-book 35 years worth of profits, and that investors will be excited and drive the share prices up as a result?
Why? Because they think that top tax rate is going to go back up to 35% after the tax holiday? Or after the tax cuts expire, maybe, if he’s referring to tax cuts instead of to this overseas profit tax holiday?
He says they can do this because they can borrow lots of money, because rates are low… but, um, they’re not going to. Companies don’t generally have the flexibility to suddenly increase their profits by 35X just because the tax bite will be smaller in a given year — sometimes they can time taxes, like Warren Buffett could take all those unrealized gains on Berkshire’s decades-long holdings in Coca Cola and American Express and book those gains and pay the lower tax rate (it certainly won’t be 0%, but it might be 20%)… but he’s not likely to unless he has some other reason, just like other companies aren’t going to suddenly start selling important and profitable subsidiaries and booking their gains willy-nilly. Taxes are an important consideration, but for most companies they are not the primary consideration.
I should also note that companies have already made and booked those profits that are overseas — this isn’t new money, for the most part. Apple doesn’t say that it made $10 billion in the US and has $30 billion in profits pending overseas this year, awaiting a lower tax rate so they can “realize” those profits, they say that they made $40 billion in profits, and the stock market values them as if they’re a company that made a profit of $40 billion. There is a tax liability on the balance sheet for part of that overseas cash, and they’ve already borrowed $100+ billion at low rates in order to buy back stock and raise dividends, but no one cares because they still see that endlessly growing pile of $200 billion in overseas cash. Apple already earned those profits, and the stock market already gave them credit for earning that money, they just won’t bring the cash back to California right now unless they get a tax break to do it. Bringing that money home doesn’t mean that it’s all new profits, though it could lower the tax liability that they keep on their balance sheet. So in Apple’s case, that long-term deferred tax liability now sits at about $30 billion, which is presumably close to what they could “earn” in new profits by bringing all their cash home if there’s a 0% US tax holiday (presumably it would be more like $20 billion if there were a 10% holiday, though I don’t know precisely… and long-term deferred tax liability doesn’t just mean “hidden overseas,” it can also be taxable gains on investments or other assets that they haven’t realized, as would be the case with Berkshire Hathaway’s $84 billion in deferred tax liabilities, very little of which is “overseas profits”).
What would that mean? If they got to bring all that capital home and book the gains and get rid of those deferred tax liabilities, that would be perhaps a $30 billion one-time earnings bonus. That’s a lot for Apple. They might even raise the dividend more than usual, or put more into buybacks (they’ve already bought back well over $100 billion of stock, without any preferential tax treatment).
What would a one-time $30 billion earnings boost mean for an $800 billion company? Beats me. It wouldn’t change the earnings forecast for next year in any meaningful way, and Apple trades at about 14X next year’s earnings. If this tax holiday is permanent and the US becomes a territorial tax country forevermore, which is a much bigger deal than the one-time holiday that seems more likely to me, then maybe Apple’s income goes up a few percent because they’re not paying US taxes on those overseas earnings in the future… perhaps the earnings go from $11 to $12 or a bit more. If investors decided they’d be willing to pay a slightly higher multiple of 15, and they assume even $13 in earnings, that’s a stock price of $195… a very nice move for Apple from $155, for sure, but if that earnings boost is not permanent, which seems more likely to me, it’s just a $30 billion increase to Apple’s cash hoard that already stands at $200 billion. Investors have never been willing to give Apple much credit for its cash pile, and if the territorial tax system remains in place that seems unlikely to change just because the cash pile grows a bit. And they’ve never been particularly aggressive about dividends, and have no shortage of cash for investing in anything they want to, so it seems unlikely that an extra $30 billion would change their behavior.
So yes, there’s some potential for an impact from tax reform, and it would be felt most strongly by the companies that have the biggest piles of untaxed overseas profits… and there’s some potential that the market as a whole could rise, too, if we end up seeing corporate tax rates fall, but there’s no reason for all of this to happen at the flip of a switch… and there’s certainly no real way that most companies could “pre earn” their next ten years’ worth of profits and take those profits now and somehow give them to shareholders just because the tax cut is likely to be temporary. That adds in a million moving parts and doesn’t pass a basic logic test.
Moving on, then… we’ve finally made it to “S.”
“S” for Robert Williams = “Springload factor” — which basically means that because he’s recommending options trades, he’s going to multiply whatever fantastically positive returns he has already created in his mind by multiplying the possible repatriation total by the mythical “companies will pre-earn 35X their current earnings” number, and multiply it again, this time by 208.36.
“And this multiplying factor isn’t made up out of thin air.
“It’s based on our historical case study from the smaller 2004 ‘money bomb’ event.”
I’m not sure why they use “just” 208.36% for the gains — earlier in the ad they use 402%…
“… the trading method I’m about to show you would have returned a 402% gain during George W. Bush’s money bomb.
“That’s a year’s worth of profits in a day. And a lifetime’s worth as soon as November 9th.”
But for some reason 208% is the number they come up with. And that makes some sense — if you can accurately predict an 8% move in the market with some precision (like within a month) and bet on that move by using options, then you should be able to generate at least a 200% return using options. It’s that “predicting an 8% move with some precision” that’s the hard part.
And “T”, thankfully, is not yet another multiplier — it’s the “Total money at play”, the number that Williams gets when he multiplies up all of his H.E.I.S. numbers, and he says he ends up with $11.7 quadrillion dollars.
And this is the disclosure he notes after revealing the “T” total:
“Full disclosure- the total number we’re suggesting is at play is actually more money than there is in the entire world at this time.
“It’s obvious this opportunity will not generate more money than there is in the world. That would be impossible. But that’s what happens when you try to make a mathematical model for something that’s potentially bigger than anything that’s happened before.”
So yes, the obvious response to seeing that $11.7 quadrillion number is “well, that formula is meaningless” … but Williams’ response, having built up this lovely acronym and everything, is to just change the first input. Keep the bizarre “incentive factor” and just assume that you can time it perfectly to catch an 8% move in the market because of a tax holiday announcement, multiply that by an “extremity factor” of 5.84 because there’s a lot more overseas profit to bring home now than there was in 2014, multiple that further by 35 because you don’t understand the difference between one-time dividend payments and earnings power, multiple that yet further by 208 because you’re going to be placing your bet using options, and you get that 343,591% return.
Remember, the basis for this return is not just the made-up “incentive factor” multiplier — we can agree that this is ridiculous and still see massive returns if the rest of it is right. The real basis is getting that 8% monthly move in the stock market right, and being right about the overall stock market return being 5.84X greater than it was in 2004 at the time the last tax holiday was announced, for a monthly return of the broad market of 47%. I suppose there might have been gains like that for some 30-day period at some point in the past, but certainly not for any calendar month over the last 30 years, not for the S&P 500. The best month the S&P 500 has had in terms of monthly return have been December of 1991 and October of 2011, both of which were in the 11% neighborhood.
I have a hard time swallowing that multiplier effect, that someone repatriating $300 billion moved the market by 8% in the short term and repatriating $1.6 trillion is therefore going to move the market by close to 50% in the short term. So what if we ignore that muliplier but do decide that we can predict the most successful month in recent stock market history, with an 11% gain in the S&P 500. What would the gains for that look like if you use the options strategies Williams says he recommends for Extreme Alpha?
He says he uses just options, nothing crazier or super-leveraged beyond that, so I’ll just use a hypothetical — let’s say that we’re convinced that Trump will get a big tax holiday through Congress, and that the market is surprised and delighted and surges by 11% by, let’s give ourselves a little extra time and just say this will happen not necessary by November 9, but by the time options expiration hits on December 15.
I’m not, by the way, speculating that Robert Williams is using a trade like this as his recommendation — all he gives is the $2 minimum cost and the $6,400+ return in his hinted-at scenario… I’m just trying to give an example that’s in that neighborhood.
And I’m using the SPY ETF for this calculation, which is an S&P 500 index ETF. The big S&P 500 index ETFs will almost certainly all perform more or less the same, but this is a handy one to use for our purposes — SPY is at $255.63 today, so an 11% move would take us to about $283. Again, that’s a HUGE and maybe historically unique move even in two months. You could buy the SPY 12/15 calls with a $270 strike price, giving you the right to buy SPY at $270 anytime before December 15, and that bet would cost you very little… about 12 cents a share.
So what does that mean? Well, let’s run through the numbers. You buy, lets say, 10 contracts, each representing 100 shares. There’s plenty of liquidity in these big ETF options contracts, so you won’t impact the price at all with a regular person-sized trade like that. That’s $120 you’re putting at risk (12 cents per share, $12 per 100-share option contract, 10 options contracts), plus probably $10-30 in commissions, depending on your broker (most charge a smallish fee per contract, those add up).
So you’ve bet $120 that the SPY ETF will rise to at least $270 in the next two months, which would mean a gain of about 6% for the S&P 500… but you really think it’s going to go up by 11%, to $283.
If it goes to $270.12, you break even (other than what you spent on commissions to buy and sell).
If it stays below $270, you’re out of luck and you’ve lost your $120.
If it rises to $275, you’ve made a huge amount of money — each option contract is then worth $500 (you bought the “right to buy at $270” for 12 cents, it’s now at $275 so that right is now worth $5, and you bought 100 “rights” for each contract, so your 10 call option contracts are now worth $5,000.
And if SPY rises to $283, it starts to get ridiculous… $120 turns into $13,000. That’s a gain of a bit more than 10,000%, enough to make you feel bulletproof and start making lots of crazy trades with your newfound cash so you can lose it all nice and quick (just like the casino, right). But, of course, nowhere near a gain of 343,000% or whatever it was that the “H.E.I.S.T.” formula predicted.
(Of course, we based that on an 11% return in a month, heavily discounting the part where Williams predicted that the market return would be more like 40%+ in the month after the tax bill passes… though the returns diminish as you go out to the even more speculative end of the options quotes, because the highest price call option available for SPY on December 15 is $320, a gain of about 25% from here, and the quoted price for that can’t really dip below one penny).
The gains are ridiculous mostly because predicting a 10%ish move in the S&P 500 in a two-month period is a lot harder than it sounds. Even betting that the market will crash by 10% or so in the next two months, which could be seen as a form of insurance, is pretty cheap — an S&P put option at $235, for example, would set you back about 65 cents a share for December 15, and return about 800% if the market falls 10% to put the SPY at $229. (Of course, for an 800% gain to be enough to make you feel good about 10% losses in the rest of your portfolio you would probably have to put an uncomfortable amount of money into buying those put options, which is even worse than paying too much for car insurance, but everyone’s hedging strategies and stomach is different).
But that is a imaginable-if-unlikely way of turning $12 (for one options contract, it would be $12.00 plus commissions) into $1300, at least. It’s not $2 to $6,872, but you could go through the options quotes and get there if you wanted — all you’d have to do is be a bit more precise about the timing (giving yourself until mid-November instead of mid-December to be right, for example), and the returns ramp up quite a bit because that option quote to buy the $270 call is at three cents a share instead of 12 cents… or you can be more aggressive with the price target, if you’re really convinced that $283 is where we’re headed than a December 15 bet on $280 costs you half as much as a bet on $270.
Or you can bet on a specific stock that would benefit from a tax holiday because it has an unusually large overseas profit pile, like Apple or Microsoft, which will increase your cost but possibly generate a larger potential return. You can really make the numbers give you any hypothetical return you want… as long as you’re right about the future.
And, as you would probably guess, Extreme Alpha doesn’t seem to have ever made gains like that 300,000% in the past, either, or even close — the biggest gains they take credit for in the ads are “annualized gains” of 400 or 500%, and it’s pretty typical to use your best-performing trades in your ad. 500% is nice, sure but since you’re usually talking about trades that last a few months that probably actually means the best returns are in the 80-140% range to hit that “annualized” level. And from what I can tell from the examples given in the ad, he often recommends “spread trades” in this service — which would cut your risk but also limit gains if you used something like a bull call spread (which is buying a call option at one price and selling a call option at a higher strike price to reduce your cost).
“Annualizing” your returns on short-term options trades, incidentally, is usually quite misleading — so take those claims in ads with some degree of skepticism. Those options trades that are speculations on a particular stock or sector moving based on a near-term catalyst are not particularly smooth or steady (options trading systems that tend to be much smoother are those that generate much smaller “scalping” trades that net 2%-4% most months, then might give you an annualized 25 or 30% as long as you don’t hit that month where you’re reminded of your substantial capital at risk and lose 100% and wipe out three years of your gains… which is a whole different kind of options trading).
So that’s what’s essentially being promised by Extreme Alpha, it seems — a perfectly timed short-term options trade on a broad market index, which is very hard to do on either an individual stock or on an index (if you wanted to predict a big swing in Apple, it would cost you a lot more because individual stocks with stories and catalysts and earnings releases and big sentiment shifts are almost all more risky and volatile than the overall market, even huge stocks like Apple).
I don’t know if my example of a SPY call option trade is anywhere close to what Extreme Alpha might recommend — I’d assume they would probably go with something higher-priced and lower-risk that depends on a less dramatic move in the market, but that’s just a guess. I wouldn’t try to talk you out of making a trade like this if you like to speculate on big-picture things, predicting large swings in big indexes is cheap and is therefore very rewarding if you happen to be right… and the fact that you’ll be wrong probably every time isn’t a killer for your portfolio if you’re only risking $100 each time (or whatever a minuscule bet would be for you), and if that kind of speculating is enough to calm your animal spirits and keep you from doing something much riskier with your portfolio.
If you try to predict exactly where the market will move over the next month, you’ll almost certainly be wrong. But you can make that speculation without putting much money at risk, so you can make your own call on that pretty easily.
What, then, do we think about the prospects for actual movement in the overall stock market over the next month or two as a result of whatever tax deal might come before Congress?
Well, the market is not cheap.
And the market expects tax cuts.
That’s my base assumption — we’ve been talking about tax cuts for a year now, we have one-party leadership in Washington, Representatives are presumably anxious to announce progress on something and President Trump is widely reported to be obsessed with booking a “win” on something. That makes some kind of tax legislation “more likely than not” to happen, in my book. Voters don’t generally care about overseas profits, so that would be for the Business Roundtable, but it wouldn’t surprise me if it happens. Even if we have to put the term “leadership” in quotes.
But I don’t think we’re any smarter than anyone else. I think the rest of the market already sees this — it’s not like we’re in a highly undervalued market that’s desperate for some stimulus, we’re in a richly valued market that has pretty good participation (and the CNN Money Fear and Greed index is already well into the “extreme greed” end of the scale… not that this means anything predictive, but I always like to check it as a sentiment indicator). Sure, the market can experience a blowoff top and surge to new highs — it’s certainly done that plenty of times in the past, but it can also panic into a 10% drop quite easily.
I guess what I’m trying to say is that if I were to bet on a tax reform bill specifically moving the market at a specific time, I’d have fun with it but keep that bet awfully small. You do have the general market tendency to rise in November and December on your side, and we haven’t yet hit earnings season in earnest so we’re not sure what the big companies are going to report over the next couple weeks — that could certainly swing sentiment pretty dramatically one way or the other as we head into the holidays.
If you’re trying to nail things down or understand the actual process of this promised “tax reform,” the status of any possible tax reform bill, schedule wise, is still quite up in the air… rumors and sentiment will change about this probably every day as Paul Ryan makes announcements and President Trump Tweets, but I’d say it’s not likely to be voted on in the next month. First the House and Senate have to pass the FY18 budget (or something they can call a budget), which is in the process of being amended on the Senate floor today, and they probably have to include some deficit allowances (to give room for tax cuts without cutting spending) and a reconciliation measure in that bill.
Then if they can agree to a spending bill for this fiscal year, which is sometimes more challenging than you might think (this year’s budget wasn’t passed until halfway through the fiscal year, back in May, and we’ve sometimes gone half a dozen years without a real federal budget being approved), and the bills are signed by the President, then they can get into debating tax cuts or tax reform.
That’s all because of Senate rules — it’s likely to be impossible to get a filibuster-proof 60-vote majority in the Senate for tax reform in this particular climate, and you would need 60 votes for a big new piece of legislation, so they need to set up a reconciliation process by which tax cuts (or other things that they say are part of the budget process) can be passed by a simple majority. Reconciliation can be applied, under Senate rules, to anything that’s budget related and that doesn’t add to the Federal deficit after ten years… so it also would be hard to use it for permanent tax cuts (that’s why Bush’s tax cut, passed in 2001, expired in 2011). It’s also possible for the Senate to change its rules, and they’ve already pre-inserted a bit of “deficit allowance” into the spending bill, but making big changes to the rules would be a big deal.
Assuming no rules get changed, the practical matter is that you need to use reconciliation to pass tax cuts, and you need an approved budget before you can have a reconciliation process, so the budget comes first. (That’s why the ACA repeal votes kept flying around late in the last fiscal year — they were trying to pass them under reconciliation as part of the FY17 budget and couldn’t get 50 votes… so now that we’re in October and we’re in the new fiscal year, Congress will have to follow the reconciliation rules of the next budget agreement).
So that means, basically, “get November 9 out of your head.”
There might be a budget passed by then, but November 9 is not a meaningful deadline (the fiscal year started on October 1, any real deadline passed long ago — the next real deadline is probably mid-December or early January, when the government might start running out of money again and threaten a shutdown), and it’s quite unlikely that we’ll have a tax reform vote or even a slimmed-down tax cut vote that early.
There isn’t even a bill for consideration yet when it comes to tax reform, and every single lobbyist in the United States is going to be trying to squeeze language into any bill that does get proposed, so listening to all those lobbyists will take time (and if you don’t listen, the businesses they represent might donate to your opponent in the next election).
Maybe, as “leadership” keeps saying, we’ll see some kind of tax reform legislation voted on by the end of the year, if President Trump can stay on message and the Republicans can all agree on something (taxes are easier than health care, but not a lot — there are still deficit hawks in the Republican party), but it wouldn’t be surprising to see either a very simplified and limited temporary tax cut that doesn’t dramatically alter folks’ models of the economy or corporate profits… or a tax reform debate that continues into next year. And with the current state of affairs, there’s also something to be said for putting your chips on “this is somehow going to turn into a dumpster fire.”
There was a Bloomberg article about the process today that not only gave some folks pause when it comes to tax reform being passed this year, but also reminded everyone of the possibility of a government shutdown in early December if spending bills can’t make it through — with the biggest stumbling blocks being the hot-button political items that both sides want to include (border wall spending, planned parenthood, defense spending caps, ACA insurance subsidies, etc.)
The markets, one would think, should at least steel themselves for something strange… but they haven’t (persistently record-low volatility says that traders don’t expect a wild end to the year, for whatever that’s worth… that seems silly, but it’s also why options premiums are relatively low on both the put and the call side — which is good for options buyers).
So what’s the reality of tax reform or tax cutting? No one really knows yet, but this is how I think of it:
The biggest thing is not the corporate tax cut that Trump is proposing (from 35% to 20%)… that would impact some companies, but very few large corporations (like the ones you might buy stock in) actually pay anything near 35% on their earnings, and in the end it’s likely that a chunk of the benefit from that lower tax rate will be offset by cutting important deductions (like interest expense, which would deter companies from borrowing money). Corporate tax revenue is not nearly as important to the Fe