Tax cut backfires

[billvon 3,116]

Looks like trying to add stimulus to an already overheated economy wasn't the best idea. Who knew? Well, at least Trump can now spend billions on more "stimulus" for his properties.
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Are Trump's tax cuts backfiring on Wall Street?

by Matt Egan @MattEganCNN
February 6, 2018: 8:09 AM ET


Be careful what you wish for.

Wall Street partied hard while President Trump pushed for huge business tax cuts that the economy didn't really need. Tax cut euphoria carried the Dow a breathtaking 8,000 points to levels never seen before.

Now comes the hangover. Investors are remembering that giving lots of medicine to an already healthy economy can have side effects, namely inflation.

Those inflation fears are suddenly rocking Wall Street. They sent the Dow plummeting 1,800 points in just two trading days. The losses wiped out a quarter of the gains since Trump's election.

For months, investors basically ignored the threat that the tax cuts might backfire, causing bond yields to spike and raising the likelihood that the Federal Reserve will have to raise interest rates faster to fight inflation.

"We have an infinite capacity for self-delusion as investors," said Bruce McCain, chief investment strategist at Key Private Bank. "When we feel good, we don't want to be bothered by reality."

Market analysts warned investors about this. In the fall, Morgan Stanley predicted that enacting aggressive tax cuts risked "overheating" the economy and causing stocks to "boom then bust."

Stocks definitely boomed. The Dow spiked 45% between Trump's election and its all-time high less than two weeks ago, after the tax cut was enacted.

But economic growth has been accelerating, and U.S. unemployment is the lowest in 17 years. So borrowing money to stimulate the economy wasn't required.

And, as outgoing Federal Reserve Chairwoman Janet Yellen warned in December, it could leave Congress less ammo to help the economy when times get tough again.

. . .

Concern about inflation was most glaring on Friday, when stocks tanked after the January jobs report revealed the strongest wage gains since 2009. Businesses are having trouble recruiting and keeping talented workers, forcing them to pay more.

"When you shovel stimulus in at the peak of the cycle, the market starts to worry about a sudden and unexpected rise in inflation," said Nicholas Colas, co-founder of DataTrek Research.

McCain said there was a threat all along that the tax cuts would overheat the labor market.

"That just begs for a round of inflation that brings this whole party to an end," he said.
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[rushmc 23]

CNN.

"America will never be destroyed from the outside,
if we falter and lose our freedoms,
it will be because we destroyed ourselves."
Abraham Lincoln

[SkyDekker 1,465]

I have a feeling that inflation is probably a concept a bit too difficult for the majority of your news sources.

[billvon 3,116]

FOX:
================
Dow Jones down more than 1,100 at closing bell in historic plunge
By Fox Business

Wall Street continued a broad selloff Monday, as the Dow plunged a record 1,175 points amid inflation fears.

The Dow Jones Industrial Average closed at 24,345. The S&P 500 fell 113 points to 2,648. The Nasdaq Composite dropped 273 points to 6,967.

The Dow fell as much as 1,597 points in afternoon trading, the largest intraday drop in history. The blue-chip index’s 4.6% decline reflected its worst day since at least Aug. 10, 2011. Coming off its worst week in two years, the Dow wiped out its 2018 gains with its pullback Monday.

Stocks have lost steam with investors refocusing on the potential for faster inflation growth.
==================

Unless you have moved so far right that you now consider FOX to be left wing.

[Phil1111 1,182]

SkyDekker

I have a feeling that inflation is probably a concept a bit too difficult for the majority of your news sources.

He thinks inflation could be what happens to a parachute when it opens.

or

A porn star's big fake boobies.

[RMK 3]

On a side note, I do like how this forum has marked all the most dumbass comments with a bright multi-coloured balloon. It’s a nice feature and allows for easier use on small mobile device screens.

"Pain is the best instructor, but no one wants to attend his classes"

[gowlerk 2,275]

Both the recent run up in stock prices and the even more recent decline have little to do with Trump or his policies. They are a function of good old supply and demand coupled with even more basic fear and greed. After all the years of low interest rates there has been too much cash chasing too few good stocks pushing prices to unjustified levels. The threat of inflation and higher rates was bound to show up sooner or later. Rates can not stay at historic lows forever. It remains to be seen how far stocks will fall. My guess, and it is nothing more than that, is for a months long period of mostly declines till fall when they will settle in at about the level they were at just before Trump's election. That is still pretty high.

Always remember the brave children who died defending your right to bear arms. Freedom is not free.

[billvon 3,116]

>The threat of inflation and higher rates was bound to show up sooner or later.

Agreed. The additional tax cut merely sped up the arrival of that threat.

[normiss 897]

Huh?

[yoink 321]

it was a dig at rush.

[normiss 897]

LOL, duh, and DOH!
Thanks.

[billvon 3,116]

One of the funnier moments that day was seen on the stations that carried his speech. In one window they had him bragging on all the good he was doing for the economy; in the other they had "DOW PLUNGES" along with the amounts the market was losing. Even FOX cut away from his speech to cover the market drop.

[ryoder 1,590]

normiss

LOL, duh, and DOH!
Thanks.

Don't feel bad;
I had to read it twice before it clicked.

"There are only three things of value: younger women, faster airplanes, and bigger crocodiles" - Arthur Jones.

[normiss 897]

It just became blatantly obvious as well.

[billvon 3,116]

Trump just found someone to blame for the stock plunge - the economy.

===========
In the “old days,” when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!
===========

See? Has nothing to do with Trump. It's the stupid economy that doesn't recognize how good his news is. The economy is basically committing treason.

[normiss 897]

The company I work for celebrated the tax change by announcing no raises, across the board, worldwide.
Yay.

I suppose I should be happy my bonus is (so far, as of right now) still coming, albeit only 60%.

[kallend 2,148]

1033 more off the DOW.

www.npr.org/sections/thetwo-way/2018/02/08/584310245/another-rout-in-the-stock-market-as-dow-drops-more-than-1-000-points

...

The only sure way to survive a canopy collision is not to have one.

[billvon 3,116]

kallend

1033 more off the DOW.

Stupid economy made another BIG mistake, not listening to Trump.

[jakee 1,595]

billvon

***1033 more off the DOW.

Stupid economy made another BIG mistake, not listening to Trump.
Trump knows more about the economy than anyone. Including the economy.

Do you want to have an ideagasm?

[billvon 3,116]

>The smart money isn't listening to any of this bullshit and is instead buying equities that
>are now on sale. I hope it drops another 5% by Friday.

Sounds like the smart money IS listening, and is hoping everyone else listens even harder.

Lots of people made money during the 07 recession; a falling market has plenty of investment opportunities for the canny investor. (A lot more lost money, of course.)

[gowlerk 2,275]

Yea sure. Everyone thinks they should be able to time the market. In reality it’s like trying to catch a falling knife. You might get lucky but you’ll probably end up bleeding.

Always remember the brave children who died defending your right to bear arms. Freedom is not free.

[normiss 897]

I worked for Schwab prior to 9/11.
I supported many very large IBM servers and scores of routers to workstations that did just that.
It's not new by any means.

[billvon 3,116]

> Today's volume on the S&P was 50% higher than the average. That is not Mom and Pop
>trading the extra billion shares, it's protective stops set by computers as are now getting
> triggered.

Well, two things here.

One, the 'circuit breakers' (protective stops) that you discuss do exist - but they stop trading; they do not increase trades.

Two, 'mom and pop' in general aren't doing any trading at all. 'Mom and pop' have a 401k that is composed primarily of mutual funds and similar instruments. Each fund has a manager that makes decisions on trading; these decisions are then implemented via those "institutional computer based technical trading" systems you mention. And when the market takes a big swing those tools get used to try to reduce losses and/or improve market position.

There are, of course, some private day traders who do this for fun via "Power Etrade" or a similar tool. They make up a very small percentage of transactions.

[billvon 3,116]

>Great opportunity to add to your positions or start a new one.
>That is not market timing, it's taking advantage of volatility to buy quality stocks on sale.

That is pretty much the definition of market timing. You think that those stocks are at a temporary low, so you decide that the timing is good to buy.

>Market timing would be selling it now thinking you're going to buy it back cheaper tomorrow or
>next week simply because the overall market has had a recent pullback.

Well, you can buy it now, thinking you are going to sell it later for more money because the overall market has had a recent (and temporary) pullback, but will climb in the long run. That's what you just advised doing.

Or you can sell it now, thinking you are going to buy it later for less money because the overall market has experienced a spike that will be followed by a correction. (But long term it will continue to climb.)

They are both examples of market timing.

[SkyDekker 1,465]

billvon

> Today's volume on the S&P was 50% higher than the average. That is not Mom and Pop
>trading the extra billion shares, it's protective stops set by computers as are now getting
> triggered.

Well, two things here.

One, the 'circuit breakers' (protective stops) that you discuss do exist - but they stop trading; they do not increase trades.

Two, 'mom and pop' in general aren't doing any trading at all. 'Mom and pop' have a 401k that is composed primarily of mutual funds and similar instruments. Each fund has a manager that makes decisions on trading; these decisions are then implemented via those "institutional computer based technical trading" systems you mention. And when the market takes a big swing those tools get used to try to reduce losses and/or improve market position.

There are, of course, some private day traders who do this for fun via "Power Etrade" or a similar tool. They make up a very small percentage of transactions.

A very large volume of trading is done by algorithms scanning the internet and financial reporting. Quite a bit of financial reporting is done in such a way that it is easier to read for the algorithms. It is estimated around 70% of the market volume is traded as such. Volume wise computers issue much more trades than people do.