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Black Swans or Grey Elephants?

Updated: Aug 20, 2021

Air Travel Hitting an All-Time High in the Past Year

The United States has air travel picking back up, hitting the highest level in a year amid eased restrictions. An increase in air travel is very much good news, but it's going back to that reopening theme and some inflation fears that a lot of people have as we come out of the lockdowns and recession.


For those receiving checks, check your account. If you have not done so already, it should be there. As most of you already know, we had the new stimulus bill (STEMI) passed last week and signed into law by president Biden. However, it has its detractor, and the most vocal regarding the STEMI is Senator Rand Paul. He followed in his father's footsteps in the Austrian business cycle theory (the philosophy of how economies work). The detractors are about the business cycle caused by monetary policy through central banks. Usually, this does not end well if you continue to grow the economy by just throwing money into the system.

In the quote above, Senator Rand Paul was quoting the non-partisan CBO. He mentions the increase in risk for the financial or fiscal crisis, and in this situation, it could lower confidence in the U.S.'s ability to pay down debt. What he said should cause all the politicians to have some sort of pause.

Diving deeper into that CBO report, they said the reserve status of the U.S. currency is undoubtedly at risk with the amount of spending. By 2050 the amount of revenue that the government is giving, 50% of it needs to go to just pay the interest.

Infrastructure Bill

President Biden is not the first president to say we need to do infrastructure spending. President Trump campaigned on an infrastructure bill. President Obama campaigned on an infrastructure bill. However, we continue not to spend money there. The Government is talking about a $2-4 trillion stimulus bill for infrastructure after the U.S. has already spent $6 trillion in stimulus over the last year.

The administration has also stated that this infrastructure bill should have higher interest rates. So, Treasury Secretary Janet Yellen talks about the need to do this infrastructure and points out the need to fund the higher tax infrastructure bill.

The Biggest Federal Tax Hike Since 1993?

The administration is embarking on what could be the most significant federal tax hike since 1993 to finance an infrastructure plan, Biden's climate-change initiatives, health care, and economic inequality. Bloomberg has a list of reportedly under consideration proposals, though they all likely won't make it into the final bill. Notably, the first two bullets would effectively unwind the two most significant Trump tax cuts components.

  1. Raising the corporate tax rate to 28% from 21%.

  2. Paring back tax preferences for so-called pass-through businesses, such as limited liability companies or partnerships.

  3. Raising the income tax rate on individuals earning more than $400,000.

  4. Expanding the estate tax's reach.

  5. A higher capital-gains tax rate for individuals earning at least $1 million annually. (Biden on the campaign trail proposed applying income-tax rates, which would be higher).

With all the talk about a federal 'wealth tax,' progressives in certain parts of the country are already pushing for state wealth taxes in places like New York - the notion that taxes will move higher under Biden is hardly a surprise.

Just as the Laffer curve results do not square with the image above, why bother with taxes if the infrastructure bill pays for itself? Our view is the monetization of the debt. The political risk of raising taxes will likely keep rates low.

Why bother with taxes at all?

Jeffery Gundlach, an American investor, and businessman states, "80% of the budget is borrowing, so why bother with taxes at all. In other words, he talked about the unlikeliness of taxes increasing substantially.

If you look at what has happened over the last year, 80% of the spending has been met with borrowing or stimulus through the federal reserve. Therefore, our take is that we probably don't see a massive change in tax policy.

Unknown and Known

The amount of money going into the system is making the deflation argument less impactful. This is something that we know, and there's plenty of unknowns. We titled this market insights call "Black Swans and Gray Elephants" because there are things that we do know but just not getting a lot of coverage, such as:

  • The discussion at the Federal Open Market Committee (FOMC) regarding the supplemental leverage ratio

    • Economists using very obscure language to say very straightforward things

  • The measurement of the money supply

    • Change in the measuring of the money supply from weekly to monthly


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