All of the markets have a very strong “risk on” bias to them. Stocks, commodities and bonds are all showing the same trade. As is always the case there are a bunch of factors involved. The Euro story is one of them. The spin is that the fix is in and we should worry about something else. (I don’t believe word one of that spin)
Another factor is the story being planted left and right that that there is big progress being made on the debt ceiling. The talk today from the NYT, WaPo and WSJ is that Obama has put real cuts on the table for Social Security. That there is a plan to means test Medicare as a way to cut costs. (As of now there are no details on any of this)
One aspect of the “compromise” talk is a story about how changing inflation calculations could generate significant new revenue for the IRS. The technical description is a change from CPI-W to the Chained CPI for the purposes of indexing various aspects of the tax code.
The Joint Committee on Taxation did a review of this. I was surprised with the results. The consequences are measured in the following chart that looks at things out in 2021. Look at what income groups have a tax increase as a result of this. Those making Less Than $100k would get hit by the highest percentage. Those that make $500k-1mm do pay 0.1% more, but the really fat cats making over a Mil don’t feel it at all.
This analysis is restricted to just the changes in inflation adjustments. There are more changes that will be added to the final package (if any is achieved), including broadly higher tax rates. This one proposal is not an earth shaker. But it is representative of what we will see. My thoughts:
The proposal that was analysed by JCT is a No Sale in my opinion. What Democrat is going to vote for this? None in their right mind, is the answer. This drives a stake in their base.
The same is true for any other of the “new” ideas that got floated today. Means testing Medicare will be an impossible sale. Reducing COLA adjustments for Social Security may look like a possible alternative on paper. But it’s a political third rail.
Market enthusiasm for what is being made to look like a break in the log jams on the debt limit talks is very premature. These ideas being bandied about will prove to be very unpopular. There is not one segment of the population that will like what is coming. If there is to be a credible plan to balance the government’s checkbook, there is one thing for certain: We will all hate the results.
The ‘solution(s) will all be rejected by some interest group(s) over the next few days. I would put a high probability on the process hitting the wall (again) at some point soon.
The markets are all pricing in a resolution. I think it will go down to the last hours.
There will be a ‘risk off’ market as a result of the sobering conclusions. This will come before the end of the month.
When some Pol from the left or the right tries to tell you who is going to be paying more taxes, just ignore them. They are all lying. As the JCT report shows, everyone will be paying more.