Some thoughts to add to the US tax repatriation discussion, and what it means for the dollar
Back in December, a few US Senators eventually capitulated to allow the final passing of the Tax Plan. These senators stood aside because they knew that the Senate had extracted just about all they could, thus allowing a very diluted form of the plan to pass. Markets (investors) had already lost most of their enthusiasm for the bill but President Trump had his prize, which didn’t resemble his campaign promises, which were permanent tax cuts for the rich, middle America and corporations, who at first were promised unlimited, flexible tax reform for wealth held overseas. So just consider this: The passing of the bill helped stocks to climb ever higher. The Fed is on course for the 3 hikes in 2018 and markets seem to have that all discounted where we are right now with the USD. That combination of expanding fiscal policy and tighter mon pol is historically and/or usually associated with an appreciating USD. It seems despite the distortion(s) thrown up by a long period of QE. “Textbook” examples are the Reagan-Volcker years and the reunification of Germany years. I throw the Germany example in just to show that the combination works elsewhere as well.
The tax plan stimulus was originally promised to be passed much earlier in 2017. Things are calming down, improved economic performance in Europe during 2017 allowed the Euro to rally significantly against the USD. Much of that accounts for the poor performance of the USD during 2017. As we have said, the direct impact from the tax plan on the USD is limited because most of the estimated $2trln held overseas is held by US companies in US treasuries, EM currencies and some high yielding bonds from European sovereigns where these companies have footholds. The bulk is said to be held in UST`s. US companies know they cannot sell large tranches consecutively, one after the other, because they risk a rout which devalues the remaining holdings.
Remember the 2004 US tax holiday? I remember it well as it was hoped, at the time, that it would generate enough cash to the US Treasury to help pay for war and thus limit hiking the debt ceiling in one fell swoop. Companies repatriated some but 79% went for share buy-backs and 15% went to paying higher dividends. Things like financials, markets and corporate (even personal spending, debt and savings) have almost always repeated themselves historically and indeed, the most successful investors of all time have used historics to make extraordinary amounts of money using historics and therefore cycles. There may be an indirect impact on the USD from the changed tax regime for internationally booked profits to pay for instance, towards Google`s 2nd headquarters and Apple`s headquarters expansion, whatever that turns out to be, but these companies have the cash already. They are awash with cash. Cash-rich as an accountant would say. They were planning on these expansions and will likely use this tax holiday to “show a leg”, a patriotic leg of sorts.
But what about the likes of say GE? GE are far more typical of US big corporate America. Using GE as a yardstick: since the crisis, GE have rationalised thoroughly and are typical in that way. They got out of the disastrous sub-prime lending business and turned back to what they do best, make things, to put it simply.
If companies, such as GE, unlikely as it seems, who have massive holdings abroad, repatriate significant amounts of those “safe” holdings, it won`t show up in the USD until it shows up in the Current Account. The CA has to narrow as investments held outside the US are bought home. It hasn`t narrowed significantly yet but needs to be watched.
Trump has one more shake of the dice. Infrastructure plans. Tax plans will add to the debt pile significantly. Everyone knows that. How will infrastructure affect the USD and the debt pile is the bigger question now. Trump wants a public/private partnership. He has failed to deliver so far, except on watered down legislation. He is delivering on deregulation and that is a double-edged sword. Risk/reward? $200bln was the last number ear-marked for the administration`s contribution to infrastructure. Investors are looking at the form and doubts are there. USD is down but remains high. Trump and his entire administration wants it lower. Could go either way (obvious statement) but bias lower in my humble opinion.