The Digest #223
Corporate Taxes, Election Gambling in 1916, Berkshire's Cash, Treasury Inflation Protected Securities, Market Prices as Political Predictors, The Three Indias, Semiconductor Progress, and more ...
Corporate Taxes
In 2017, the corporate tax rate was cut from 35% to 21%. Unlike many of the tax cuts passed in that year, this tax cut was not set to expire after 2025 unless extended by Congress. During the Presidential campaign this year, the candidates offered very different proposals for the corporate tax rate. Kamala Harris called for increasing the rate to 28% while Donald Trump floated the idea of cutting the rate to 15%, but only for companies that manufacture products in the United States.
With Donald Trump’s resounding victory, along with Republican control of Congress, it is clear that the corporate tax rate will not go up over the next four years and could be cut substantially. The prospect of tax cuts appeared to be one of the major reasons for the sharp rally in stock prices in the days after the election.
Taken in isolation, the retention of the 21% corporate tax rate and a cut to 15% for some firms clearly represents an accretion of value that should be reflected in stock prices. However, it seems like first level thinking to simply apply a new rate to projected pre-tax profits in perpetuity and assign a higher valuation in response.
Longer term treasury yields have been creeping up for weeks, perhaps in anticipation of a Trump victory, and went up further once election results were known. This is most likely due to fears of higher structural budget deficits in the years to come. Higher interest rates translate into a higher cost of capital for companies using debt and could pressure stock prices as bonds become more attractive to investors.
Higher tariffs, while potentially justified, will have an adverse impact on many companies and could also curb consumer spending. It is too soon to know precisely what kind of tariffs will be implemented, and it is impossible to determine if other countries will retaliate with their own tariffs on American products.
The corporate tax rate is an important variable that is relevant for determining how much to pay for stocks, but the impact will vary from company to company. Equally important is the fact that the rate is subject to change and no one has any idea how the political winds will shift in the long run. Since the majority of the present value of a company’s market capitalization is in anticipation of earnings well into the future, it is hazardous to assume that we will enjoy low corporate tax rates in perpetuity.
Articles
Donald Trump’s Resounding Victory, November 6, 2024. “In the final analysis, I believe the election was primarily a verdict on the economic failures of the past four years, with social and foreign policy issues taking a back seat in the minds of most voters. Many citizens who previously were reluctant to vote for Mr. Trump changed their mind this time. I count myself among this reluctant group.” (The Rational Walk)
Election Gambling Sparked the “Best Investing Book Ever”, November 5, 2024. Betting on the outcome of the election was very much in the news this year. It was interesting to read about how Benjamin Graham was influenced by the betting markets in the 1916 Presidential Election. (Beyond Ben Graham)
Cash! by Brooklyn Investor, November 6, 2024. This is the first article by Brooklyn Investor in over a year. He writes about topics including how investors might interpret Berkshire Hathaway’s record cash balance. (The Brooklyn Investor)
What to Buy if the Election Has You Worrying About Inflation by Jason Zweig, November 8, 2024. With rates on Treasury Inflation Protected Securities ranging from 1.75% to 2.25% plus inflation as measured by the CPI-U, Jason Zweig suggests that these bonds might be good options for investors concerned about inflation. (WSJ)
I’ve written about TIPS in the past and agree that it is a potential option to hedge against inflation. My concern is that the CPI-U over the past several years has failed to match increases in the cost of living. More generally, I suspect that the government will purposely understate CPI in the future given that many obligations as well as tax brackets are linked to this measure. Still, TIPS might be the “least bad” option for long-term investors who wish to invest in bonds.
The Wisdom and Madness of Crowds: Market Prices as Political Predictors! by
, November 7, 2024. An interesting article on political prediction markets and polling. (Musings on Markets), November 5, 2024. I have kept various notebooks over the years but usually each of them has been dedicated to a specific purpose. This article suggests having one consolidated notebook and makes some interesting arguments about why this could be helpful. (Books of Titans)The Power of Morning Pages, August 15, 2020. I wrote about my use of the “morning pages” journaling system a few years ago, a habit I started in 2019. I recently abandoned this form of journaling because I found that it was not focused enough and made me prone to useless ruminating. Instead, I now write a daily journal about what I read the prior day. (The Rational Walk)
Podcasts
Sajith Pai — Exploring the Indus Valley, November 7, 2024. 1 hour, 28 minutes.“India isn't the monolithic 1.5-billion-person market that many Westerners believe. Instead, it's three distinct ‘countries’ hiding in plain sight. There's India One: 120 million affluent, English-speaking urbanites (think the population of Germany) who love their iPhones and Starbucks. Then comes India Two: 300 million aspiring middle-class citizens who inhabit the digital economy but not yet the consumption economy. Finally, there's India Three: a massive population with a similar demographic profile to Sub-Saharan Africa, that’s still waiting for its invitation to join India’s bright future.” (Infinite Loops)
Redefining Semiconductor Progress, November 5, 2024. 1 hour, 28 minutes. “My guests today are Andrew Homan and Chris Miller. … we get into a comprehensive discussion on the semiconductor ecosystem. Andrew and Chris share insights on how venture capital is navigating this complex industry and what it means for the future of computing. We discuss the AI-driven revolution in chip demand, the geopolitics of semi-manufacturing, and the next wave of innovation beyond NVIDIA.” (Invest Like the Best)
Rare and Powerful Skills, November 4, 2024. 16 minutes. “A few easy-to-overlook skills that are so vital in today's world.” (The Morgan Housel Podcast)
Heracles by Euripides, November 8, 2024. 31 minutes. I have been working my way through all of the Greek tragedies and recently read Heracles, so I found this podcast very interesting. If you have never read a Greek tragedy, I would highly recommend doing so. I have written about several of them on my website. ()
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