The Macro Market Wrap Up With The Mad Genius, Vol. 19

Markets seemed pretty mixed today at a glance, but looking at all types of indices, not just the DOW or S&P, we can see that most almost any index you look at was off…banking, transports, tech, small caps. In fact Bloomberg has a list of about 15 indices and it looks like the DOW and a REIT index were the only one’s that were up on the day. And of course, the biggest news of the day was that Mario Draghi of the EU has officially confirmed that the ECB will no longer buy bonds.  And we also got news this evening that the Trump administration will be stalling future tariffs until March.

But that’s not really what I want to talk about. I want to have a look at something that is kinda under the radar right now, but it should be making headlines.  And the whole idea is that money flows to where it is treated best, which by the way doesn’t mean preferential.

So to start off, I’d like to ask a question…do you know someone or know of someone who has opened a business, and their incorporation was done in a state like Nevada or Delaware?

What I’ve seen in the last few weeks is that businesses are moving their HQ or major portions of operations out of states like California, Oregon, Washington, and New York, to physically relocate to Texas.  Now, I don’t have anything against the states they are moving out of, and don’t have any love affair with Texas.  In fact I live in New York.

The latest company to make the announcement was Apple.  Other companies are moving too…Jamba Juice, McKesson, CoreMark, and close to 100 others just in this year. I expect the trend to continue to pick up pace over the next few years as the cost of living rises too quick, traffic worsens, quality of living slides, and public policy as well as onerous taxes become even more burdensome.

And that brings me to the concept that I’d like to mention today, which is the Laffer curve. Yeah, the teacher in me is coming out here.  You may have heard stories about how Art Laffer drew this curve on the back of a napkin while dining out. But here is what the Laffer curve is…take a mixing bowl, and turn it face down on your table or countertop. If you look at it directly from the side, that is the basic shape of the curve.  Along your x-axis is the tax rate, and along the y-axis is your productivity, or as Laffer himself put, the tax revenue.

The overall concept is that the more you burden any economic activity with additional regulatory costs, taxes, and the like, the less incentive there will be for people to engage in that activity.  At first, when those burdens are relatively low, people won’t care so much and they’ll ramp up their operations. But eventually there is going to be a line in the sand that people won’t cross.  Meaning even if they are still able to eke out a few more pennies, the associated risks will outweigh the potential for gain, and the activity will come to a screeching halt.

Let’s have a look at a quick example.  If I bake bread, and my total cost for the raw materials, labor, etc, is $1.00, I might sell each loaf of bread for a current market price of $2.00. If the government creates a regulatory burden, such as buying health department licensure for my bakery, maybe my cost per loaf is $1.10, but people still won’t buy the bread for more than $2.00. Then the local government institutes a tax to help pay for local schools, and that costs me another 10 cents per loaf.  My cost is now $1.20, and I still sell for $2.00.  I’m ok with that so far.

But then the government starts in with more taxes for other projects and profit taxes, and the government decides to raise the minimum wage.  Even though I was already paying my workers a much higher wage than the minimum and they were happy with it, the new minimum is higher than what I was paying. Now my cost is $1.50 per loaf, and the retail price is starting to edge up but not enough at only $2.05.  Now I’m starting to think about getting out.  My profit is not enough to keep the business open, let alone support my family.

So now, remember the first question I asked? Do you know anyone or know of anyone who opened a business and incorporated in a state like Nevada or Delaware? This is exactly what is happening with these other businesses that are moving out of states like California.  Their tax and regulatory burdens are too high to be profitable, so they are moving elsewhere in an effort to reduce those burdens…not only Nevada and Delaware come to mind, but other places with business friendly policies like Puerto Rico and Texas also come to mind. And this is exactly what we would expect; the Laffer Curve has predicted for us that this would happen.  Like I said, there will be more to come.

Well that’s it for today. Thanks for watching Episode 18 of The Macro Market Wrap Up With The Mad Genius.  Until next time remember that there is always a bull market somewhere in the world, and on the opposite side of every crisis, lies opportunity.

 

#economy #laffercurve #taxes #texas