Barron's - USA (2020-10-19)

(Antfer) #1
October 19, 2020 BARRON’S 9

UP & DOWN WALL STREET


If taxes rise under a Democratic administration,

one winner could be tax-exempt municipal bonds,

whichwould become more attractive to investors.

Wall Street Prepares


For a Biden Victory,


Higher Taxes and All


he’d voiced two weeks earlier.


To be sure, not everyone was con-


vinced. A report from a prominent


institutional broker (name withheld


to protect the guilty) professed on Feb.


20 that the hit from Covid-19 “may


already be old news,” and that a V-


shape recovery was “merely a matter


of time.” That call was early, which on


Wall Street is wrong. That V recovery


did materialize in the third quarter


(data due to be reported in a couple of


weeks), but only after an annualized


31.7% collapse—the worst in U.S.


history—in U.S. gross domestic prod-


uct in the second quarter.


Whatever warning it might have


gotten from the Trump team, Wall


Street is lining up solidly behind Joe


Biden, based on campaign contribu-


tions. But Greg Valliere, chief U.S. strat-


egist for AGF Investments, advises


financial types to be careful of what


they wish for. “Some analysts say it’s


simply a matter of backing a winner;


others say a Biden presidency would be


more stable and predictable, with a


moderate trade policy and a huge stim-


ulus in early 2021. But that seemingly


overlooks the looming tax hikes,” he


warns in a client note, with the last


sentence emphasized in boldface italics.


Various projections point to a sig-


nificant possible economic slowdown


in 2022 when Biden tax increases


would be expected to hit, he contin-


ues. A Democratic administration


probably would defer tax hikes while


the economy still looks weak, “but the


big economic impact would come in


2022, after the stimulus sugar high


has receded,” Valliere adds.


Corporate taxes would see the big-


gest impact, rising to 28% from 21%,


with a 15% minimum tax and other


business levies under the Biden plan.


Individuals making over $400,


would see significant tax hits, with


wealthy Americans also facing in-


creased estate and Social Security lev-


ies and caps on itemized deductions.


Biden also has proposed taxing capital


gains as ordinary income for high


earners, a “huge factor that could lead


to cashing in gains before the effective


date,” Valliere writes. This all pre-


sumes that a Blue Wave sweeps Demo-


crats into control of the Senate, along


with the House of Representatives.


Under this scenario, the one winner


could be municipal bonds. Dan Clif-


ton, head of Strategas Research’s


Washington, D.C., team, writes in a


client note that a Democratic win


could increase federal funding for


state budgets and Medicaid, and elimi-


nate the cap on state and local tax de-


ductions, while boosting taxes and so


increasing tax-exempt munis’ attrac-


tions. He further points out that the


relative performance of shares of


muni-bond insurerAssured Guar-


anty(ticker: AGO) have tracked the


betting odds of a Dem sweep. Both


have improved in the past month.


W


hat little I know about


the martial arts is a


result of misspelling,


transposing a couple of


letters in “marital.” I have heard that


one principle of some martial arts is to


use the weight and force of one’s op-


ponent against him. In my experience,


however, this doesn’t work well in the


marital arena, and it’s more likely that


you’ll be the one who’s flipped onto


the mat. In financial terms, leverage


can be used to flip the force of interest


rates to your advantage. It can also


leave you flat on your back.


Borrowing money at low rates to


invest at a higher yield is a winning


strategy, until it isn’t, as when the cost


of funding rises or the value of, or


return from, the investment falls. A


perfect storm hit earlier this year when


markets nearly melted down, the cost


of borrowing jumped as funding mar-


kets seized up, and assets lost value—


falling below the minimum levels


required by the loans—resulting in


forced sales at the worst possible time.


At that point, those with leveraged


positions were on the floor, staring at


the ceiling, and gasping for breath.


The Federal Reserve then stepped in


By Randall W.


Forsyth


Red flags about Covid-19’s effects on the economy started flying in January, but most investors ignored them.


“I


’m shocked,


shocked!” Captain


Renault’s famous


line fromCasa-


blancaimmediately


came to mind as I


read the New York


Times’ account of Trump administra-


tion officials privately sharing con-


cerns about the spread of coronavirus


with some well-heeled investors on


Feb. 24, while the president and his


advisers were declaring publicly that


Covid-19 was contained.


It’s not just that it had already been


disclosed that, in recorded conversa-


tions for Bob Woodward’s bookRage,


President Donald Trump had admit-


ted to serious worries about the virus,


which he said he was “downplaying”


to avoid panicking the public. Dis-


sembling when things aren’t going


well is hardly unique to this adminis-


tration. The old joke about lawyers


applies equally to politicians: How do


know when they’re lying? When their


lips move.


More to the point, red flags about


the coronavirus’ threat to the global


economy already were flying by the


time of the Feb. 24 meeting cited by the


Times. On Jan. 31—which now seems


like years ago—J.P. Morgan had pub-


lished a warning of the risks the pan-


demic posed to the markets, with Dem-


ocratic primaries about to get under


way. That followed by a week an article


in the British medical journal The Lan-


cet, “ANovelCoronavirus Outbreak of


Global Concern.” And in a Feb. 3 inter-


view with CNBC, hedge fund titan


David Tepper had said the virus had


Noam Galai/Getty Imagescaused him to reverse a bullish stance

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