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