Reading the Tea Leaves

Maybe the people buying volatility are right.

From my friend Yra Harris blog,

“The day that NAFTA began the Chines YUAN was devalued from 5.8 yuan/dollar to 8.7, a 50% devaluation. Today the YUAN is at 6.88 to the dollar. So Mexico is becoming a tempting place for foreign investment as the depreciated peso plus a cheap labor force provides an added incentive to multinational corporations. Now, if the Trump administration pursues a regime of tariffs the landscape will change dramatically as an all-out trade war will ensue. If that’s the case, THEN THE U.S.EQUITY MARKETS ARE AS FAR OVERVALUED AS THE PESO IS UNDERVALUED. Just putting the issues out there for discussion and potential investment potential.”

Yesterday, Google stock dropped 2.52% after the Trump executive order on immigration.  If all it takes is an executive order that is similar to past executive orders to drop the stock, what’s holding it up?

On the flip side, I read Professor John Cochrane’s blog about corporate tax rates.  It’s long and detailed but I can sum it up quickly.

  • Corporate tax rates should be 0% because corporations aggregate taxes.  They don’t pay them.
  • Worker’s wages are decreased, investor return is decreased, and/or consumer prices are higher, and pay the 35% corporate tax
  • Lowering the corporate tax by X% will result in an increase in worker wages/investor return/lower consumer prices by X%

If Trump follows through on his promise to drop the corporate tax rate 20% to 15%, would it offset the damage he would bring by instituting tariffs? Additionally, de-regulating is going to decrease the cost of doing business tremendously.  There is no way really to quantify what that will look like.

I don’t have a guess on the stock market except 10 years from now it will be higher than it is today.  I know of people that are unhinged that are selling it-or tremendously bearish.  Hey, I empathize.  I was right with ’em in 2009 and was wrong.  I do think if corporate taxes drop by 20%, there will be M+A activity like crazy.  Especially as it pertains to corporates and startups.  A drop in corporate tax rates will fuel the animal spirits of corporations.  They should be willing to take a little risk again.

There is no doubt that Sarbox and other financial regulations combined with high taxes, cheap money have put a big damper on exits in the startup community.