Over the past several weeks, we’ve been keen to suggest that voters (and, more narrowly, the investing public) shouldn’t take the word of billionaires at face value when it comes to how an Elizabeth Warren presidency would affect the economy and the prices of financial assets.
In addition to the rather obvious fact that billionaires have a vested interest (in the most literal sense of the term) in keeping Warren out of the White House, assessing the implications of her policy proposals is an exercise that doesn’t lend itself to slapdash analysis and ad hominem attacks.
Unfortunately, quite a bit of the Warren criticism that’s made headlines recently cannot be taken any semblance of serious. At best, much of it leans on unsupported assumptions about the impact of a Warren general election victory on equities and the economy. At worst, it takes the form of outright profanity-laced slander.
Mercifully, analysts who have some claim on being taken seriously are starting to weigh in, and even if their takes don’t paint the prettiest of pictures when it comes to what the economic and market implications of a Warren presidency would be, they at least offer support for their arguments, which are reasonably trenchant.
The latest example comes from Barclays’ Maneesh Deshpande, who, in a note dated Tuesday, takes an in-depth look at the “implications of a Warren agenda”.
His analysis spans thousands of words and covers more than a dozen pages, and as such, doesn’t lend itself to the “summary treatment”, as it were.
But, we did want to highlight a couple of interesting passages which help to provide some reality-based context for some of the more bombastic proclamations you might have heard from the folks who would be most impacted by Warren’s crackdown on egregious inequality.
Right off the bat, Deshpande notes that “Senator Warren stands out among the current field of Democratic candidates for providing quite a detailed and specific roadmap for the goals she hopes to achieve”. He doesn’t say this, but we will: It says something about the state of American politics when presenting detailed proposals for what you plan to do if elected to the highest office on the planet makes you an outlier.
The following table from Barclays “summarizes her key policies on tax, trade, labor reform, healthcare, energy, and technology, as outlined on her campaign website and in related materials”. As the bank notes, when taken together, these policies “would represent a fundamental shift in the economic, corporate, and social landscape of the country”.
Importantly – and as indicated in the table – not everything Warren wants to do can be accomplished via executive action. She’s going to need Congress, and, ideally, control of both chambers.
Warren’s tax on the ultra-wealthy has been a punching bag for… well, for the ultra-wealthy. In other words, much of the criticism of Warren’s plan to reduce inequality emanates from the people who are on the “right” end of the spectrum, where one pole is marked “too much money to conceptualize” and the other is labeled “one busted hot water heater away from missing a mortgage payment”.
But Barclays takes a closer look at the implications of Warren’s tax policies and the reality is a bit more nuanced than some critics would have you believe. Here, for those who need a refresher, is the basic premise of the ultra-millionaire tax (from Warren herself):
The Ultra-Millionaire Tax taxes the wealth of the richest Americans. It applies only to households with a net worth of $50 million or more—roughly the wealthiest 75,000 households, or the top 0.1%. Households would pay an annual 2% tax on every dollar of net worth above $50 million and a 3% tax on every dollar of net worth above $1 billion. Because wealth is so concentrated, Saez and Zucman project that this small tax on roughly 75,000 households will bring in $2.75 trillion in revenue over a ten-year period.
Warren would use the funds raised to pay for a variety of things like child-care, student debt relief, free public schooling and college. To be clear, there shouldn’t be anything controversial about that, but there is.
So, what would this actually mean for the economy and for stocks? Barclays’ Deshpande takes a stab at answering that in rational terms devoid of bias and hyperbole. (We should note that Barclays research is independent and does not support nor endorse any presidential candidate in the nomination process or in the general election and doesn’t attempt to predict whether any particular candidate will be nominated or elected.)
“Since this is a tax on wealth and not on income, the affected households would likely need to fund it by reducing their assets. This would thus lead to lower allocation to public and private assets, which in turn would crimp investment in the economy”, Deshpande writes, before delivering a series of important caveats.
Obviously, reduced investment isn’t the best news for economic growth over the longer haul, but investment has been “remarkably subdued” during the current expansion anyway. “The resulting ‘savings glut’ has arguably been one factor for the ‘secular stagnation’ that has led to lower yields across the globe”, Barclays notes.
Turning to the impact on stocks, Deshpande essentially says that the mechanical impact would likely be trivial. “Only a portion of the $2.75tn is invested in equities and the demand reduction per year is not significant relative to equity market capitalization (~ $30tn US equities and ~$60tn global equities)”, he notes.
Of course, that doesn’t account for any knee-jerk “sell first, ask questions later” reaction, but the point is, if you’re looking to justify a prediction about a massive plunge in equities tied to a Warren win, the ultra-millionaire tax ain’t gonna get you there.
What about her real corporate profits tax? Here’s the gist of that (from Warren):
This new tax only applies to companies that report more than $100 million in profits — about the 1200 most profitable firms in the country last year. That first $100 million is left alone, but for every dollar of profit above $100 million, the corporation will pay a 7% tax. Any company profitable enough to hit the Real Corporate Profits Tax will pay that tax in addition to whatever its liability might be under our current corporate tax rules.
That is potentially more impactful for equities. “Based on 2019E consensus estimates, such a tax would have a recurring EPS impact of 6.8% and if implemented would clearly directly affect stock prices by a similar, if not larger, amount”, Barclays says.
As far as repealing the Trump tax cuts goes, the first thing you have to assume is that it’s even legislatively possible (i.e., it depends on the make-up of Congress). But let’s say it is. Here’s a chart that shows the estimated impact of the tax cuts on S&P earnings:
So, just to be clear, even in some kind of “nightmare” (and that characterization depends heavily on how much stock you own, which is in turn correlated to income bucket) scenario where Warren’s entire tax agenda breezes into law with no changes, you’d still have to assume a roughly 10 percentage point sentiment hit on top of the earnings-related impact to get to the 25% plunge in equities envisioned by some high-profile names who have recently weighed in publicly about the implications for stocks of Warren’s policies.
To be fair, Warren’s critics are likely taking a more holistic approach and “analyzing” the impact of her entire agenda, but using the word “analysis” to describe some of the more bombastic accusations leveled against the Senator is a stretch.
With all of that said, we want to leave you with one last passage from the section in Deshpande’s note where he analyzes the impact of the ultra-millionaires tax. We’ll present this without further comment, as it speaks for itself:
Moreover, overall consumption in the economy is likely to increase, since these tax revenues would be funneled to lower income groups who have a much great propensity to consume their disposable income. The disposable income of this strata of the society would also benefit from labor reform (such as an increase in the minimum wage and stronger unions). The higher consumer spending would thus boost economic growth although the magnitude relative to drop in investment is difficult to quantify. This would mostly benefit Consumer Discretionary stocks (except maybe some luxury goods retailers) as the maximum benefit would accrue to the “middle portion” of the consumer goods spectrum since the most basic staples and high luxury goods would at best be unaffected.