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Friday, June 6, 2008

Barack Obama Vs. The Stock Market (UPDATED)

Newsmax.com, a conservative site, has an in depth report about what they see Barack Obama's policies doing to the stock market. Now, it is important to first note that no one person, not even the President, can single handedly affect the stock market or any market. For instance, Bill Clinton tried his damndest to crush the market when he raised taxes on the wealthiest, and yet, through a complicated set of events, the market exploded regardless. Still, taking a look at his policy proposals, one should be troubled by the direction that they may send the market into.

The most troubling policy proposal of Barack Obama's, as it relates to the stock market, is his desire to raise capital gains taxes. While it is still unclear just how much he will raise them, the consequences of raising capital gains taxes on the stock market could be devastating. Here is how capital gains taxes work in the stock market. Any profit on any investment held for more than a year is taxed at capital gains levels. Any profit on any investment held less than a year is taxed at ordinary income levels. (another words at the same level as your income from your paycheck is taxed) Now holding any investment more than a year has with it intrinsic punishment. That investment becomes illiquid. As such, there is already a natural motivation against long term investing. Still, for the most part, we want investors to hold their investments long term. Day trading, and other short term strategies, contributed to the internet bubble. Such techniques should be reserved only for select few professionals. A capital gains tax punishes exactly that behavior which we want to encourage in the stock market, long term investing. Raising the capital gains tax means Barack Obama will discourage even more long term investing. Raising the capital gains tax will not only discourage investing in general but furthermore, it will discourage long term investing specifically.

On top of this, Barack Obama has already promised to raise the top rate on those making 250k and more and he is suggesting adding an extra payroll tax on all income over $250,000. (currently at 102,000) These two tax increases will go at heart of investable dollars. It is exactly those that will be hit with the higher income tax and payroll tax that dominate the stock market. This group is also going to be the ones most punished by the capital gains tax increase. Those making 250k and more will likely see their own tax rates go up as much as ten percent. Thus, an individual making 500k will end up paying an extra fifty thousand in taxes every year. This extra tax will cut at the heart of investable dollars. Remember, people invest only after everything else has been paid for. As such, increased taxes on the wealthier Americans will go almost exclusively to giving those Americans less money to invest in the stock market.

Next Barack Obama wants to increase the corporate tax rates. While this may be a great populist tool, what it means is that corporations will have less money for capital investment. Furthermore, they will have to pay more on their capital returns in the form of the higher capital gains tax. In other words, just like wealthy Americans, corporations will be hit twice. Thus, what you will have is not only less investable dollars, less incentive to hold those investable dollars long term, but an environment of stunted growth for the investment vehicles of those dollars.

Let's not forget that Barack Obama wants to create a new "regulatory framework". What this means is a plethora of new regulations for all companies to follow. Obama will reserve a special place for financial services and oil, which will be hit with all sorts of punitive regulations. The environment for those two industries specifically will be very sour under Barack Obama.

The return of the estate or death tax could put further pressure on the market. The estate tax punishes mostly the wealthier estates. Since equity in illiquid assets like real propery is included in the estate tax, there is going to be great motivation for those hit with the estate tax to liquidate and sell their investments, a liquid asset, to pay for the estate tax. Thus, once again we have another Barack Obama policy that will put downward pressure on the stock market.

Of course, all of these things maybe combined with socialized medicine, forced eco friendly energy, and tax and spend policies on the poor and downtrodden which will all likely further contribute to an unfriendly environment for the stock market. Thus, in conclusion, while he won't single handedly control the market, Barack Obama's policies will unquestionably be unfriendly for the stock market.

For the other side, here is my analysis of John McCain's policies on the stock market.

For an update on how President Obama's policies have affected the market go here.

26 comments:

Lantern Bearer said...

Well, it seems to me that he is more likely to be unfriendly to those who have gamed the stock market. I have been around that industry since 1973. I am now still around that industry by marriage. I had a lot of my money at stake in that industry until a year ago. The stink became over powering. I suppose there are some maggots who don't mind that stink. You seem to be one of them.

mike volpe said...

I don't know what that means. You have to say something more than rhetoric. Are you saying that raising capital gains taxes will punish those who "gamed" the system, or simply anyone who has made any money in the market? Are you saying that anyone that has made at least $250,000 has "gamed" the system.

You sir have perfected the art of class warfare, however it is cheap and obvious and it will be called out here.

GFRR said...

You could look at things this way under the Obama plan:

The role of the investor who earns under $250K a year is an employee who can keep their house and have money to spend on services and in stores, or as a small business owner, to keep people employed so that they can have money to spend on services and in stores. Hence, they get tax cuts.

The role of the investor who earns over $250K will be, instead of investing excess in the stock market, be infusing more money into “safer” places like Treasury bonds and savings/CD accounts at banks. They will be in a sense, creating more cash on hand for both the government and banks/loan companies. But they will be losing some of the long-term gains that they previously got in the stock market because they will try to avoid the capital gains tax hike. Note: this is not really as much of a “hike” as it’s made out to be – see this quote:

Under Obama’s plan: “The top capital gains rate for families making more than $250,000 would return to 20% - the lowest rate that existed in the 1990s and the rate President Bush proposed in his 2001 tax cut. A 20% rate is almost a third lower than the rate President Reagan set in 1986”

Most people who earn over $250,000 are not going to face financial problems when they retire – they just may not have as much luxury as they would get with the existing Bush policies. For those who spurn Social Security or welfare programs, wouldn’t it make more sense to give the long-term investment potential to people who are most likely to wind up on welfare after retirement age – those who earned under $250,000 a year??

So, The Stock Market, large companies, and wealthy folks may lose out on bigger profits, but they will still make plenty and investments will be safer (esp. since mortgage-backed securities will be shunned for a while – I would imagine at least until there are rules in place for making them better regulated). Also, more credit will be available, which will allow our economy to evolve and invest in new directions with new businesses, which is more important than making existing companies wealthier. People may not see their retirement accounts skyrocket like they have in the past decade, but they won’t see them fall precipitously either. It’s healthier for us to not gamble as much.

By the way, I think it’s good if the oil industry “sours”. They earned record profits while the economy was tanking and were happily taking advantage of their being a war in oil-rich areas overseas (how do they claim record profits and at the same time say they needed to raise prices because of the war?). These aren’t people that I’m going to feel sorry for, nor the bad managers of car companies that are losing out because they won’t raise their fuel economy standards like they should have a LONG time ago. If they want to blame someone for stealing their profits, try their bed-fellows the oil companies, who are earning record profits at their expense as well.

Inflation will have its limits because companies know that they can’t push people too far with price hikes before they just change their lifestyles to not depend on them any more. Some jobs will be lost or changed, but the smart companies will invest more wisely, and will have fewer, better choices to offer consumers. That, my friend, is how real capitalism should work!

mike volpe said...

That nice little story and metaphor may sound good but it is entirely beside the point.

First, it is those that make over $250,000 that have the bulk of the Dollars invested in the market. Beyond that it is groups like Hedge Funds, Mutual Funds, and Private Equity. He will raise taxes on all three. Since they will pay more in taxes they will have less to invest.

This isn't about whether or not these people can afford to live. Yes, they will still be wealthy but more of their wealth will go to taxes and less will go to investments. That's bad for the stock market. This is really very simple.

mike volpe said...
This comment has been removed by the author.
GFRR said...

Those that make over $250K aren't going to change their behaviour much by reinstating the previous capital gains tax levels. They aren't going to just keep their money under the mattress - if anything, they'll stick with investing just as much or shunting a bit more of it into short-term, lower-yielding investments which give more cash on hand to most banks and creditors.

(Also, in case you've been asleep, the Stock Market is currently being held up by taxpayers. I don't think those that are profiting the most from the Stock Market are in a position to whine about not earning a teensy bit as much because they have to give some more to the tax pool.)

Maybe the difference is that you want the short term gains of the Stock Market to be as high as possible, and I'm ok with the Stock Market to have more steady gains if that means that those who stand to gain the most pay more into a bailout fund/stabilizing the economy in other ways.

Thanks for replying...

mike volpe said...

First of all, of course they will. Taxes always influence behavior. The more you tax something the less of it you get. That is just common sense.

Of course, it isn't only the capital gains tax that will be raised on those making $250,000 and more. It is income tax and payroll tax. I am not even mentioning the reinstitution of the death tax which will also force major estates to sell lots of equities to come up with tax money.

All of these tax increases will mean less money for these folks to invest.

You are trying to defend an untennable point. The people that have most of the money invested in the stock market are the wealthy, mutual funds, hedge funds, and private equity. Each of them will have their taxes raised. That means less money in the market. It is really common sense.

Your circular logic can't get around the simple point that those that make the market go, not the regular folks, but those that make it go, the wealthy, mutual funds, hedge funds, and private equity, will all pay higher taxes and thus have less to invest. It's that simple and no amount of circular logic will change that simple fact.

GFRR said...

A slight correction in the last post - in the first part, those who will be investing will be investing nearly as much, minus the taxes (not the same amount, obviously). My point was still that this won't be a significant reduction in the amount invested. The other points still stand...

mike volpe said...

Not significant, how exactly do you come up with that? What sort of numbers are you using?

Someone making $500,000 yearly will face an extra $50,000 in taxes. That's fifty thousand less to put in the stock market. Someone making $10,000,000 yearly will face an extra one $1,000,000 in taxes. That's $1,000,000 less to put into the stock market. That's not significant.

Frankly, that vague language is your way of admitting your point is untennable. To say that the wealthy will put a less in the market, but not much less, without proving how you formulated it won't be much less, is to show that your point is untennable.

You can't have it every which way. If Barack Obama is going to punish the wealthy with much higher taxes, then that money will come ou of somewhere. That money will mostly come out of the stock market. Period.

GFRR said...

The argument may seem circular to you because I see both the investor and the consumer/worker
driving profits and productivity. You want to focus on only investing in the investor (lower taxes) and not in the consumer/worker. That seems like a poor plan. I think it only works if there's a balance. If we lost the consumers due to poverty/healthcare costs/war, etc., it won't matter how much of a tax break the investor is getting. There won't be anyone at least in this country able to buy their services/products.

We'd have a country of wealthy investors and overseas employees and consumers. Our Stock Market would look great, but the average American would be doing badly.

That seems like common sense too.

Thanks again for replying...

mike volpe said...

That's an economic argument not an argument for the stock market, and of course, it dismisses the fact that the wealthy are consumers as well as the poor and middle class.

I will handle that argument though frankly it is much better made in response to this piece...

http://theeprovocateur.blogspot.com/2008/10/misnomer-of-bottom-up-economic-building.html

The fact is that while it sounds good on paper it is total nonsense.

While the poor and middle class will have more money in their pocket it will be at the expense of the wealthy having less. There is no economic growth there. That is, as Fred Thompson said, taking from one side of the bucket to put in the other side. You can't see economic growth when one portion of the population spends more at the expense of another portion of the population spending less.

This is where Obama's economic argument falls apart. Of course, the wealthy don't need their money. They can afford the tax increase and remain wealthy, however taking money of their pockets takes it out of the economy. The money doesn't sit idly. It is invested, spent, and saved in the bank. All of these vehicles see less money as a result. It is that simple.

You seem to think that we should just ignore the shrinking spending power that will be created by the wealthy and ignore the negative effects of that. That isn't how it works. Bottom up economic building is a fraud. It doesn't exist. You don't build the economy by rewarding the poor at the expense of the weak.

You build the economy by government spending less so that everyone is rewarded. The only tax cuts that work are those that are across the board. Targeted tax cuts while other taxes are raised is just plain dumb economic policy.

GFRR said...

I thought it was common wisdom that the poor spend a greater proportion of the money they receive than the wealthy simply because they NEED to. Maybe it’s not on designer or luxury items, but it’s on essentials like food, clothing, etc. Isn’t that why many believe the trickle-down theory is wrong? The wealthy would more likely invest their excess, but then you’re again, supporting investors versus consumers. I think they both need to be supported to make the economy better (although you pointed out that you’re only concerned about the Stock Market here, of course).

It does make sense, too, that we have some targeting tax breaks. For example, people who earn close to the poverty line shouldn’t be expected to pay an equal % of taxes as someone who earns a lot of money. That would mean everyone would pay a whole lot less or else more people would be unable to pay for food, shelter, etc. because their taxes would be so high. That certainly wouldn’t make things better for wealthy people that live in the US unless they want to be isolated in ever-shrinking, affluent communities surrounded by ever-growing, poor communities. Those situations never end well, I’m afraid.

It’s a wonder that people who want to argue that jobs are created by investing in large companies don’t argue that jobs are created by investing in big government. I don’t know why you’d trust one or the other to do the best for everyone with the money. Politicians are corrupt and the government is flawed, yet companies are led by people who aren’t really worried about how investors see them, just that they keep generating profits. Both have corruption, over-spending, people at the top with disproportionate power and not hurt as much by bad decisions. Even the Stock Market was hurt by the bad decisions by so many of these managers that benefited from tax breaks already available to them. Companies definitely help us by creating jobs, driving innovation, giving us global power, etc. But by the same token, government gives us the post office, hospitals, fire dept, global power (through the Armed forces), etc. Why can’t it be a balance to invest in both? Again, I realize this is a question of the economy, not the Stock Market.

I don’t want to reward anyone at the expense of the weak. I’m guessing most of the wealthy investors wouldn’t classify themselves as weak even with a tax hike. I don’t even make enough to pay the tax hikes that some of those folks make, so I’m guessing they’ll still do pretty well. What I do want is for us to invest more in the country so that we’re not just supporting people (through tax breaks and FDIC insurance) who invest all over the world at the expense of building our economy (again, I know, not the Stock Market). Thinking more about this – would you be more amenable to the tax hikes if they were offset by greater tax breaks for employing a larger proportion of US citizens? That way companies would be allowed to operate as usual (no overall tax hikes) if they promised future investments in the US. They would have to agree to things like giving people livable wages for the US, of course. But this could even have a positive (or net neutral) effect on the Stock Market - more consumers with enough disposable income to spend on goods and services.

mike volpe said...

You argument continues to be terribly fallacious, with all due respect. Frankly, you either ignore the point I have been making all along or you just don't understand it.

Let's make one thing clear. EVERYTHING that EVERYONE makes is "SPENT" if you will. It just depends on how you mean spend. A wealthy person might buy a second home. They may buy an investment property. They may even buy a building. They may start a business. Maybe, they will spend it by putting it into a mutual fund, CD, muni bond, or even just spent into a checking or savings account.That is beyond the normal spending that wealthy people make just like poor people.

Either way, it works into the economy and no less than hundreds of poorer people spending on things like clothes and furniture. All of it stimulates the economy and by taking it out of the hands of the wealthy it doesn't stimulate the economy.

The rest of your argument is simply naive, again with all due respect. That's because 40% of the population currently pay exactly ZERO in federal taxes. They are taken care of the way you claim they should be. Barack Obama wants to give a tax cut to those that don't even pay federal taxes. Think about the ridiculous class warfare of someone having their taxes raised by 10% while someone else, who doesn't even pay taxes, get a tax cut which is really a tax credit.

This is the plan you are backing.

GFRR said...

I'm taking a break to ponder what you're saying, but I wanted to say thanks again for sparring with me on this. I'm glad that you're not one of those that just falls back on how much you hate one group of politicians or another. These are important issues everyone should be thinking about.

mike volpe said...

anytime, I always enjoy a great debate. Take a look at other posts and please feel free to respond.

Bill Jennings said...

I am sorry to say that it appears you all are missing the point here. Yes, under an Obama presidency taxes will go up, and money will move from those that provide the grease to our economy to those that take from the economy. Money will move from those who put capital to good use, to those that do not. Like the Clinton, Frank, Schumer, houses for everyone plan, money and capital will move from where it creates jobs to more socialist causes. That, it seems, everyone gets.

However, what I don't think people here get is the damage that an Obama presidency is going to effect on our democracy. No longer will we be able to speak freely; obama has shown that if you disagree with him, you will be punished. He is from Chicago politics, notorious for retribution and revenge. Moreover, he believes in socialism---with the help of Pelosi and Reid, our country is going to go far left.

At the end of the day, there really is only one solution. Smart capital should retreat from the markets and under the mattress. Businesses should layoff workers in protest of government mandated rules. This country was not founded on big government, and regardless of the rhetorical argument that the bush government was big government (I don't like Bush either), you guys have not seen anything yet.

Our nation is going to go down the toilet very quick under an Obama presidency, and true patriots who want to get this country back would be wise to let the the inevitable happen by taking all your money out of the system, firing workers, and give the left-wing freaks what they think they want.

As an aside, military members who have fought so hard for this country for decades, only to be spit on by academia and the other freaks, should leave the military in mass. By staying in the military, you are saying that you believe marxisim and racism (afterall, 99% of certain demographics are voting for Obama strictly because of his race).

We are facing tough times that require tough action. True patriots will retreat and just wait it out. The media controls our control now and until there is chaos, the media will continue to control

Jose(Joe) said...

Obama will be our next president and hopefully not for long. We will have to repair the damage in the next four years. Sure there are bad times ahead on the horizon, but we will find our way home. As for the stock market, It will probably do a little better. This is due to the excessive spending that Democrats seem to excel at.

Anonymous said...

It is exactly your cowardice and trembling that echoes through the market right now. I do not say this out of mean-spiritedness, just frankly.

A stripped-down market that has blown off excess, non-collateral value represents a fresh forest of profit. If we lose heart and withdraw from the market, then a younger and bolder generation of investor will step in and reap the rewards. Unfortunately for us, many of them represent overseas interests.

"Quakers" sell stocks that are bought visionaries. Divest if you want, but Im sticking with Buffett.

mike volpe said...

I don't know who the last comment was directed at but this was written in June and it was an analysis. You may not like the analysis but calling me a coward is silly. I call it as I see it.

Anonymous said...

Over the past 5 business days, the markets have dropped 8%. While there may be some reasons for the market to drop (GM, Best Buy, etc), they are not nearly enough to cause a drop of this magnitude in such a short time. Plus there also good reasons for the market to go up (oil, for example). It now appears the market is rejecting Barackanomics. Those with money are putting their funds into other areas out of fear that Barack may actually do what he promised: raise taxes, decimate corporate america, wipe out utilities depending on coal, etc. His economic plan, if implemented, would wipe out our economy, and investors are worried about that. I think we should worry more about keeping high employment than we should worry about punishing a few people for making sound investments. But, in this day and age, it is all about envy and hate, not common sense.

Anonymous said...

reason obama was elected is this country is going down the tubes with lazy people/no work ethic.. and look the majority of his voters were young go no where losers with liberal art degrees from online and shity schools.. thank god i have a GREAT education and paid my way through school and did not cry with my hand out like most losers nowadays.. obama at least had the balls or lack of brains to say "redistribute wealth" yeah take from people who invest and give to losers on the street, free health care for lazy losers and welfare/free housing to women with multiple kids with drug dealin sperm donors!! nice.. can ya say loser AIGHT!! peotic a little hip hop loser slang there..

EXODUS VIO-LENCE CONCRETE COFFIN bay rea thrash rule the world.. check out their lyrics!! hint!!

Anonymous said...

You don't make a poor person richer by making a rich person poorer. Don't rely on the government to solve your problems because you will never be happy. The best we can ask our government is to stay out of the way and let us make our own money.

Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, its inherent virtue is the equal sharing of misery.
Winston Churchill


"The American people will never knowingly adopt socialism, but under the name of liberalism they will adopt every fragment of the socialist program until one day America will be a socialist nation without ever knowing how it happened."
– Norman Thomas, American socialist

John Hershey said...

I agree that overtaxing the people who 'earn' in the stock market is not the best fomula. Most likely the huge drop in value is because people are cashing out to save their possessions. The other reasons is because of lack of oversite to protect the market itself. One reason could be stock options given to employees instead of cash payments (bonuses) for their excellence in 'job performance' so in turn the person could buy their own companies stock. Another part is to realize it is an International Market and those investors will lose trust if the President's Administration does not reiterate the roll of enforcement. Therefore the primary roll of government is to protect the market not by overtaxing, but by enforcement of laws, even if new laws have to be introduced; such as if you are going to sell a stock you need to own the stock (only one example).

Anonymous said...

So - here we are almost 2 years since the post and where is the stock market?

It has had significant gains since Obama took office.

So - what's up with the predication?

Anonymous said...

January 20, 2009: Dow Jones $7,920.66 at close

January 5, 2011: Dow Jones $11,722.89 at close

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