THE 2022 BUDGET AND IF PASSED IN ITS ENTIRITY AN INCREASE IN CAPITAL GAINS TAX WILL BE RETROACTIVE

The President released his budget yesterday. The Administration is proposing a $6 trillion budget for fiscal 2022 and total spending to rise to $8.2 trillion by 2031.

The annual budget deficit would hit $1.8 trillion in 2022 and recede “slightly” in the following years to around $1.3 trillion and then rising to $1.6 trillion in 2031.

By 2024 debt as a share of the economy would rise to the highest level in American history, eclipsing its WWII era record.

Tax revenues are projected to rise to a record one fifth of the total economy, the result of “exponential” tax increases on corporations and high earners.

The levels of taxation and spending in the President’s budget would expand the federal fiscal footprint to levels never yet experienced.

The GDP is projected to grow by 2% for most of the next decade and inflation is projected not to rise more than 2.3% per year and the Federal Reserve only gradually raises interest rates from their current rock-bottom levels in the coming years.

According to the proposal, based upon projected interest rates, the interest on the national debt would consume an increased share of the federal budget, doubling from 2022 to 2031 from about 8% of the budget to 16%.

Wow!  These numbers are unfathomable.  Ten years ago, most were aghast by a $250 billion annual budget deficits.

I ask has the Administration adopted the much-maligned economic policy of Modern Monetary Theory (MMT), the dubious policy that a country can borrow without impunity as long as it is in their own currency?

I think yes.

Earlier in the week I referenced the financial blog “FINSUM” and its comments about a retroactive increase in the capital gains tax.  Posted below is a headline from Dow Jones Newswires which validates these comments.

President Joe Biden’s budget proposal assumes that an increase in capital-gains tax took effect in late April, Dow Jones reports, citing two people familiar.

The assumption means that it would already be too late for investors to realize gains at the lower tax rate if Congress agrees to pass the capital gains tax changes: Dow Jones

NOTE: Biden Tax Hikes Hitting Resistance, With ‘No Room for Error’

I believe this is extremely significant.  I do not think it will be passed but it further validates the extreme progressiveness and antibusiness stance of the Administration.

I am certain the budgetary narrative will rise to epic proportions given the possible economic and social ramifications.

Radically changing topics, earlier in the week I referenced a possible rotation from growth to value, the result of rebalancing of a BlackRock momentum fund.  Yesterday according to Bloomberg, the growth to value rotation was “near its greatest velocity on record.”

Wow!  What an oxymoronic term…momentum value versus momentum growth.

Commenting further about yesterday’s market action, Bloomberg writes “stocks faded from early gains after an outline of Biden’s budget revealed a retroactive capital gains tax back to April 2021.”  Bloomberg opines such a proposal is “disturbing, disruptive and unplanned.”

What will happen today?  Activity is expected to wane throughout the day as many leave early for the Memorial Day holiday.

Last night the foreign markets were up.  London was up 0.28%, Paris up 0.67% and Frankfurt up 0.61%.  China was down 0.22%, Japan up 2.10% and Hang Seng up 0.04%.

The Dow should open moderately higher on economic optimism.  NASDAQ futures are flat.  Is the result of possible sales of the highflying entities as some type of change in capital gains tax is all but a certainty? Is it the result of further rotation from growth to value?  Or higher inflation in the immediacy?  Probably all of the above.  The 10-year is off 4/32 to yield 1.64%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.