COVID-19 UPDATE: Two-thirds of USA at "infection break point" = good. Rising tax rates --> higher capex. Array ( [cookie] => 596a25-805399-724db3-06fc84-1cfaa6 [current_usage] => 2 [max_usage] => 2 [current_usage_crypto] => 2 [max_usage_crypto] => 2 [lock] => 1 [message] => [error] => [active_member] => 0 [subscriber] => 0 [role] => [visitor_id] => 208285 [user_id] => [reason] => [method] => ) 1 and can accesss
As we close out the week, the best development is the sustained downturn in cases seen in the USA (11 consecutive days cases down vs 7D ago) and equally true of the current epicenter of FL, CA, AZ and TX, or F-CAT. F-CAT and NY tristate and about 21 states, in total, have case prevalence exceeding 12,500 cases per 1mm residents. Assuming a seroprevalence of 10X, this implies these 21 states have seen >12% of their respective population infected. But these 21 states, or 65% of the US population, are arguably at the infection break point, or akin to being closer to herd immunity. That is, the initial vulnerable pool of infected has been exhausted and that is good news regarding the risk of a renewed outbreak.
Below, we discuss the situation of the other 29 states, which is 35% of the population. Collectively, these other 29 states could see an outbreak and if we used 12,500 as the threshold, these 29 states would likely see an additional 515,000 cases. By the way, at the current US cases reported, this is about 10 days of cases. So, it is not like this might be years away.
Markets were understandably unnerved by this tweet from President Trump, regarding a suggestion to "delay the 2020 elections." For obvious reasons, this simply defies logic and several senior Republicans later countered these suggestions.
https://twitter.com/realDonaldTrump/status/1288818160389558273
It was really timely for us to hold our webinar yesterday (thank you to the clients who tuned in) as our head of Policy Strategy, Tom Block, offered a number of useful insights, not only on this tweet (improbable but possible that either Trump or Biden dispute the election outcome). And while the Senate remains a tight race overall, there is a chance for a Democratic sweep leading to Democratic control of White House, Senate and House.
On the surface, many might suggest a Democratic sweep is negative for markets, but we can see how a D-D-D could be markets positive. Tom Block noted the likely top agenda items, post a Democratic sweep are:
- Repeal (raise) corporate tax rates;
- Modify healthcare programs, perhaps a Federal mandate for Obamacare;
- Ease restrictions on immigration;
Of these, the latter two are market friendly, in my view, because reducing the healthcare burden clearly eases a strain on the American consumer. And regarding immigration, we have done several studies showing the positive effect of growing labor supply (via births or immigration) and there is a number of studies showing the benefit of immigrants on innovation and capital formation.
History shows higher corporate tax rates --> seek tax shield --> higher capex
What might surprise investors is that higher corporate tax rates often leads to a rise in capital spending. The reason, we believe, stems from rational behavior. If tax rates rise, companies seek to shield income, aka, find tax shields. The most obvious tax shield is depreciation and interest expense. And the higher the marginal tax rate, the greater the cash flow benefit of capex and debt. This has borne out in the data.
- There have been 2 eras where US corporate effective tax rates rose, 1966 to 1980 and 2003 to 2007;
- In both periods, corporate capex (as % GDP) rose;
- Interestingly, in periods where corporate tax rates fell, capex (as % GDP) also fell.


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