With over 15 years’ experience assisting US individuals to navigate the complexities of the US and UK tax legislation, James Murray is currently a Director at Frank Hirth. James has a focus on those international US citizens and Green-card holders who have an interest in a non-US structure including those in the asset management sector.
Frank Hirth has over 140 tax professionals across London, New York and Wellington providing US and UK tax compliance and advisory services to individuals, partnerships, trusts and companies. Most technical staff are fully qualified to ‘dual handle’ both regimes, to provide global tax efficiency. Established over 40 years ago Frank Hirth is recognised as the leading tax accounting practice for assisting with international US tax matters outside of the US.
What are the headlines from recent US tax reform?
The main headline of President Trump’s Tax Cuts tellgamestop Jobs Act 2017 (‘tax reform’) signed into law in December 2017 was very much in the corporate arena with a reduction of the Federal tax rate from an eye watering 35% to a more globally competitive 21%; as well as a move to a territorial system of taxation for US companies.
Individual US citizens, greencard holders and residents continue to be subject to US Federal tax on their worldwide income, irrespective of where they physically reside. The top Federal tax rate has been reduced to 37%, however, they have also withdrawn a number of favourable deductions that were previously available – resulting in only a marginal change in the effective tax rate in many cases.
Unfortunately, some of the changes targeted at US corporations have had what may have been unintended, and certainly unexpected, results for our international US clients who have business interests overseas.
In what way has it impacted Americans doing business outside the US?
These changes can result in certain income within non-US companies being attributed to the US shareholders on an arising basis for US personal tax purposes, as opposed to upon receipt of funds by way of dividend. As a consequence the US and UK tax points and character may not align and therefore can result in double taxation.
We are already seeing that this will require those US individuals with a certain level of interest in a UK company needing to reconsider how to best structure their business and the best strategy for extracting funds tax efficiently.
Has there been a change in the number of Americans living in the UK as the result of the reform? Why is this?
It is too early to tell or measure, particularly given the general uncertainty in the UK with Brexit. Over the last few years there has been a general increase in the number of US citizens choosing to relinquish their US citizenship although again this may be down to several factors. For instance, the implementation of FATCA has been instrumental in identifying those US individuals living overseas who may not have appreciated the tax implications of holding such a status.
Do you have any advice for American taxpayers residing in the UK?
Yes. The key is to ensure that high quality, joined up advice is sought as soon as possible. Navigating two very complicated tax regimes is a challenge and mitigating double taxation is vital. There are a number of anti-avoidance and anti-deferral measures within both the US and the UK legislation which, without the appropriate guidance, can lead to mismatches and other issues. This is even more apparent for long term UK residents following the changes to the UK deemed domicile rules that became effective 6 April 2017 as they can no longer access the UK’s remittance basis.
Managing the US and UK tax systems requires a deep understanding not only of each jurisdiction’s legislation, but most importantly how they interact with one another, including the use of tax treaties. There are many myths out there that can often be dispelled following discussion with an expert. We find that more than ever having tax advisors working closely and collaborating with wealth managers and lawyers often results in the client obtaining rounded, and not siloed, guidance as to how best manage their affairs.
Are there any substantial changes you anticipate in the future, good or bad?
Many of the US tax reform changes are due to sunset in 2026 and so are not permanent. It will be interesting to see what, if any changes occur, especially if the US administration changes. At present there has been no indication that any amendments will be passed to correct errors. There will however be increasing pressure to do so.
There has been a lot of recent news regarding trade tariffs, as America and China impose a number of greater tariffs on a wide range of each other’s goods. Is this all political showboating though, or do they actually have an impact?
Trade tariffs were introduced to increase the ease and competition, while decreasing the costs of shipping goods abroad. This has been a great source of growth for international business and globalisation, yet there are concerns that it isn’t always beneficial to everyone involved.
The Role of Trade Tariffs
According to the World Trade Organisation (WTO), trade tariffs are customs duties or taxes on merchandise imports. This provides an advantage to locally produced goods over those which are imported therefore, while those sourced from abroad help raise greater revenues for governments. Countries can set their own trade tariffs and change these when desired, though this can result in tense political situations when tariffs are called into question.
Trade tariffs are used to protect developing economies and their growing industries, while they can be used by advance nations too. These are a few common roles for trade tariffs:
- Protect jobs: Imported goods can threaten domestic jobs and industries, especially if they’re produced cheaply abroad. Domestic firms may then cut jobs to save on costs, with higher unemployment leading to political unrest. Trade tariffs can be used to create a more level playing field.
- Consumer concern: Especially when importing foodstuffs, if one country is worried certain products may be contaminated they can levy a tariff to reduce the risk.
- Political retaliation: When countries believe trading partners haven’t been fair, played by the rules or there are other political differences, they can increase tariffs. This could mean the other nation then retaliates by levying tariffs too. If tensions ease off, then it’s likely any increases will be reverted.
There are many examples throughout history where trade tariffs have been used in many such ways, and they’re still being implemented as political weapons today. That alone suggests that they do work.
Price Impact
In the simplest terms, trade tariffs increase the price of imported goods. It means that domestic companies don’t need to increase their prices to compete, though this does allow some businesses that wouldn’t exist in a more competitive market to continue running. Without trade tariffs it would be something of a free border for goods, that could see high levels of unemployment in some countries with low production levels.
Trade tariffs can also be used to help limit volume too, by raising them to tempt consumers to stick with domestic goods and slow down the amount being exported if businesses are priced out. The higher the tariffs the less likely businesses in overseas countries are likely to export.
Benefits of tariffs can help governments raise revenues, especially in times of need, while for domestic companies they benefit from less competition. When tariffs are levied many domestic businesses can really benefit in these times. However, for consumers and businesses that rely on importing certain materials or goods, such as steel for production, the price can become inflated due to tariffs. There are constant shifts in benefits, with consumer consumption often lowered with higher tariffs for the short term, for example.
America’s Trade War
The changing global economy means that businesses need to implement key strategies to deal with such shifts, as explained by RSM. A great example of how the global economy is changing is with a step towards deglobalisation, best demonstrated by President Trump’s ideas of protecting and improving US manufacturing by adapting tariffs and effectively starting a trade war with China.
This started in early March 2018 when the USA imposed a 25 per cent tariff on the imports of steel entering the country. Such a move was designed to protect the US steel industry but has impacted upon the stock market and China, along with over 1,000 more tariffs, which is the USA’s biggest trade partner.
However, history has shown that trade wars for the USA aren’t always successful, with one in the 1930s excelling the Great Depression to increase unemployment levels to 25 per cent of the country. Whether this latest attempt works or not remains to be seen. Either way, businesses need to employ flexible strategies to prepare for many of the globalisation issues which could affect or destabilise the world’s economy in the future.
With this week’s market commentary from Rebecca O’Keeffe, Head of Investment at interactive investor, Finance Monthly learns about global markets, the US-China trade war and about recent activity in the M&A sphere.
A turnaround in Asian markets has seen US futures rise and eased the pressure on European equity markets. The last two months have seen global sentiment become more fragile, but the one thing that has kept markets going is the reliance on investors to buy on the dips. The last week had undermined that position in what was a worrying sign for the wider markets, but investors appear to be feeling slightly more resilient this morning.
Steve Mnuchin has taken on the unenviable task of attempting to resolve the trade dispute between the US and China via negotiation – however, he may be trying to reconcile the irreconcilable. The idea that, as one of the largest holders of US treasuries, China will be expected to help finance the growing US fiscal deficit but is also expected to reduce its trade surplus with the US by as much as $100bn to satisfy Trump’s demands appears to be a major contradiction. The question for investors is whether this adds up.
Another day, another flurry of activity in what has become one of the most vitriolic and antagonistic hostile merger bids since Kraft purchased Cadbury in 2010. GKN and Melrose investors have just three days to wait until the final count is in and much will depend on short versus long term investors. This bid has raised several questions about the difference in UK takeover rules versus other European countries and, irrespective of the result, may provide a catalyst for the Government to review the current rules to make sure they have the right balance between competition and protection.
World stock markets have had a positive start to 2018, signalling a strong year for economic growth ahead.
Forefront in the optimism is Japan, whose stocks increased by over 3%—bringing it to nearly its highest in 26 years. Leading the rally were energy and financials stocks.
This comes after US stock markets closed last night with another record high.
What this means for Japan
Topix index of all First Section issues on the Tokyo Stock Exchange jumped to its highest since 1991, rising by 2.1%. The Nikkei, short for Japan's Nikkei 225 Stock Average and the leading and most-respected index of Japanese stocks, rose by 2.6%.
The Nikkei stock average surged above 20,000—something it has done before, but has not been able to sustain in the past.
The anticipated market rally in 2018 will commemorate the longest winning streak since 1989, when during the Japanese asset price bubble, the Nikkei gained for the 12th straight year.
"With a global economic expansion, Japanese companies will likely keep double-digit growth," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co.
Analysts have said that the expected yen’s weakness, combined with the upbeat economic outlook, means Japanese companies will be aided in posting another record profit in the new year.
Despite the good news, analysts have also warned of a risk of volatility, with Senior technical analyst at Mizuho Securities Co., Yutaka Miura saying: "Although the weather is fine, the waves are high... there will be scattered rain."
Describing the surge, Miura also said: "More overseas market players flocked to the market in the afternoon amid hopes for higher (Tokyo) stock prices this year."
How the US plays a part
Analysts have also forecasted the dollar to trade between ¥95 and ¥120 in 2018, compared with around ¥113 in late December.
Japanese companies such as Toyota and Sony depend heavily on the US market. Construction machinery manufacturer Komatsu, for example, will receive a boost thanks to the US tax overhaul legislation enacted in late 2017.
A potential defeat of Trump's Republicans in the US midterm election in November will likely start to gradually be factored in by investors, with the Nikkei possibly dropping below the 20,000 line.
Mizuho’s Miura concludes: "Following the passage of the tax reform bill, political conflicts between Republicans and Democrats will become clearer toward the midterm elections,” adding: “The conflicts may hamper Trump's efforts to push through other policies such as his long-promised plan to boost investment in infrastructure which is scheduled to be announced in January.”
The year 2017 has been eventful in terms of the various socio-political and economic developments across the world. Here is Mihir Kapadia’s quick summary of the year as it was.
The Year of Elections
After 2016 gave us Brexit and Trump, political and economic analysts across the developed world were wary about the possibility of protectionism spreading across the European continent, especially as 2017 was due series of elections in the region. With The Netherlands, France and Germany, the three big powerhouses of the European Union, going to the polls, there was a real threat of right-wing populist parties gaining prominence and altering the mainstream and liberal values of the western developed economies. The fear was legitimate, as EU sceptics appeared to be inspired by Brexit and Trump and were engaging on similar campaign promises based on nationalism and the closing of borders.
The year delivered relief across the continent, as liberal political parties emerged victorious over right-wing populists; however, the political dynamics and discourse in the region were considerably altered. Eurosceptics including Geert Wilders in The Netherlands, Marine Le Pen in France, and the Alternative for Germany (AfD) party gained mainstream prominence and considerable representation in their respective countries.
Germany is currently in a difficult spot, as none of the parties secured a working majority, Angela Merkel’s CDU has been attempting to negotiate a ‘grand coalition’, in an attempt to break the current political deadlock after coalition talks with the pro-business Free Democrats (FDP) and Greens collapsed. While brokering a grand coalition across parties in the parliament can deliver governance, it is too early to comment how strong the Chancellor’s leadership and authority would be.
Trumping the Stock Markets
While protectionism and populist policy proposals have been part of the 'Make America Great Again' campaign slogans, the larger driver behind the 'Trumponomics' rally has been the hope that President Trump can push through policies to stimulate growth and increase corporate profits. Anticipation of infrastructure expenditures, healthcare reforms and tax cutting legislation helped rally the stock markets to a series of all-time highs. While the stock market has consistently risen strongly since November 2016, despite the fact that many of Trump’s key promises such as infrastructure spending and healthcare reforms are yet to materialise, there are increasing fears that the US stocks are being overvalued. However, these concerns have been there since 2003 when the current long equity rally began.
Meanwhile, the dollar has had a rough year, having lost about 9-10% in 2017, but Trump has probably been happy to see it fall, as it will help boost US exports.
Financial analysts observing the uptrend in the US stock market over the year have cautioned that the markets may already be overpriced. The last time the US economy had a meltdown, it was 2008 and it affected the whole world. The 2008 financial crash occurred because of fragility in the banking system due to poor mortgage lending. The US is currently trending positively on earnings, employment, wage growth, housing and GDP. These indicate no signs of an impending recession; and the Federal Reserve is likely to raise interest rates through 2017 and into 2018. Trump has been indirectly very good for the economy.
Dull year for Gold
The significant threat globally throughout 2017 has been North Korea's aggressive stance against the US and its regional allies - South Korea and Japan. The year-long nuclear ballistic tests and provocative missile launches rattled Asian markets, but net impact was negligible and equities have risen in Asia and elsewhere. Therefore, safe-haven assets, such as Gold, received little support due to these threats.
Globally, the bullish stock market, rising interest rates and a sense of market security proved to be bad news for Gold, US-denominated assets such as Gold are influenced by the movements of the dollar, and its fortunes are also tied to the dollar among other factors. The US dollar has fallen nearly 10% year-to-date (or YTD) in 2017.
Under a bullish Federal Reserve, the commodity had already priced in the factor of interest rate hikes. Only if the actual rate of increase is lesser than expected, gold prices may benefit and see some relief going into 2018. Investors therefore will keenly observe the Fed’s tone when they discuss the interest rates for next year to understand how they would progress into 2018.
Brexit uncertainty remains
Brexit continues to dominate the UK’s political and economic spheres and the year began with the invoking of Article 50 by Prime Minister Theresa May on 29th March 2017. Political discussion around Brexit also led the country into a snap general election in June, resulting in the Conservative Party losing their majority, and further splitting the British parliament.
Since the Brexit referendum of 2016, the pound lost 10% against the Euro and 17% against the Dollar. The fall in the value of the pound in fact worked in favour for the stock markets, with the FTSE100 (which largely comprises of exporting organisations) having reached record highs through the year. While the fall in the value of the currency may have helped British exports, the benefit stops there. Rising inflation and weak wage growth in the UK have directly affected the average British household as the period of uncertainty continues.
While Brexit is inevitable, the financial sector, which considers London to be its capital, is keen on retaining its ‘passporting rights’ - the right for a firm registered in the European Economic Area (EEA) to do business in any other EEA state without needing further authorization in each country. In fact, London has been the major focal point for this very reason – an English language capital city, ideally located between the Americas and Asia and acting as the gateway into Europe. Therefore, any indication of a ‘Hard Brexit’ – one which threatens to pull the UK out of the EU without any deal, is of a major concern for the City of London. The pound and the economy therefore are directly affected over this concern as businesses continue to operate over the period of uncertainty. The UK also faces an upward of £40 Billion Brexit ‘divorce bill’ payable to the EU, which adds another financial liability to the process.
Eurozone recovery at its finest
The European Central Bank’s (ECB) president Mario Draghi has expressed the bank’s confidence over the region’s recovery, noting that the momentum has been robust, as GDP has risen for 18 straight quarters. The central bank attributed the overall success this year to improved employment figures in the single bloc, while noting that inflation cannot be self-sustained at this juncture. Mr Draghi used these comments to express interest and possibility for extending the timeline of the slowdown of its bond-buying program, which is slated to start from January 2018.
While the recovery has been robust, the ECB also recognises that it is vital for member states to continue a stable political and economic structure within, and reinforce each of their fiscal structures in order by focusing on both, keeping a buffer rainy-day fund while also working towards reducing debt. While these are words of wisdom for the future, Mr Draghi would also be thankful for the past year as Eurozone mitigated the rise of far right into leadership, especially in France, Netherlands and Germany – the three key powerhouses in the EU. The economy therefore was well protected this year.
10 Years of the Financial Crash
2017 also marked the 10 years of the great financial crisis of 2008 in October, which had sent the risk assets across global stock markets and economies tumbling. The ten years since the financial crisis of 2007-08 has passed quickly and on a better note than anyone could have expected at that point of time. From the collapse of Lehman brothers in 2008 to the arrests of Irish bankers in 2016, the 2008 depression had brought in a wider understanding of the fragile western economic ecosystems. The crash was a serious wake-up call for governments across the world, thus paving way for bringing in regulatory responses to the banking practices - such as the expansion of government regulation, scrutinised lending practices, and tougher stress tests to make sure they can withstand severe downturns.
The financial crash of 2008 provided a learning opportunity to set things right, and our economic mechanisms today have certainly implemented checks and balances to be more cautious in their functionality. If the crash has taught us anything, it is that complacency can be catastrophic.
It has certainly been an interesting year, and 2018 holds more opportunities for us than ever before to learn and grow.
Velshi & Ruhle grade the economy's performance under President Trump.
Today marks the 30th anniversary of the day when the financial bubble, that resulted in the Dow Jones reaching a record peak of 2722 in August, burst in spectacular fashion.
Following a fraught Friday on the New York Stock Exchange where the DJIA dropped sharply, the opening bell on 19th October started a selling onslaught and panic on the floor that hasn't been seen since. We take a look back at Black Monday 1987 in numbers.
Black Monday In Numbers
"It was a frightening week, more frightening than any week in '08" - Jim Chanos
19th October 1987 – The date of Black Monday.
9am – The sounding of the opening bell that began the selling that almost crashed the entire American financial system.
250 points – Points drop on the Dow Jones by 12:30pm.
508.32 points – Number the DJIA fell on 19th October 1987, it was at the time the largest drop Wall Street had seen.
4x – The amount the points drop on 19th October was bigger than the previous record.
22.76% - One Day Percentage Loss on the Dow Jones Industrial Average (DJIA). A record that still stands today.
Dow Jones Industrial Average from January - December 1987
$500 Billion – Amount of capital lost on 19th October 1987.
33% - Drop in S&P Futures on Black Monday.
604.33 million shares – Volume of shares on the New York Stock Exchange. A record at the time.
$1 Billion dollars – Value of Sell Orders reached by 10am on 19th October.
112 million – Shares lost by the Designated Order Turnaround System at NYSE as the computers buckled under the weight of sell orders.
648 - Days it took for the markets to recover.
$18.8 Billion - Market Value Lost By IBM on Black Monday. It was valued at around $62 Billion before Monday 19th October.
"Wall Street was uniformly unprepared for this magnitude of drop" - Paul Tudor Jones, October 19th 1987
23pc - Drop on the FTSE 100 on Black Monday and Tuesday combined. The biggest ever in history and a figure that has never been seen since.
60% - Percentage drop of the New Zealand Stock Market after Black Monday.
$6.7 Billion - Total in paper losses on AT&T Shares.
30.9% - Amount of American Express shares were reduced by during the trading day.
Traders react after one of the worst days the New York Stock Exchange has ever seen.
33 – Age of Paul Tudor Jones in 1987, when he and his colleague Peter Borish foresaw Black Monday.
$100 Million - Amount Paul Tudor Jones made by shorting the market and ensured his legacy on Wall Street.
$1 Billion – Amount Sam Walton, reportedly America’s Wealthiest Man lost on the day. ''It was paper when we started, and it's paper afterward.'' He said after the days trading.
$500 Million - Reported figure that Walton's Wal-Mart company value lost on Black Monday.
40% - Reduction in restaurant bookings and turnover in local businesses used by Wall Street Traders on 19th October.
$500 Million -Reported value of holdings in Allegis, Holiday, Bally and various other companies sold by future President Donald Trump in August that ensured he avoided any losses and became one of the few to make money on Black Monday.
16 hours – The time it took after the Dow Jones Closed on Black Monday for the US Federal Reserve to release a statement saying that it “affirmed today its readiness to serve as a source of liquidity to support the economic and financial system”
10 – Number of the largest banks who extended credit to traders following the Federal Reserve statement.
Traders stand bewildered after the New York Stock Exchange closed on Black Monday
2,078 – Stocks Traded on the board at the NYSE on Black Monday.
2,038 - Stocks Traded on the board at the NYSE that made a loss.
$470 – Amount Gold price per ounce increased (from $15.50) as one of the only performing stocks.
$1 Trillion – Total loss of wealth by the close of play.
$10,000 – Cash withdrawn late on 19th October from his Bank by Allan Rogers, head of government bond trading at Banker’s Trust, and hid in his loft because he was so scared the whole banking system was going down.
7% - Percentage of stocks that didn’t even open the following morning.
126 points – Rise in DJIA in the opening minutes of Tuesday 20th trading following Federal Reserve stop-gap measures.
10:00am – The rally is over and the Dow Begins to plummet once more.
11:28am – Time the Chicago Mercantile Exchange ceases trading on the S&P contract.
The crash was splashed all over the world news following a devastating day for traders.
11:15am – Time on Tuesday 20th October traders and banks like Merrill Lynch, Goldman Sachs and Salomon requested John Phelan CEO of the NYSE perform a total shutdown due to lack of buyers.
285 – Price paid by Blair Hull on MMI Futures in Chicago sparking the rally that some say prevented a full blown crash.
62% - Amount made by Tudor Investment Corp. in October.
102.27 – Dow Jones Industrial Average gain on the day for Tuesday 20th October.
23000 - Number hit by the Dow Jones on October 18th 2017, almost 30 years on from Black Monday sparking fears another equity bubble may be about to burst.
Thanks to some quick responses from the Federal Reserve and a surprise market rally, the Dow Jones rallied enough to avoid a repeat of the Great Depression that had followed the Wall Street Crash of 1929 that bore many similarities to Black Monday in 1987.
The flash crash also led to several huge changes on Wall Street including a kill-switch on trading the S&P if it drops below 7% and an overhaul of the computer systems that had caused so many issues on that fateful day to ensure that the confusion and inability to trade would no longer be an issue. And while there have been monumental crashes on trading floors across the world, none seemed to repeat the speed and fear that occurred on the New York Stock Exchange on the 19th October 1987.
Rumour and conjecture abound in the financial world that lessons may in fact not have been learned, and that we may be in line for another Black Monday, especially given the DJIA topping the 23000 figure just today. Analysts remain nervous, citing an 8-year bull market and reports of a hugely over-inflated US stock market. One thing is for certain, no one at the New York Stock Exchange will want to see the markets offer up any sort of anniversary.
All Photos: Roger Hsu
Sources: Bloomberg, NY Times, Guardian, Reuters, Washington Post
By Mihir Kapadia, CEO of Sun Global Investments
In November 2016, for most observers, a Donald Trump win was a slightly worrying possibility and a Hillary Clinton victory seemed to be the best route for economic continuity and stability. But then the unexpected happened; Trump won the Presidential Election and the market rallied strongly from the next morning onwards.
This optimism continued as Trump’s inauguration approached, with markets anticipating the sweeping economic reforms promised by his campaign. In the market, this was christened the ‘Trump Trade’, and over half a year since President Trump took office, some of the optimism seems to be showing signs of fading.
Markets were apprehensive mainly because Trump seemed to be an unknown political factor and a threat to the established order. Some people feared a similar panic to the one that swept global markets in the aftermath of the BREXIT vote.
However, with hindsight, Trump’s ascent represented a great investment opportunity for investors. His economic policies emphasised large scale infrastructure investment, significant reforms and a large stimulus which is likely in aggregate to be positive for economic growth and activity.
Trump exhibited a more conciliatory tone towards Janet Yellen and the Federal Reserve, compared with the more hostile rhetoric of the campaign. This emphasised continuity and stability and reassured the markets further.
The dollar surged to new heights and the situation seemed promising for investors who had hoped to see progress in the US economy by an administration that would not be mired in a political stalemate. Trump achieved a Republican majority in both houses, a fact which in theory increased his chances of pushing through his legislative agenda. Compared with the Obama administration which often faced a hostile and partisan Congress, the Trump administration seemed to represent a more decisive direction for the US economy with pro-growth policies and promises of tax cuts and deregulation.
These factors ensured some progress for the US dollar and for US assets. However, some more troubling questions have arisen about the administration in more recent days. It has been argued that campaign promises have not materialised, and in some cases, such as the President’s tough stance on China, these seem to have reversed altogether. In addition, the numerous scandals and controversy to have hit the White House since January have led to questions as to whether the Trump administration will be competent enough to deliver on their economic agenda.
One key event was the release of US first quarter GDP figures that showed the slowest growth in years. Although it is still early days for the Trump administration, it was viewed by some as indicating the failure of the Trump administration to boost the economy. On this view, despite the promises of tax reform and infrastructure investment, few if any of Trump’s economic policies seem no closer to fruition than they did before the election. It is this which seems to have cooled investor optimism. However, this is not the complete picture - while the US dollar has declined in 2017, US Stocks (especially the NASDAQ) have powered away and are at new all-time highs at the time of writing.
During the campaign Trump criticised the Fed for its policy of keeping interest rates low. Whilst Trump’s opinion on interest rates has varied, he has argued for a lower dollar which many see to be somewhat inconsistent with lower interest rates. Whilst the Fed has raised interest rates once this year, with officials indicating that two or three more interest rate increases were on the way, recent events have seen interest rates on hold and the likelihood of more rises this year is again under question.
Many controversies have pervaded Trump’s time in office; this did not seem to affect markets much until a flare-up of the James Comey – FBI issue which eventually rattled the stock markets and the US dollar. This soon evolved into a larger ongoing investigation into the administration’s links with Russia.
Foreign policy has also proven fraught with uncertainty, with the latest economic sanctions on Russia straining relations with the allies in the EU. Both US and European businesses have expressed concerns over the prospect of being penalised by the very same sanctions aimed at punishing Russia, due to the amount of partnerships and contributions involved. For investors, some of the allure of Trump during his time in office would appear to have faded for the time being.
However, Trump’s time in office has seen a very different story unfold within emerging markets, with its biggest loser being Mexico. The key effect was Trump’s controversial policy for a border wall between USA and Mexico for tackling illegal immigration.
Upon Trump’s victory the Mexican Peso crashed to record lows, with more details of the President’s plan hurting the emerging market’s economy – and relations with the US, further. The threat to use remittances as a tool to fund the wall, amongst other ideas, also served to threaten other Central American economies.
However over half a year since Trump’s inauguration the markets tell a very different story. The Mexican peso has become one of the world’s best performing emerging market currencies, rallying to a 14-month high since January after Trump took office. After the volatility seen at the beginning of the year, the peso has seen far more positive movement over the first seven months of Trump’s presidency. This positive sentiment has boosted other risky assets including Emerging Market Assets.
In conclusion, the Trump Presidency presented an opportunity for a resurgent US economy with comparisons made early with President Reagan’s time in office. Half a year later, Trump’s presidency has proven to be tumultuous, subverting expectations for some and confirming them for others. Although US stocks and emerging markets have gained strength, global risks for investors have also risen under the turbulent Trump administration. If this is taken as a sign of things to come, it is likely that investors will see more volatility over the next 4 years.
Androulla Soteri, tax development manager at MHA MacIntyre Hudson below discusses the consequences of the US President’s potential implementation of tax reform in the country, and the impact it could have on UK business.
Corporation Tax (CT) has been an important part of the election manifestos, and we now find ourselves in a coalition of two parties supporting a move towards lower CT rates. This makes it clear which direction the new government will decide to go in.
The main argument for dropping CT rates is to make the UK a more attractive place for multinationals to locate business. This in turn increases the job-pool which raises further tax revenue in the form of National Insurance contributions, and consequently VAT as consumers have more disposable income to play with. In over a decade, CT has never made up more than 11% of total tax take. Given its relative lack of significance, there’s a strong argument to suggest an overall benefit in reducing it.
One of the arguments against a reduction is that if big multinational companies were forced to pay their fair share of CT, this would help reduce the budget deficit and national debt, and also contribute to public services such as the NHS, schools and policing.
But it’s also worth taking a look at the US, which has one of the highest rates of CT in the world at 35%. One of Trump’s intentions is to drop the rate to 15%, to bring US companies back home. If this happens, US businesses could lose interest in investing in the UK, especially with Brexit looming on the horizon. Instead, they could look to repatriate headquarters, increasing employment of US citizens and consequent tax revenues associated with it.
If Trump’s plan is a success, the UK could be shaken hard over the next few years, especially in light of ongoing Brexit uncertainties. Lowering CT rates in the UK may therefore be an incentive for companies to remain within a benign competitive UK tax system.
The task of running the UK over the next two years is unenviable. But if the Government sticks to its plan of lower CT rates, we’ll certainly see clear evidence within the next few years of whether this is good or bad for the economy.
Below, Tamara Lashchyk, a Wall Street Executive and Business Coach, talks to Finance Monthly about the current state of markets in the US and the impact that Trump's Presidency will have on the strength of America’s economy. Tamara has 25 years of experience working at multiple Wall Street investment banks including JP Morgan, Bank of America and Merrill Lynch just to name a few. She also recently authored the book “Lose the Gum: A Survival Guide for Women on Wall Street.”
Over the last 12 months the US Equity Markets have shown steady signs of growth until last November when the US elections sent the stock market soaring into another stratosphere. A 16% market surge over the last six months could have an intoxicating effect on investors, but one should heed a word of warning about using market performance as the sole barometer of economic health. With GDP growth hovering just below two%, the stock market has fast outpaced the growth of the real economy.
Although corporate profits are a contributing factor to this bull-run, much of the current market rally has been fueled by the economic optimism generated by the Trump campaign and his promise to deliver a pro-business agenda. Any interference in Trump’s ability to deliver against that agenda could halt this market momentum and even send it towards a decline.
But in the wake of an administration riddled with controversy and scandal, the private sector sits anxiously awaiting, to see on how much of this promise Trump can actually deliver. Topping the heap of the Trump strategy is Tax-Reform and a reduction of the corporate tax rate which would stimulate profits; repeal of onerous government regulations particularly in the banking sector; and renegotiation of trade deals.
But the clock is ticking and Trump’s time horizon could be much shorter than the four year term of a presidency. If the all stars and planets align for Trump then he will have the full duration of his time in office to work with a Republican Congress. But with mid-term elections less than two years away, Trump’s opportunity to deliver may evaporate just as they did for President Obama when he lost both the Senate and the House.
At this point however, the mid-terms seem like a distant concern while the greater issue is the dark cloud of political smoke that engulfs this Administration. Whether or not there is actually fire remains to be seen, but in the meantime all the political noise creates an unproductive distraction that pulls Trump’s focus towards political warfare rather than delivering against his pro-business agenda. If any of the countless allegations are proven to have merit, a Trump impeachment could also be on the horizon.
To understand the impact that a disruption of Trump’s presidency may have from an economic standpoint, one should take a closer look at the current state of the economy. If you peel away the market enthusiasm and look at the economic fundamentals, the real economy is on solid ground and has been for quite some time. Unemployment continues to steadily decline although recent figures show signs that the decline is tapering off as underemployment and non-farm payrolls have reported softer than expected numbers. Caution regarding the slowing pace of growth is already priced into the market as seen by the return of the 10 Year Treasury yields back to their November levels. Inflation is under control eliminating the need for aggressive rate hikes by the Fed but a quest for normalization is still at the forefront of the Fed agenda as we balance against the danger of falling into a deflationary trap. Forcing a rate hike however, could send the economy into a tailspin so the Fed will likely play it safe by running the economy hot and dealing with the consequences of more money supply in the market.
So all in all, the fundamentals paint a solid economic picture, but they by no means match the gangbuster returns of the markets. Although the stock market is one of the leading indicators, in the past it has proven itself to be a cautionary tale, especially when considered in isolation. It is therefore important to look beyond the superficial gains of the recent market rally when evaluating the strength of the US economy.
The White House is on fire. Every day – almost every few hours – new scandals are breaking. From investigations about Russian collusion to alleged obstruction of justice, the blaze is white hot. But when it comes to the world of businesses and law, it's not the alleged criminal law bombshells that are causing the most panic. James Goodnow, talks to Finance Monthly.
On June 1st, US President Donald Trump formally announced what everyone knew was coming: the US is out of the Paris Climate Accord. The announcement and its build up set off another explosion the likes of which Trump and his Twitter account aren't as accustomed to fighting: a neck-snapping backlash from the business community and the lawyers who represent them.
Trump Thumbs His Nose at Business
“Global warming is an expensive hoax!” Donald Trump famously — or infamously — tweeted in January 2014. With that shot across the bow at the global scientific community, Trump started his war against climate change. His claim served as a rallying cry for his base supporters — many of whom believed that rejecting limits on carbon emissions would lead to a resurgence of US jobs in the coal industry. And the strategy was largely successful, catapulting Trump into the White House.
Despite Trump's bluster, the business community largely took a wait-and-see approach following Trump's election. The reason: Trump engaged in plenty of campaign hyperbole that was ultimately dialed back once he assumed office. Obamacare "repeal and replace" is stalled, construction has not started on Trump's border wall with Mexico, and his travel ban has been blocked by the courts. Perhaps the withdrawal from the Paris Accord would end with the same fate: a promise that would be delayed or not fulfilled.
The business world miscalculated. What business leaders monitoring the situation failed to account for is the fact Trump was backed into a corner. He needed a win with his base. And withdrawal from the Paris Accord is one of the only "successes" he could accomplish unilaterally.
The Business World's Reaction
The response from the business and legal community has been swift. On June 1, 25 major US companies, including juggernauts Apple, Facebook, Google and PG&E signed an open letter to the president that appeared in the New York Times and Wall Street Journal. The letter makes the business case for the Paris Accord: "Climate change presents both business risks and business opportunities."
The day before the announcement, Tesla and SpaceX CEO Elon Musk gave Trump an informal ultimatum on Twitter, saying he will have "no choice but to depart" from Trump advisory councils if Trump pulled the plug on the Paris Accord. Musk's comments are not isolated. Since the election, over 1000 businesses signed the Business Backs Low-Carbon USA statement.
The chorus of voices coming from the business community is united by a common theme: US withdrawal from the Paris Accord is not only ethically questionable, but leads to dangerous instability for business. Every day, business leaders make difficult decisions about where to allocate resources. A stable and uniform framework allows businesses to confidently invest in technology that will last into the future. According to the Business Backs Low-Carbon USA statement: "Investment in the low carbon economy ... give[s] financial decision-makers clarity and boost[s] the confidence of investors worldwide."
Legal Community Reaction
Trump's decision has also put lawyers into hyper-drive. Within Washington, there is widespread disagreement about the legal implications of Trump's move. Last week, a group of 22 US lawmakers, including Senate majority leader Mitch McConnell, warned Trump in a letter that his failure to withdraw from the Paris Accord could open the litigation floodgates: “Because of existing provisions within the Clean Air Act and others embedded in the Paris Agreement, remaining in it would subject the United States to significant litigation risk." But it's far from clear that US withdrawal from the Paris Accord will immunize the White House from the courts – with groups that favor the agreement already having vowed to sue.
In-house lawyers are no doubt sweating, as well. Lawyers at large corporations with operations in the United States are tasked with providing recommendations to business leadership on what they can and can't do from a regulatory perspective. With Trump pulling the US out the Paris Accord, lawyers now have to look to domestic regulations — a scheme that itself could be turned upside down — and try to reconcile those with international protocols. All of this uncertainty may translate into lawyers feeling like they are walking on quicksand.
Trump's Political Miscalculation?
Trump prides himself on operating on instinct. Prior to making his decision to pull out from the Paris Accord, he no doubt felt the rumblings of this business backlash coming. Why, then, did he move forward? Part of the answer may lie in his examining his base. Recent polls show that, for the first time, Trump's support among his core supporters is starting to erode. And that may spell danger for Trump, who relied on a mobilized and rock-solid base to ride into the White House. Trump thus decided that his need for a political victory and appeasing his base was worth the kickback from the business community.
But Trump may be missing something here. According to many reports, moderate conservatives and centrists who voted for Trump did so in part because they believed his rhetoric was nothing more than puffing that wouldn't ultimately be acted on. They were willing to throw their support behind him believing that he would revert to more traditional GOP, pro-business values.
But Trump's withdrawal from the Paris Accord demonstrates that Trump isn't all talk. When his back is against the wall, he is willing to act – even if it means acting against the interests of non-base voters who helped elect him. That realization may alienate the critical segment of the business electorate he needs to win again in 2020. More immediately, it may spell trouble for Republican members of Congress in 2018.
The White House is on fire. But it may not be heat from the blaze that stops Trump politically – but rather a cooling to Trump and his policies from moderate Republicans and the business world.
James Goodnow is an attorney and legal and political commentator based in the United States. He is a graduate of Harvard Law School and Santa Clara University. You can follow him on Twitter at @JamesGoodnow or email him directly at james@jamesgoodnow.com.
As anticipation for President Donald J. Trump's first budget release in the next few weeks reaches a crescendo, there is much debate about whether cutting the deficit should be a priority for the administration. Apparently most American voters think it should be. In a unique survey in which respondents made up their own Federal budget, majorities proposed a combination of spending cuts and revenue increases that would reduce the deficit for 2018 by at least $211 billion. There were partisan differences, but Republicans and Democrats did agree on $86 billion in deficit reductions.
In the survey, which was conducted by the University of Maryland's Program for Public Consultation (PPC), a representative sample of 1,817 voters were presented discretionary spending for FY 2017 (broken into 31 line items), and sources of general revenues, actual and proposed. They were then given the opportunity to modify both spending and revenues, getting feedback as they went along about the effect of their choices on the projected deficit. Respondents were not instructed to reduce the deficit, and were able to both increase or decrease spending or revenues.
Overall, majorities cut spending a net of $57 billion. While both Democratic and Republican members of Congress are planning for increases in spending on national defense for 2018, this was the area that received the biggest cut from the public-- majorities cut it by $39 billion. Other significant cuts were for subsidies to agricultural corporations ($5 billion), intelligence agencies ($4 billion), homeland security ($2 billion), the State Department ($2 billion) and the space program ($2 billion), plus smaller trims in other areas. The one area to be increased was the development of alternative energy and energy efficiency, which was increased by $2 billion (a 100% increase).
The biggest changes, though, were on the revenue side, which were increased a total of $154.2 billion. The biggest source of revenues ($63.3 billion) arose from increases in personal income taxes for higher earners. Those with incomes over $100,000 saw their taxes go up 5%, while those with incomes over $1 million had increases of 10%.
"Clearly Americans are concerned about the deficit and are ready to make some tough choices to bring it down—more than Congress is even ready to consider," said PPC Director Steven Kull.
Other major increases came from an increase in taxes on capital gains and dividends from 23.8% to 28% ($22 billion), a new transaction fee on financial transactions of 0.01% ($20 billion), a 5% increase on corporate taxes ($17 billion), a tax on sugary drinks of $.05 an ounce ($9 billion), an increase in the estate tax ($7.8 billion), a tax on alcohol ($7 billion), a fee to banks who have large amounts of uninsured debt ($6 billion), and repeal of the 'carried interest' tax break for fund managers ($2.1 billion).
There were significant partisan differences. Republicans only cut $5 billion from defense, while Democrats cut $91 billion. Republicans cut $9 billion from education, while Democrats increased it $3 billion. Republicans cut environmental spending by $6 billion, while Democrats raised it by $1 billion. Most Republicans did not join in on increases to corporate taxes, estate taxes, and taxes on sugary drinks.
Nonetheless, Democrats and Republicans did converge on $86 billion in deficit reductions, including $69.2 billion in revenue increases and $17 billion in spending cuts.
Overall, Democrats made the largest reductions to the deficit of $306.5 billion, with $96 billion in net reductions to spending and $210.5 billion in revenue increases. Republicans made total deficit reduction of $134.2 billion, with $65 billion in spending reductions and $69.2 in revenue increases.
(Source: Voice Of the People)
