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Lee Adler might be right about many things, but he's wrong about Trump's tax cuts.
We had gotten into (in his own words) "a vigorous conversation" about the impact of U.S. President Donald Trump's tax cuts on the markets at an incredibly fabulous holiday party attended by a bevy of beauties and Wall Street legends.
Subsequently, in Sure Money, one of Lee's readers, Jesse, wrote: "Hi Lee. Enjoy your articles. Your views about tax cuts and the market still tanking seem to conflict with what Shah Gilani says. Can you expound on how a tax cut will be bearish?"
I've been saying in Wall Street Insights & Indictments, in Zenith Trading Circle, and on global TV that tax cuts will boost the economy and drive markets higher. For argument's sake, I'm also on record on FOX Business Network's "Varney & Co." show telling host Stuart Varney the market will double in five years or less.
In Lee's response to Jesse, he wrote…
I have no doubt that Shah will quickly adjust his outlook when the market proves him wrong on this issue (INSERT BIG SMILEY HERE). But all kidding aside, when views are this far apart, it's obvious that one of us will be proven wrong, and we will need to make the adjustment in outlook as soon as it becomes apparent that our considered outlook isn't playing out as expected.
Here's what Lee got wrong, and why I'll be proven right (while making a ton of money in the process)…
This Bearish Reasoning Proves My Bullish Case
Lee started his response to my bullishness with, "There's no doubt in my mind that tax cuts will goose the economy for a time."
That's bullish in my book.
He then followed that with, "But eventually the corporate CEO and CFO class will find ways to divert the extra cash into their own pockets, just as they did with QE. Ultimately, the long-run beneficial effect to the economy is questionable, and more importantly, irrelevant."
One of my trade recommendations closed out for a 995% win. And I've got seven more trade recommendations lined up right now. Click here to learn more…
Sorry, Lee. While you're right about what's going to happen, you're wrong about it not being a bullish opportunity.
When – and make no doubt about it that "when" means "right away" – CEOs and CFOs divert extra cash into their own pockets, it will be by granting themselves stock options and conducting massive share buybacks to put a floor under and raise their stock prices, making their options profitable. That's bullish for stocks.
Yes, they did it with quantitative easing (QE). QE lowered rates so the cost of capital was practically nothing. Companies borrowed money, because they weren't making much during the Great Recession, to buy back their shares and create demand for them. They wanted to raise earnings per share metrics to push their stock prices higher. That was bullish for the market.
That's going to continue as tax cuts generate more cash to plow into more buybacks. Once again: bullish.
Lee says, "Federal tax revenue will decline, and the deficit will grow. The U.S. Treasury will be forced to sell more debt to cover the shortfall. That will put supply pressure on both the bond and stock markets."
He's right and wrong.
Yes, the deficit will grow – it's been growing regardless. And, initially, tax revenue could fall. But it may not fall if tax cuts stimulate consumption, which stimulates production, which stimulates profits and increases tax receipts.
Still, the Treasury selling more debt won't necessarily put pressure on both the bond and stock markets.
It might put pressure on the bond market. If it does, and rates rise faster than expected, there'll be an exodus of money sitting in low-yielding bonds as their prices fall and investors experience capital losses on their holdings. That's supposed to trigger the "Great Rotation," when bond investors get out of losing bond positions and rotate into stocks.
That was supposed to have happened by now. It hasn't, because rates haven't risen by much if you look at U.S. 10-year Treasury prices and yields. If the Great Rotation finally comes to pass, all that money has to go somewhere.
If it goes into stocks, and it will, that's bullish for the stock market.
The Year of the Bull and How to Play It
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.