frontloaded stimulus < backloaded cuts?
add in the
taxestariffs and maybe it’s not so bad
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Random Walk and the robot go stock-picking
First, for everyone who independently decided to buy AROC 0.00%↑ at the open yesterday because of decisions you made entirely of their own volition having nothing to do with anything that I wrote, you have now generated a staggering 783.7% annualized return:
. . . based on a single day return of 1.6%, including after-hours trading.
Take a bow. Buy a steak dinner. Or maybe a yacht.
Maybe the OBBB is fiscally responsible?
Random Walk is a certified deficit-scold.
I’m also very pessimistic about the politically economy of doing anything about it.1
I’m also pretty skeptical of any attempt to forecast anything with as many moving parts and inter-dependencies as the deficit impact of various tax cuts, spending cuts, and spending increases, when GDP, tax receipts, interest rates, and borrowing needs are all variously causes-and-effects.
Given all that, my general default is “the deficit will probably go up, but linear extrapolation is as good a bet as any.”
That all being said, I am partial to a solid contrarian take.
Consensus appears to be that Trump’s OBBB will make a fiscal disaster more disasterish.
Now, most of that consensus can be safely ignored as reflexively partisan (and again, forecasting these things is futile), but even if it’s not making things worse, my prior is that I doubt the OBBB is making the deficit situation better.2 Plus, while I haven’t been paying the closest attention (bc infra), I haven’t really noticed anyone defending the bill as a deficit-saver, so much as a growth-maker—which, tbf, is related, but different.
All of which is to say that I have very little reason to think the OBBB is going to move the deficit in any predictable way, one way or another.
Frontloaded Gain < Backloaded Pain
That’s why I was tickled to come across this little brief from Wells Fargo arguing that, actually, the OBBB is net-good for the bottom line.
The first assumption you have to make (which is a totally fair assumption) is that the 2017 tax-cuts are part of the current law baseline, and therefore they ought to be stripped out of any changes. That makes sense, imo, because the 2017 cuts are functionally “current law” as it pertains to the current path of the deficit.3
Once you do that, though, there’s an argument that tax-cuts are, in fact, outweighed by spending cuts—just not at the same time:
Tax cuts are front-loaded stimulus, while spending cuts are backloaded savings.
How’s that for political economy? Popular stimulus now, with unpopular spending cuts later, during someone else’s term. Clever girl, Mr. Trump.
Don’t forget the tax-hikes tariffs
In terms of the deficit impact, the story looks even better when you factor-in the tax increases that all the newly religious deficit scolds hated just a few weeks ago, aka tariffs.
Again, Wells has to make some assumptions here, given tariffs are a moving target, but when you add in tariff revenue, the deficit picture starts to improve—even if you count the TCJA renewal as part of the spending:
By 2031, the combined effects of tariffs and the OBBB should cause the deficit to start heading in the right direction.
By 2031, but that’s not nothing.
The story looks dramatically better if you (correctly) treat the 2017 tax cuts as part of the “current law” trajectory:
Tariff revenue and spending cuts begin to substantially outweigh tax cuts by 2027, substantially reducing the deficit as a share of GDP thereafter.
Three-cheers for fiscal responsibility!
Of course all of this assumes that nothing gets re-traded, that tariffs are steady-state 15% and have no other impact on imports or GDP, which itself can be safely modeled given tax-cuts, and that net-interest on an unknown amount of debt, with uncertain effects on rates, is reasonably calculable.
So, basically, trust it about as far as you can throw it, but who knows, maybe things are better than they seem.
Other interesting reads
Cloudflare’s pay-per-crawl. Interesting model to re-monetize content in the post-search world.
America’s worst housing market is now Florida’s Cape Coral. Heard it here first(ish)
PE caught in crosshairs, as Stefanik seeks accountability from Harvard. Flagged this earlier, but now the WSJ has picked up on it: Stefanik has called into question Harvard’s private market marks (as part of its bond issuance).
Microsoft to cut 4% of its workforce. Doing more with less.
Labor market is not as strong as it seems. Ah yes, immigration flows are no longer driving adds, and “weakness” is actually a secularly lower breakeven, and it’s all just different and harder than we expected. Definitely heard it here first.
Previously, on Random Walk
AI is not taking white collar jobs
No, AI is (probably) not taking your jobs. Post-ZIRP took your jobs.
Secondaries will not save VC (reprise)
An OG of venture secondaries enters the chat, plus some actual data. Did you know, it's a seller's market out there? Bet ya didn't.
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Personally, the most free-money would come from sweeping DOGE-like de-regulation because throttling supply at the discretion of no-skin-in-the-game lawyers with basically no incentives to make consumer-optimal decisions is just pure dead-weight loss. Everyone hates regulators—even regulators hate regulators.
Critics of the bill also seem confused if the bill is bad because it makes the deficit worse, bad because it cuts spending to Medicare, bad because it ends subsidies for solar energy, or bad because it increases funding for border security, which, you know, feeds my skepticism of the whole exercise, and reinforces my assumptions about the political economy of doing anything. Mostly, no one likes it when their ox is the one being gored.
Yes, they were technically set to expire, and so therefore extending them is technically a “new” revenue drag, but the reality is that they were always going to be extended, and, more importantly, when people think of the deficit, they think of the current trajectory, which includes the 2017 tax cuts. In other words, the 2017 tax cuts are better understood as “current law” and the OBBB not-changing them is net-neutral to the current path.