Bill de Blasio Is Right

By: Kent Engelke | Capitol Securities

Did NYC’s mayor Bill de Blasio just make the Democratic Party case for lower taxes? The mayor is pushing to raise the price of cigarettes from $10.50 to $13.00 in an attempt to drastically reduce the number of smokers by 2020. The “progressive” mayor stated higher prices will cause lower demand, thus saving lives.

I do not know if the 25% increase will be treated as a tax—something in itself… it is very regressive given the preponderance of smokers earn less than $48,000 a year and can least afford an increase — but his rationalization is correct based upon Econ 101.

Higher prices/taxes dictate less demand.

Based upon almost every sentiment survey, President Trump is The Hope and Change President. Can this sentiment be transformed into increased economic activity?

I believe it depends upon tax and regulatory change. Perhaps the most progressive American mayor, the mayor of the nation’s largest city, inadvertently just made a strong case for lower taxes—tax something more, there is less demand and vice versa.

Will tax reform occur? The Establishment is against this type of change. Society is for it. Much emphasis has been placed upon the first 100 days of any administration, a vestige of FDR’s “first one hundred days” eighty-five years ago. Today, nothing occurs in 100 days, except major market transitions, the result of technology based trading where momentum is the primary variable. In my view, rarely is there any type of macroeconomic thesis followed.

The explosion of the ETF industry is incredible over the past decade. According to Credit Suisse, in 2006 there were 16 iShares funds globally that had more than $1 billion in assets and traded an average of more than $100 million day. Ten years later, 77 funds meet those criteria. Seven of the 10 most actively traded securities in the US last year were ETFs.

Wow!

Yesterday, stocks staged an advance predicated by Treasury Secretary Mnuchin comments that a tax reform proposal will be made shortly. The comments had a large impact on the small capitalized issues. The Russell 2000 was precariously on support near the lows of the year. This small cap index is now bumping against the downtrend line off of the early March highs.

Last week I had referenced a Bloomberg article stating that short futures contracts on the Russell 2000 had grown the most since 2008.

I ask how much of the change is the result of algorithmic trading? What happens if ETFs enter the fray, the result of tax and regulatory reform that would greatly benefit Main Street America?

Based upon yesterday’s market action, Bill de Blasio is right. The more you tax an item, the less demand there is for that item. And vice versa.

Last night the foreign markets were up. London was up 0.10%, Paris was down 0.12% and Frankfurt was up 0.4`5. China was up 0.03%, Japan was up 1.03% and Hang Sang was down 0.06%.

The Dow should open flat ahead of Sunday’s vote in France. Earnings are continuing to paint a mixed picture on the health of the economy. The 10-year is unchanged at 2.24%.


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