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Speaker 2: Flex Deal Paul Sweeney live here in our Bloomberg Director
Speaker 2: Brokers Studio streaming live on YouTube as well. To check
Speaker 2: us out there. Hey, let's have some fun, kids, Let's
Speaker 2: talk tax policy. Gary Wilson, director of Policy analysis at
Speaker 2: the Tax Foundation. He's zooming in from Fadeville, Arkansas. All right,
Speaker 2: here's one of my lasting images from the early days
Speaker 2: of the lockdown in COVID is the people down in
Speaker 2: the Ozarks on the lakes, partying their brains out, Like none.
Speaker 3: Of this social distancing stuff.
Speaker 2: You can't tell those people not to have a good
Speaker 2: time in the summer done in the Ozarks. They're out
Speaker 2: there to have a good time. And that's where our
Speaker 2: next guest is, Hey, Garrett, talk to us about what's
Speaker 2: happening down in DC. I mean, it seems like this
Speaker 2: saw tax thing, which is really important to metro New York.
Speaker 2: I'm not so sure about Faydeville, Arkansas, but it's really
Speaker 2: important for us here.
Speaker 3: That seems to be a real sticking point isn't that's right.
Speaker 4: The leadership in the House is trying to get together
Speaker 4: the final votes and what is a very narrow margin
Speaker 4: in that chamber amongst Republicans. And the big sticking point
Speaker 4: right now is the fate of the state local tax deduction. Currently,
Speaker 4: it's capped at ten thousand dollars. You can write off
Speaker 4: your state local tax payments against your federal taxes spent
Speaker 4: that way since twenty eighteen and expires at the end
Speaker 4: of the year with the rest of the twenty seventeen
Speaker 4: tax law. But there's been a lot of intense negotiation
Speaker 4: about where to put that cap, going anywhere from making
Speaker 4: the current cap, making it permanent, extending it, or making
Speaker 4: it more generous upwards of we're now hearing a forty
Speaker 4: thousand dollars cap, maybe putting in income limits. The big
Speaker 4: sticking point is they haven't come to a compromise design
Speaker 4: that everyone can agree on that fits with the revenue
Speaker 4: needs for the rest of the package and the salt
Speaker 4: folks can live with to deliver to their constituents back
Speaker 4: at home.
Speaker 5: What do you think realistically winds up getting done? Since
Speaker 5: everyone loves to also hate cell caps, so at.
Speaker 4: This point it seems like it's just a matter of
Speaker 4: give and take on the exact numbers here. It seems
Speaker 4: like there will be definitely an increase in the cap,
Speaker 4: but a continuation of a cap, be it thirty thousand
Speaker 4: or forty thousand or something north of there. It does
Speaker 4: look like leadership wants to have some sort of additional
Speaker 4: income limit that.
Speaker 3: Would be new.
Speaker 4: So if you are very high earning, say north of
Speaker 4: five hundred thousand dollars, there may be additional limits that
Speaker 4: are new there that could also limit the benefit of
Speaker 4: this expansion. The other thing that's sort of fun under
Speaker 4: the radar is there is some partial new limits for
Speaker 4: those folks who are working around the caps using their
Speaker 4: businesses through pass through firms. That's been a common tactic,
Speaker 4: and this bill would partially remove that for certain types
Speaker 4: of business income. So that's another thing for folks to
Speaker 4: watch out for if they're planning what this might do
Speaker 4: for their tax bill in the coming years.
Speaker 2: Hey, Garrett, when prisident Trump's on the campaign trailer, who's
Speaker 2: talking about eliminating or lowering limiting the taxes on tips,
Speaker 2: for example, overtime, that kind of stuff that works well
Speaker 2: on a campaign trail.
Speaker 3: Is that something that can get done in this package.
Speaker 4: So there are several sort of I would say trial
Speaker 4: balloons here that are temporary over the next four years
Speaker 4: that would deliver on a deduction for tipped income, for
Speaker 4: overtime income. There's a special four thousand dollars deduction for
Speaker 4: seniors in here, and even a deduction for a car
Speaker 4: loan interest for those payments for folks who are itemizing
Speaker 4: and non itemizing alike, so you don't have to itemize
Speaker 4: to get it. The big headline there is those are
Speaker 4: fairly open ended deductions for most taxpayers who are not
Speaker 4: very high earners, but they do expire at the end
Speaker 4: of the in the next four years, and so that
Speaker 4: will line up with potentially another debate about whether or
Speaker 4: not those are extended. Only to think about that is, well,
Speaker 4: have to see if they're popular, right, if people find
Speaker 4: them helpful. There's of course also the revenue costs. They
Speaker 4: add up to a few hundred billion over ten so
Speaker 4: they would need to figure out how to extend those
Speaker 4: moving forward. What that means is there may be another
Speaker 4: tax fight the end of Trump's term heading out of
Speaker 4: twenty twenty nine.
Speaker 3: If it goes forward, that.
Speaker 5: As an energy person, I'm obviously really interested in what
Speaker 5: happens with the tax cuts in the Inflation Reduction Act.
Speaker 5: What do you think and then the credit phase outs? Basically,
Speaker 5: do you think that those stick where they are right
Speaker 5: now or does it get more severe for some of
Speaker 5: the alternative energy players.
Speaker 1: Yeah.
Speaker 4: For the IRA credits, it's really been a balancing act,
Speaker 4: both at the committee level and amongst leadership, right to
Speaker 4: try to balance the concerns of members who are more
Speaker 4: sympathetic to those credits, amongst Republicans who may have a
Speaker 4: lot of projects in their districts worried about the disruption
Speaker 4: if they're phased out too aggressively, and other folks who
Speaker 4: are worried about the fiscal cost of these credits and
Speaker 4: want to see them phased out in a more aggressive timetable.
Speaker 4: And so right now we're seeing in the current package
Speaker 4: a phase out over the next five years through the
Speaker 4: early twenty thirties for projects that have not been underway
Speaker 4: at that point, but there's been a negotiation right now
Speaker 4: to move that up as soon as twenty twenty seven.
Speaker 4: I think that will be the question is to what
Speaker 4: extent do folks who are more on the sympathetic side.
Speaker 4: Are they okay with that right? Will that be too
Speaker 4: disruptive for projects that are currently being penciled out within
Speaker 4: their districts? And of course, the other thing looming over
Speaker 4: the IRA credits. I think that's we're saying is even
Speaker 4: if it does pass the House, the Senate may have
Speaker 4: very different ambitions on this. That's sure of the general package,
Speaker 4: but specifically with the IRA credits, we may see something
Speaker 4: very different, much less aggressive in there, but that comes
Speaker 4: with its own trade off in terms of the revenue cost.
Speaker 4: It will bring in five hundred billion over ten years
Speaker 4: according to the Joint Committee, and in additional revenue to
Speaker 4: offset other parts of the tax cuts, so they don't
Speaker 4: have a lot of wiggle room there. But we'll see
Speaker 4: if the Senate has different ideas.
Speaker 2: Hey, Garrett, i spent my whole career on Wall Street,
Speaker 2: so I'm all about making money minimizing taxes. But even
Speaker 2: I have to admit the favorable tax treatment that carried
Speaker 2: interest receives is just extraordinary. Can you give us how
Speaker 2: that came about? And is there any pressure to change that?
Speaker 2: Because it's kind of tough to see some of these
Speaker 2: private equity guys, you know, with effective tax rates in
Speaker 2: the single digits are the low teens, when everybody else
Speaker 2: is paying forty to fifty percent.
Speaker 4: Yeah, carried interest has come up time and time again
Speaker 4: in all these major tax battles. Of course, we had
Speaker 4: a small change on carried interest treatment in twenty seventeen,
Speaker 4: basically lengthening the amount of time it was required to
Speaker 4: hold a position to qualify for that carried interest, which
Speaker 4: is subject to the lower qualified capital Gains and dividends
Speaker 4: rate upwards of twenty or twenty three point eight percent.
Speaker 4: And there have been efforts to try to tax that
Speaker 4: income as ordinary income. Right with that, of course, I
Speaker 4: think two things. One, it isn't a major revenue raiser
Speaker 4: either way. So if you were to tax at ordinary rates,
Speaker 4: it only raises maybe about twenty billion over ten, which
Speaker 4: is a lot of money, but in the big picture,
Speaker 4: is not a lot when you're talking about trillions. So
Speaker 4: the major sort of policy debate is on, as you're
Speaker 4: hinting at, right, the fairness question of what is the
Speaker 4: appropriate tax treatment of that type of income.
Speaker 3: On the one hand, if it's just.
Speaker 4: Basically like wages, right, like labor income, that would be
Speaker 4: an argument in favor of taxing and ordinary rates. Folks
Speaker 4: who are more defensive of the current treatment would say
Speaker 4: it's more like capital gains income. It's more like investment income,
Speaker 4: and we don't want to penalize that kind of investment
Speaker 4: in the US.
Speaker 3: But the big.
Speaker 4: Trend, as you mentioned earlier, is it's been an uphill
Speaker 4: battle to make that treatment stick.
Speaker 3: We did see the.
Speaker 4: President express some interest in that change earlier, but that's
Speaker 4: been dropped out of the package, along with other things
Speaker 4: like raising the top rate on higher earners.
Speaker 3: These are also issues.
Speaker 4: That could come back back up again in the Senate
Speaker 4: potentially if they're looking at how to make the revenue
Speaker 4: numbers work.
Speaker 6: YEP, sounds super easy, not at all complicated.
Speaker 5: Garrett, Thanks a lot, Garrett Watson, Director of Policy Analysts
Speaker 5: Analysis at the Tax Foundation. We appreciate that in the
Speaker 5: latest news that it looks like a speaker at Mike
Speaker 5: Johnson and Security an agreement on a forty thousand dollars
Speaker 5: assault cap increase. We of course keep you updated on
Speaker 5: all the latest.
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Speaker 5: Alex Steeler, paulus, when you've done, Tucker.
Speaker 6: This is from BRIC Intelligence Radio.
Speaker 5: Karen Manna is investment director and portfolio manager at feted Hermes,
Speaker 5: and she joins us, now take us out of the
Speaker 5: blind spot conversation. So when I'm looking at the thirty
Speaker 5: year yield five percent, what is the correct term premium
Speaker 5: premia for the bomb market right now?
Speaker 7: Good morning Alex, Good morning Paul, Thanks for having me
Speaker 7: on again.
Speaker 3: Isn't that really the.
Speaker 7: Question of this era, the return of term premium and
Speaker 7: what should what level should we lend out to the
Speaker 7: US government, particularly in tens and thirties. I think the
Speaker 7: answer is far higher and steeper than we had grown
Speaker 7: accustomed to in the decade after the Great Financial Crisis.
Speaker 7: So setting that level is what the market is attuned
Speaker 7: to this week as we swing to the ring of teriff,
Speaker 7: sorry not tariff policy, but move on to extension of
Speaker 7: current tax policy, and how do we get there and
Speaker 7: get agreement on that? So same some resistance to directly
Speaker 7: answer your question around this five ish mark, but do
Speaker 7: the headlines steer us north of there, it's possible.
Speaker 2: So I mean, is it fair to look at a
Speaker 2: two year at four percent, at thirty year at five percent?
Speaker 2: Nice round numbers. One hundred basis points of premium there
Speaker 2: give us just some historic context.
Speaker 8: Is that a lot?
Speaker 2: Not a lot?
Speaker 7: It's getting steeper, Paul. I typically would look at FED
Speaker 7: funds to ten in my research in evaluating that, and
Speaker 7: you would usually see that on average over the period
Speaker 7: very long period of closer to one hundred and fifty
Speaker 7: basis points. We've been teetering around that level and pulling back,
Speaker 7: but one hundred and fifty basis points is about there
Speaker 7: bed funds to the ten year, so a little bit
Speaker 7: of room to go perhaps usually that metric, But that's
Speaker 7: something that we've been talking an awful lot about here
Speaker 7: at our shop. We do invest, and we have a
Speaker 7: separate allocation or positioning around that yield curve, and we
Speaker 7: have re entered a steepener and have been slowly wading
Speaker 7: into that trade in a diversified way, looking at twos
Speaker 7: and tens and fives and thirties to try to capture
Speaker 7: that movement in momentum in the market. Interestingly enough, that
Speaker 7: steepening had faded around late January and into February, but
Speaker 7: it seems to be back here with a renewed spirit
Speaker 7: and perhaps some energy around it. So what we ultimately
Speaker 7: could see happen is as the economy slows and if
Speaker 7: the data cooperates again, it's that tension between the hard
Speaker 7: data published on jobs reports and inflation and all of
Speaker 7: those sentiment surveys and indicators. They're moving in different directions.
Speaker 7: One is staying pretty firm or reasonable, while the other
Speaker 7: shows continued angst. But what we could see ultimately happen
Speaker 7: the two year goes down, but the ten and the
Speaker 7: thirty year don't cooperate and they continue to either hold
Speaker 7: near current levels or actually push up slately higher.
Speaker 5: What should the relationship be between your yield thesis and
Speaker 5: the equity market?
Speaker 7: Well, that gets tricky too, and not to always talk
Speaker 7: my fixed income book, but it's who I am, But
Speaker 7: I think you do start to struggle with financing growth
Speaker 7: equities as the tenure eclipses four seventy five approaches five,
Speaker 7: and if there's any sort of attitude or feel that
Speaker 7: the tenure could stay elevated above that five percent mark,
Speaker 7: I think you could see equities roll over for that
Speaker 7: financing cost reason, and then folks take a different look
Speaker 7: at fixed income more apportion to the income because when
Speaker 7: you're yield exceeds your duration, you do have some protection
Speaker 7: from volatile around interest rates. So it's bringing that conversation
Speaker 7: and fixed income back to the income component, but also
Speaker 7: recognizing that the tenure is largely the broad strokes base
Speaker 7: or funding costs for many elements of not just private
Speaker 7: finance or the public markets that we watch, but also
Speaker 7: public markets aka ammunis.
Speaker 2: Credit munimunis. Let's talk about the muni market because we
Speaker 2: do love the meuni market. See no, it's not Friday,
Speaker 2: we'll talk munis. How do you what's the exposure you
Speaker 2: want to have in the municipal bond market.
Speaker 7: Well, of course that's up to the individual, their financial advisor,
Speaker 7: their portfolio needs. But if your need that tax advantage
Speaker 7: to investing, I would be using it to the full
Speaker 7: extent that's reasonable within your portfolio construct. Communis here are
Speaker 7: priced attractively. The credit quality is attractive, its sound, nothing
Speaker 7: is without its risk, and there are definitely corners of
Speaker 7: the muni market that are more attractive than others. Active
Speaker 7: managers have feeled back those exposures. They're always assessing credit risk,
Speaker 7: They're always looking at valuation within the construct of risk
Speaker 7: and exposure and managing those and trimming and adding as appropriate.
Speaker 7: But we're very bullish on the media market right now,
Speaker 7: particularly you had to trade off because of headline risk
Speaker 7: surrounding perhaps you know, feeding the budget by eliminating the
Speaker 7: tax exemption that has faded somewhat but created I think
Speaker 7: a real buying opportunity.
Speaker 5: All right, Karen, thanks lot, We really appreciate it. Karen
Speaker 5: mana investment director and portfolio manager at Federated Hermes.
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 5: So I can't believe what just happened. I know, I'm
Speaker 5: sitting in the radio studio and in walks and Mike mcgloone,
Speaker 5: think Miami Mike. Anyway, Miami Mike mcgloone.
Speaker 3: So we to see a.
Speaker 2: Season as he kind of follows like when the snowbirds
Speaker 2: go home, he feels the need to kind of come
Speaker 2: back a little bit.
Speaker 3: I think it's just a little bit of that genetics show.
Speaker 6: I see. Are they told him to comfort it?
Speaker 8: Yes? Yeah?
Speaker 5: Or that a junior or Michael McGlone is Boomergan Intelligence
Speaker 5: Senior commodity strategist. It's so great to see you in person.
Speaker 5: Bitcoin hitting a round the record. Is Bitcoin moving like
Speaker 5: gold as like a protection against what we're seeing in
Speaker 5: the bond market.
Speaker 6: Is that we're seeing right now.
Speaker 9: I think that's part of it. It's this year, it's unique.
Speaker 9: It's actually following gold because we know gold made a
Speaker 9: new high a few months ago and bitcoin's catching up today.
Speaker 9: And all the crypto people say, oh, Bitcoin's going to outperform.
Speaker 9: But I think the key risk for bitcoin is I
Speaker 9: like to put him in the same category because they
Speaker 9: basically are just the ones much more speculative and excessive
Speaker 9: like bitcoin, and the other one's a store value. But
Speaker 9: it's set ratio the ounces of gold per one bitcoin
Speaker 9: about thirty three right now. That's the same as twenty twenty.
Speaker 9: So this rock is outperforming this hot performing crypto asset,
Speaker 9: which is I am a bit concerned about.
Speaker 8: The key thing is so I like to point out big.
Speaker 9: Coin will do fine, and it'll do fine versus gold
Speaker 9: as long as the stock market's going up. And we
Speaker 9: proved in Q one that if the stock market's going down,
Speaker 9: bitcoins one of the first things people sell.
Speaker 2: So all right, let's go to gold here, because I'm
Speaker 2: going to just front run Alex a little bit here.
Speaker 2: I mean, I don't like what I'm hearing out of Israel,
Speaker 2: out of a Ran. Potentially there's be some more stuff
Speaker 2: going on over there.
Speaker 3: Will not higher.
Speaker 9: Yes, Well, here's the problem with oil. Last year's low
Speaker 9: is sixty five. It's looking up at that level. It's
Speaker 9: a bear market, yep. And just the latest data from
Speaker 9: even you know, we have access to supply increasing inventories.
Speaker 9: The driving season is just getting started. This weekend, you
Speaker 9: had gasoline demands somewhat declining. The whole picture for crude
Speaker 9: oil is bad. It needs some kind of supply shock
Speaker 9: to really get it to go.
Speaker 2: Higher, and a supply shock of the dudes in you know,
Speaker 2: the basins and the fracking rock.
Speaker 9: Every all over the place. The US has put not
Speaker 9: a lot of oil exactly. Finally, Paul, you're heading towards
Speaker 9: the low price cure. We're hearing stories now the declining
Speaker 9: potential production from the Permian is, which is way you
Speaker 9: know in alk space. The key thing is it's taking
Speaker 9: low prices. That's what it ticularly takes, and those the
Speaker 9: big spike in prices. We got to the peak in
Speaker 9: two twenty twenty two just brought on that access supply.
Speaker 8: Now we're getting to that scale.
Speaker 9: But typically you have to get below the US cost
Speaker 9: of production, which is between fifteen and fifty five dollars
Speaker 9: a barrow to really shut that off in curtail, and
Speaker 9: that's what we've done for the last twenty years.
Speaker 8: It's around forty dollars of barrow. So I stick with
Speaker 8: that call.
Speaker 9: And the key thing for crudeil right now is it's
Speaker 9: the macro increasing demand and excess supply out of the
Speaker 9: US and decreasing demand from China, and it's the US
Speaker 9: stock market has to stay point. If we just roll
Speaker 9: over a little bit, that takes crude oil down the
Speaker 9: forty bis.
Speaker 5: Which brings me to the question that John Tucker smartly
Speaker 5: asked with WTI at sixty two. But then the energy
Speaker 5: stocks getting hammered, and I realized it's just.
Speaker 6: Propose because a lot of that says Phillip sixty six.
Speaker 5: I'm wondering why that discrepancy and if it's if it's
Speaker 5: just lack of confidence in sixty two.
Speaker 8: Oil, Yeah, I think that's what it is.
Speaker 9: Well, the good news is we're starting to refill the
Speaker 9: spr strategic Patolarum music.
Speaker 6: So there's some kind of support.
Speaker 8: Yes, in the market that's happen.
Speaker 3: Buy and who do they buy from?
Speaker 9: But that's also a good better question for people digging
Speaker 9: in the market closer than I do.
Speaker 6: Do youmever whoever they want? I mean, it depends on
Speaker 6: what they need.
Speaker 3: To fill the US government.
Speaker 2: I call up Exon and say I want to buy
Speaker 2: some of your oil that's sitting there in the.
Speaker 5: I mean, it just also depends what oil you want.
Speaker 5: So if you want like heavier oil, which is what
Speaker 5: a lot of the refiners here use, you can't really
Speaker 5: call up anyone from the US, You're going to have
Speaker 5: to call overseas operations. That could still be a chep
Speaker 5: runner Exxon, but it needs that the oil needs.
Speaker 9: But when you talk about producers, a key thing I
Speaker 9: look at is the future's curve, and it's very flat.
Speaker 9: Means that these producers have been selling out on the
Speaker 9: future's curve. For years it's called normal backwardation, and right
Speaker 9: now it's flat across the curve around sixty, which is
Speaker 9: pretty rare. I think they're they're hoping for some kind
Speaker 9: of reasons, some kind of spike so they can sell
Speaker 9: forward and add to their production. And right now, just
Speaker 9: every time we get these little bounces, you see the furve,
Speaker 9: the curve come back a little bit, you see more
Speaker 9: selling out in the curve.
Speaker 2: So it's May twenty first you're in Miami. Do you
Speaker 2: notice people going back north? You can get the reservation.
Speaker 2: Maybe you couldn't get in the restaurant before.
Speaker 9: Yeah, well it's as soon as the tulips start popping
Speaker 9: up in New York, they're out of there.
Speaker 8: In Easter weekend, it's a big weekend.
Speaker 2: Is that the one?
Speaker 9: Whit did?
Speaker 8: They come down?
Speaker 9: Typically by November Christmas typically they're coming down.
Speaker 8: Yeah, definitely by December.
Speaker 3: And then it's just madhouse.
Speaker 8: It's madhouse. But I don't really.
Speaker 9: My wife and I never have a problem getting reservations
Speaker 9: because we go early.
Speaker 8: You know, I usually early there.
Speaker 7: It is.
Speaker 3: I usually in bed by eight or nine because everybody
Speaker 3: else in Florida go to bed.
Speaker 9: Well, guess when they're down there, they stay late, you know,
Speaker 9: usually it's a later crowd.
Speaker 2: All right, So the Miami still awesome, right, but it's
Speaker 2: a power of the tacks.
Speaker 8: You can't stop it. Zero tax, zero tex.
Speaker 3: Is it still considered? Are they still trying to attract.
Speaker 2: Bitcoin and crypto because we've been talking about that as
Speaker 2: much as we used to crypto in general.
Speaker 9: There is definitely something that that's the key thing we
Speaker 9: have to open Today bigcoins made a record high. The
Speaker 9: thing that I've really noticed is that money goes to
Speaker 9: places where I don't live, right, more than you know,
Speaker 9: a common commoner.
Speaker 8: Yep. Yeah, But it's just the thing. It's it's a
Speaker 8: flow from all wealth is coming there. And the key
Speaker 8: thing here's a quick like I like to end with.
Speaker 9: They say Miami's the money laundering capital of South America?
Speaker 8: Well, what is New York for the whole world?
Speaker 2: Right?
Speaker 5: It hurts Mike Hurts mil in Studio Bloomberg Intelligence of
Speaker 5: Commodity Strategy Senior Commodity Strategies.
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