Rabobank: Kamala Taxing Unrealized Gains Would Risk Mass Sale Of US Assets And The Rich Fleeing

By Michael Every of Rabobank

On the border, Nietzsche

“Cruisin' down the centre of a two-way street; Wonderin' who is really in the driver's seat
Minding my business, along comes big brother; Said, "Son, you better get on one side or the other"
(Whoa-ooh) I'm out on the border; (Whoa-ooh) I'm walkin' the line
Don't you tell me 'bout your law and order (whoa-ooh); I'm tryin’ to change this water to wine”

        - The Eagles, ‘On the Border’

“He who has a why to live for can bear almost any how.”         

- Nietzsche

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It’s not often The Eagles and Nietzsche both describe the political economy, but the US, and the world, are bordering on major change in their “why” and “how” as November’s election looms.

On the border gap, Vice-President Harris proposes amnesty for those who arrived in the US illegally, which would logically incentivize more arrivals failing a tough border approach(?) Trump proposes to deport all those illegal arrivals and take a tough border approach. On one hand, we’d have the larger, unofficial US labor force and the implication of a similar trend ahead. On the other, we’d have a potential drop in the labor force and much lower growth in it. Market economists and the Fed have very belatedly started to realize undocumented immigration might be impacting macro data; the point may be underlined by today’s BLS revision to past payrolls data, where 600,000 to 1m jobs may be cut from the total ‘created’ over a year. If so, the macro story shifts; and so does that of new jobs added net new labor force arrivals. Yet while “Rate cuts!” views of this are already clear, there’s little discussion of the very different assumptions of post-election border policy on wage growth, inflation, housing, budgets, and productivity, etc.

[ZH: and this is what we said back in January, long before "belatedly" everyone else did]

There’s a widening Harris-Trump policy gap on tax. Social media claim Harris backs President Biden’s plan for a 44.6% capital gains tax and a 25% tax on unrealized capital gains for those with more than $100m in assets. That would theoretically narrow the fiscal deficit and act against dangerous inequality; practically it may risk a mass sale of US assets and the move of capital and the rich outside it. Of course, that this tax hike was already raised by Biden yet didn’t pass speaks to the president proposing and Congress disposing: that means those guessing the presidential electoral outcome also need to guess the Senate and House outcomes. Meanwhile, Trump favors lower taxes: fiscal deficit, fiscal shmeficit. Which tax rates do your models assume?

There’s also a Harris-Trump gap on trade. The former may keep existing Biden tariffs and add to them strategically. The latter wants a 20% universal tariff and up to 100% on China. Our house view incorporates a lower universal tariff yet is already inflationary enough for our Fed watcher Philip Marey to call a floor in rate cuts at 4.50% in H1 2025. Imagine if we were to get 20% and 100%! While it’s impossible to find a neoclassical economist who backs tariffs (or the working paper a pro-tariff US think tank says proves they have a positive economic impact), it helps to look at things more broadly in what policy assumptions to make.

To illustrate, my colleague Ben Picton is now reading Factory Man, published in 2004, from which he just shared two key passages from when the US protagonist visits a Chinese furniture factory run by a Taiwanese businessman who had negotiated deals with European and South American counterparties, but had “never met anyone like Americans”, then a CCP official, He YunFeng:

“I have figured you guys out, the translator finally relayed.

Tell me.

If the price is right, you will do anything. We have never seen people before who are this greedy – or this naïve.

The Americans were not only knocking one another over in a stampede to import the cheapest furniture they could, but they were also ignoring the fact that they were jeopardizing their own factories back home by teaching their Asian competitors every nuance of the American furniture-making trade.

When we get on top, the man said, don’t expect us to be dumb enough to do for you what you’ve been dumb enough to do for us.”

“He YunFeng would be happy to provide Basset with the dressers at a fraction of what they cost to make, a feat Basset knew would not be possible without Chinese government subsidies. All Basset had to do in return, Hu YunFeng said, was close his own factories.”

The author, whose protagonist opts to keep his US factory, has their own bias, and the above sounds Trumpian. However, it was not Americans saying it, and they were doing so 20 years ago. How many readers were aware this, not ‘free trade comparative advantage’, was realpolitik two decades ago? More to the point, how many voters -- so politicians -- were/are now? In short, it’s more logical to expect further global protectionism and goods inflation (and onshoring or friendshoring), than endless structural goods deflation (and deindustrialisation) via China.

Even in China-friendly Thailand, the government may impose tariffs as it worries about the collapse of local industry due to Chinese imports, joining the US, EU, Canada, Mexico, Brazil, India and Indonesia in doing so. Meanwhile, the US and EU are set to impose high tariffs on solar panels made in Malaysia, Thailand, Vietnam, and Cambodia by Chinese firms circumventing existing 25% tariffs on Chinese production, which may rise to 50%. The pattern is clear: the US (and EU) tariffs China; China shifts its exports to others; they also tariff China; China shifts its production to Asia and Mexico; and the US (and EU) tariffs these new China proxies. Ultimately, most countries will either end up being in one trade zone or the other: a Trump election victory would massively accelerate this process.

And what does the non-US bloc look like? Hard to say – but it’s not going to be anything like the US bloc. Russian companies that import from China have started receiving their CNY payments back from Chinese banks who fear US sanctions for dealing with them, sometimes even after the goods have been delivered and cleared by customs. Obviously, this makes importing from China even harder for Russians. As such, while the West is not doing well in general, or the dollar this week as “Rate cuts!” fever builds, it’s clear that building a global dollar alternative is hard: if you can’t even do CNY-RUB trade now due to potential US sanctions, it’s back to bilateral (dollar-priced) barter, which isn’t efficient or scalable within a bloc. And for those who say gold as medium, that metal might hedge well vs. political inflation, but you can’t run sustained trade deficits with it, and both China and Russia (and most of the BRICS) want to run trade surpluses.

So, yes, we are stuck on the border: literally, in the US case, and much else; metaphorically in a US and global sense, where everything is shifting --don’t you tell me ‘bout your law and order-- and November’s election will determine the Nietzschean “why” we are living/acting, allowing us a new “how” to achieve it - I’m tryin’ to change this water to wine.