Tuesday, December 19, 2017

Factset: What a Cut on Repatriated Earnings Could Mean


If Trump's new tax policy on US corporations can impose an immediate tax levy of 20% on these $2.5T of earnings retained offshore, then that would create a short term tax windfall of $500B.


One of the best examples of this phenomenon is Apple (AAPL-US), a company that (according to FactSet’s GeoRev data) currently derives over 60% of its revenue outside the U.S. As of the company’s latest annual report (data for September 30, 2017), Apple had accumulated $268.9 billion in cash and marketable securities on its balance sheet. Of that, $252.8 billion is strategically stashed offshore, representing billions in tax savings. As seen in the chart below, as foreign sales have increased, so has the cash balance held by Apple. 
Apple is not alone. Current estimates put the aggregate balance of cash held overseas by U.S. companies, with the purpose of tax avoidance, at $2.5 trillion.


This coupled with a current accounting of near $300B of "extraordinary measures" available to Treasury operating at "debt ceiling!" might provide Trump with an $800B war chest (effectively) in his TGA.

If the ongoing fiscal deficit fell to perhaps $30B/month due to removal of the current incentive for multinationals to save/hoard USD offshore in order to avoid taxes; Trump could perhaps operate for 26 months without Congress having to raise the debt ceiling.








19 comments:

Michael Norman said...

What will that mean for the banks, which will be gorged with unprecedented reserve balances? Nothing but Fed fund loans and RRP's to non-banks? Earnings prospects would be grim under that scenario.

Matt Franko said...

I dont have the details on how fast these current offshore balances become taxable...

If it is all at once or immediate then things might start to shift around pretty fast in 2018...

We have to watch the effects it has on risk free asset levels at the banks if these types of assets (reserves and/or govt securities) are forced to increase on bank balance sheets very quickly then we may be looking at a repeat of 2008 redux ie a potential GFC 2...

OTOH there is another reform going thru where they might remove risk free assets from having to be covered by bank capital at all... but that seems to have taken a back seat to the tax reform for now... if they put that bank capital reform thru then all of this concern can pretty much go away...

if they put it on the back burner while they take a long time to back slap each other over the tax thing we might be F-ed again...



Ryan Harris said...
This comment has been removed by the author.
Noah Way said...

Can some explain this in English?

Bigger reserves mean less risk, one would assume. And less profit because less money is in circulation? I guess if profit is all that matters ...

Matt Franko said...

Banks (Depository institutions) have to maintain regulatory capital against their assets including reserves... for now...

So if on day one there are zero reserves and by day 60 the Fed established $1T of new reserves then banks have to raise an additional $100B of capital to cover it or the banks are considered insolvent... ie they have insufficient capital compared to assets...

So in late 2008 the Fed added like $1T of reserves (QE1) in a short period of time and made most of the banks insolvent ...

So we have to watch to make sure they don’t do something similar now with all of these big changes in tax policy and we’re at the debt ceiling , etc ... lots of movement in policy and doesn’t seem well coordinated as usual with these people... could lead to another crash if they are not careful...

Matt Franko said...

Any drastic change in govt policy that quickly alters asset composition (meaningfully) of the depository institutions is dangerous...

sths said...

Matt which caused the bank failures of 08, the fall in value of mortgage back securities or the Fed adding massive reserve to the banking system.

Or are you saying, the fall in mortgage securities caused the fed to add the reserves thinking it will alleviate the situation but only made it a lot worse.

Joe said...

Aren't reserves and capital both assets of a bank? Didnt warren mosler says qe was an asset swap, it swapped bonds for reserves.

Matt Franko said...

The add of reserves cause the price/value of the other assets (MBS) to come down... as capital remains fixed...

If the non-risk assets are increased then the risk assets have to be marked down and all additional credit has to stop... this is why Lehman even though they had US govt securities to put up as collateral, could not get a loan from anyone and had to claim bankruptcy in late 2008 when the Fed started adding reserves at a record rate...

Leverage Ratio is Regulatory Capital/Total Assets

Total Assets = Risk Assets + Non-risk Assets

LR is maintained at 0.1

0.1 = ( C / Ar + Anr )

If Anr is increased by the Fed, then Ar has to decrease as C is constant over the relevant time interval and LR is ofc constant at 0.1

So what we have to look for today is some sort of similar result due to the radical changes taking place in tax policy and also we are at the debt ceiling and as MMT 101 teaches Treasury issuance is a 'reserve drain' so Treasury cannot issue any additional securities to 'drain' reserves...

Taxes will go into the TGA where there is no reserve effect BUT as govt starts to spend those balances out of the TGA at a rate in excess of taxes in, reserves will start to
build at debt ceiling as Treasury cannot issue any bonds... if this happens sloooowwwwly then more muddle thru probably but if it happens quickly then could be GFC2 redux...


Matt Franko said...

"Didnt warren mosler says qe was an asset swap" .... maybe between the govt and non-govt sectors...

Not at the member institutions... at the members it was purely an asset (non-risk asset) add... they have to mark down and/or reduce risk assets in response to this non-risk asset add... in order to maintain the LR at 0.1...

Matt Franko said...

"Aren't reserves and capital both assets of a bank?"

Assets on the left side...

Liabilities and Captial on the right side...

Six said...

Didn’t the Fed exchange reserves for loans, treasury securities and other assets? If not, what else did they exchange them for? Or did they just hand them out, ala Oprah?

Matt Franko said...

At t=0, if reserves 0, bank assets = 10, non-bank holdings of USTs = 10

then at t=1 Fed decides to add 10 of reserves “for banks to lend out!” by buying 10 of USTs

Then at t>1, bank assets = 20, nonbank holdings of USTs =0, Fed holdings of USTs = 10, and nonbank deposits = 10

Iow bank assets go up 10... and banks need additional 1 of capital to cover the additional 10 of reserve assets... if they can’t raise the 1 of capital then the previous 10 of assets gets marked down by 10...

sths said...

Blogger Matt Franko said...

"Didnt warren mosler says qe was an asset swap" .... maybe between the govt and non-govt sectors...

Not at the member institutions... at the members it was purely an asset (non-risk asset) add... they have to mark down and/or reduce risk assets in response to this non-risk asset add... in order to maintain the LR at 0.1...


Could you explain this a bit more? Are you saying the Fed didn't take any securities off the member institutions in exchange for the additional reserves?

Matt Franko said...

The Fed buys the USTs and MBS from the Dealers just like anybody else... they don’t go to the depository institutions to buy them...

The newly created reserves are assets to the depository institutions... so they “have more reserves to lend out!”... its the whole “loanable funds!” BS...

Here is the H.8 you can just go back and look at the line items back in 08:

https://www.federalreserve.gov/releases/h8/current/

Line Item 34 is the reserve assets...

Six said...

Primary Dealers

Bank of Nova Scotia, New York Agency
BMO Capital Markets Corp.
BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse AG, New York Branch
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman Sachs & Co. LLC
HSBC Securities (USA) Inc.
Jefferies LLC
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Mizuho Securities USA LLC
Morgan Stanley & Co. LLC
Nomura Securities International, Inc.
RBC Capital Markets, LLC
RBS Securities Inc.
Societe Generale, New York Branch
TD Securities (USA) LLC
UBS Securities LLC.
Wells Fargo Securities, LLC

Matt Franko said...

Bank Holdings of Securities was at $2.5T in Sept 2008 and reserve assets were 300B:

https://www.federalreserve.gov/releases/h8/20080905/


Then, 1 year later they had $2.34T in Securities and $1T in Reserves:

https://www.federalreserve.gov/releases/h8/20090925/


So the Fed obviously didnt buy securities from the banks with reserves over that time period....

Joe said...

Thanks Matt. I'm gonna have to think over all that for a bit.

stone said...

I thought what happens is say an insurance company sells some UST, the primary dealer buys those UST simply to immediately sell on to the Fed QE program. So the primary dealers are just a conduit between the large scale holders of UST and the Fed QE purchases.