ELAM: Let’s kill the golden goose

Stocks dropped on news reports that President Biden is considering nearly doubling the capital gains taxes on the wealthy.

Gains Tax Talk Hits Stocks, WSJ today

The tale has given rise to the idiom ‘killing the goose that lays the golden eggs’, which refers to the short-sighted destruction of a valuable resource, or to an unprofitable action motivated by greed.

The Goose That Laid the Golden Eggs.

Congress sees a group making what it considers exorbitant profits. It quickly passes legislation to confiscate those profits, of course knowing better how to spend other people’s money. This invariably happens near the end of mania in some asset category. And then, surprise, the legislation never collects the taxes that were envisioned.

Okay what mania does that paragraph describe? It could be the current record stock market but instead I am thinking of the 1980 Windfall Profit Tax Act. In fact, the illusory windfall was due to the oil companies literally selling all their inventory during the Second Embargo. The oldest inventory was at the very oldest prices, known as LIFO treatment, below the first embargo prices of 1972.

The effect on the Permian Basin was near immediate. Oil prices peaked in 1981. Positive social mood caused the First National Bank of Midland to block off Wall Street for a year to add ten stories to its downtown office building. Quietly Exxon and Amoco both closed their large office buildings in Andrews. By 1986 the oil price had fallen from the mid 30s to $12. Real Estate prices collapsed along with the Savings and Loan Industry. First National of Midland went bust and was taken over by NCNB, later dubbed No Cash for Nobody. But that is the way manias usually end.

This tax grab is another historic indicator that the market rally is on borrowed time. We still expect a top this summer.

The number of new stock price highs takes nine columns while new lows account for just one. A front page article describes how three out of work photographers attempted to make a fortune trading stocks online. Again the social mood clues abound.

Business is recovering air travel is resuming, and positive economic predictions abound. One result of the pandemic has been the work from home dynamic now adopted by many businesses. The result is an explosion in For Sale, For Lease signs for commercial office property. The same thing is happening there that occurred with enclosed shopping malls.

Crude oil remains above $60. As demand increases, WTIC may well hit $70 + this summer.