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October 14, 2008


In general, all cause-and-effect comments about economic conditions are unprovable judgments. There's no way to re-run the actual economy under various alternative scenarios. E.g., economists still disagree about whether FDR's actions shortened or lengthened the great depression.

Causes of stock price changes are even more difficult to pin down because investors are always trying to look forward. Deciding a cause involves reading the mind of investors as a classs.

With that caveat, I find Beck's comment (which some others are saying as well) to be plausible. Look at some figures:

Today, the federal income tax rates on dividends and on long-terms capital gains are both around 15%. Suppose a wealthy investor buys $1000 worth of a stock which is paying an annual dividend of $100. The investor keeps around $85 of the dividend (before state income tax). If he eventually sells the stock for $1100, he will keep about $85 of the $100 capital gain.

Now suppose those 15% rates are raised to 20%. Then our hypothetical investor would keep only $80 of the dividends and $80 of the capital gain. The stock becomes less valuable to investors in terms of its after-tax return, so it would sell at a lower price.

Finally, I think it's reasonable to guess that investors anticipating such tax rate increases would offer less for the stock right now.

Two points:

First, Glenn Beck has been predicting this economic crisis for quite a long time. He has been right on and before the crisis hit some people were writing him off as an idiot for predicting the things he did. Well, bottom line is he was right.

Second, Glenn Beck makes great points in the portion you quoted. Most of all, investors experience UNCERTAINTY. Uncertainty creates market environments in which investors are cautious about laying down hard money if they are uncertain how the government's role will play into that investment. That is one of the major points that string throughout his comments. Obama's rhetoric about his confusing and magical tax plans on individual and corporations (and capital gains, etc. etc.) leaves one wondering what in the world this big government politician is really going to do. He is also calling for regulation anywhere and everywhere. These send signals that the markets have to try and ingest and figure out in order to properly make investment decisions. So yes it can have effects on the market.

Glenn Beck, ugh....THAT ONE. Seems to me the market's discomfort with uncertainty will be eased somewhat just by getting the election overwith. It also seems to me that investors are hungry for regulation, and if they see evidence of it, their confidence in the market will increase, at least for THIS investor.

I cannot believe people would seriously attribute a 28% decline in the market to uncertainty over a 5% bump in the capital gains rate. It's just... they must lack all perspective. "Uncertainty" covers things like "will terrorists nuke Washington" and "will the federal government nationalize all the banks." Not "will the government make a tiny tweak to a tax rate in a tax code that has thousands of pages of changes every year."

People are wondering if we're on the verge of another Great Depression, and people are talking about the uncertainty from marginal tax rates? Lose the swami, Brendan. Get this guy for your mascot.

Noumenon - THANKS for the laugh. And for a great post.

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