A Less Friendly IRS
Inflation is receding, earnings season is just about over, and there isn’t a Federal Reserve meeting for another six weeks. With this as the background, the market did well this week. In fact, it has done well for the past month, gaining nicely off the bottom put in mid-June. That’s not to say we’re out of the woods, nor to say returns have turned positive for the year. I’m simply suggesting that in the absence of inflammatory headline news, investors are generally a hopeful bunch. After all, we wouldn’t put our money into the stock market if we thought the world was coming to an end and companies could no longer grow earnings or make a profit. As shareholders, we all believe economic growth trends are positive over time, with the occasional hiccup (as we just experienced).
Let’s start with the most important piece of economic data we’re received in many months. The Consumer Price Index (CPI) figure released on Wednesday shows inflation having peaked in June and falling in July. Inflation grew by 8.5% y/y in July, down from 9.1% prior. Is this great news? Well, not really but given where we were headed, it suggests inflation has now started to moderate and should, everything else being equal, continue in this direction for the remainder of the year. This number also suggests something else to many analysts. It suggests the Federal Reserve may slow its pace of interest rate hikes, beginning in September. Polls now suggest a 60% probability of a 50bp rate hike in September, down from 75bp previously. To a large extent, this is what is going to fuel the stock market between now and the next Fed meeting on September 27th. As long as this theme persists, the markets should remain happy.
In other news, the Inflation Reduction Act of 2022 is about to be passed by the House today, and quite possibly be signed into law as early as this weekend. Don’t let the title fool you. This bill has very little to do with the reduction of inflation but instead deals with climate change, and drug pricing first and foremost. While there are many assumptions regarding the revenue it will generate due to a new minimum corporate tax of 15%, it is likely the numbers will fall far short of expectations as is often the case. I’d be wary about claims of deficit reduction resulting from a surplus of revenue. After all, when was the last time the federal government had a surplus of money? However, it could mean lower prescription drugs (for those on Medicare), and a cap on out-of-pocket pharmaceutical expenses (again for those on Medicare). It will also help lower insulin to $35 per month (for those on Medicare). Are you seeing a theme here? Private insurance is not impacted by this bill. For most Americans, the Inflation Reduction Act will have little immediate impact. That’s not to say that it isn’t worth passing. Allowing Medicare to negotiate drug prices will help lower the expense to the federal government, and help slow the burgeoning cost of Medicare. Medicare is one of the fastest growing parts of our federal budget. It will also mean receiving a tax credit for buying an electric vehicle, assuming you have the means to buy one in the first place. Between the CHIPS Act that was passed last week and this new bill, spending will increase by approximately $1 trillion over the next ten years. Let’s hope this isn’t what we used to call pork barrel spending.
In closing, I turn to a provision in the Inflation Reduction Act that allocates $80 billion to the Internal Revenue Service (IRS). The goal is to hire 87,000 more agents of which at least 20,000 would be responsible for performing audits. No need to worry, I have been assured by the President that the middle-class is off limits and the increase in audits will solely be on the ultra-wealthy and corporations. More interesting, however, is a recent job posting for IRS criminal investigation special agents, who will be required to “carry a firearm and be willing to use deadly force, if necessary.” These special agents are both financial analysts and armed officers ready for a shootout. My initial inclination was to wonder why IRS agents need to be willing to use deadly force. However, don’t fret, these are not your typical auditors and you will likely never encounter one. That is unless you are really dangerous or on the most wanted list. If you’re interested, the job requirements include working a minimum 50-hour week, which may include irregular hours, and be on-call 24/7, including holidays and weekends. And all for a salary of $50,704 - $89,636 and 24 days off. Now you know.Bruce J. Mason, MBA