Harvesting Time

Published Nov 24, 2022, 5:59 PM

 Alexis Leondis joins with a guide to making the most of this year's investing losses. We also speak with Shuli Ren on Xi Jinping's efforts to have big tech help with common prosperity. Stephen Mihm discusses how export controls have intersected with US foreign policy and how current controls will impact the US and Chinese economies. And Jonathan Levin dissects what Fed speakers will aim to say to the market before the next batch of data and the December 14th FOMC decision. 

Welcome to Bloomberg Opinion. I'm Vonnie Quinn this week. The expert controls that are being invoked are quite confrontational, but if they're difficult to enforce, that could prove counterproductive on all sorts of levels. Stephen Mim on the current spate of US issued export controls and the effectiveness of these actions through history. Also, there won't be a bumpy road to find a new equilibrium between China's rich basically big tech billionaiers and powerful basically the government. Julie Ran on China's rich and China's powerful not necessarily one of the same. We'll also speak with Alexis Leander's as we had towards the final month of the calendar year, what you should consider before December thirty one in order to reduce your capital gains taxes, assuming you have any this year. First, to the markets. We got the minutes from the f O m c's latest meeting this week and plenty of FED speak as we waited out until December four teens. I asked Bloomberg Opinions Jonathan Levin if there is something the FED wants to communicate to the market in preparation for that meeting. Yeah, I think it could really tricky for them. I think obviously they're still trying to keep financial conditions relatively tight, and I think that their messaging efforts to do just that are getting away from them a little bit. Certainly, in the last few weeks we saw tip Space ten year really yields trading at just about one point four percent, so near the lowest since September. That's a pretty obvious indicator that maybe conditions are ceasing to be as tight as they would prefer. So, you know, you may see some of these FED officials, certainly Powell himself, do a little bit of classic jaw boning maybe try and get those real yields on the ten year up a little bit. But quite frankly, it's going to be difficult, because everybody knows that their data dependent. Here, they're going to take everything he says before the next CPI with a grain of salt and really just see what the data shows us. And this all comes back to this balancing act they're trying to do, where they're trying to slow down the pace but without letting financial conditions loosen too much. And and they're kind of doing an okay job at that end, they're in a difficult position where I'm not exactly sure what they could be doing better here, but conditions are getting a little bit looser than they have to be comfortable with. Would they go so far as to hint the possibility that they might change their minds back to seventy five basis points, You know it's possible, but I don't think that they can really go there. I think the risk there becomes potentially losing credibility, and I think, you know, the set is just going to have to get comfortable with the fact that this is going to be a game time decision. We're going to get two key pieces of data in the next few weeks. In some ways, I think average hourly earnings coming on December two might actually be the more important one because there are so many cross currents in this inflation data. But if you do get average hour early earnings coming in again month on month at something like zero point three, and you get another beat in cp I, it's really hard to see anything preventing them from going fifty. Here. At this next meeting, you say that, you know, maybe market pricing is getting away from the FED a little bit. Can you think of anything that the FED might do between now and December fourteens in order to reverse that trend. Yeah, I mean, the main thing that they can do is really just focus at this point on how long they intend to stay higher. I really think that there's very little to debate at this point in terms of the pace. Everybody knows that they're they're stepping down. We've talked about this a lot before on this program. They just have to take the velocity down so that they can find the right setting as they get to their ultimate destination point. And frankly, I don't even think that there's much room left for debate in terms of the destination point. When you hear the FED speakers out on the circuit, really, you know, the range of opinions is pretty firmly between four seven five and maybe five point two five, So buying some dramatic change, it really doesn't feel like there's a lot of wiggle room there. I think it really is just all about communicating if this is indeed their intention, the idea that they are going to stay higher for longer, maybe until the very very end of December. Maybe even come out and say something along the lines of even if we slip into a recession, provided it's not historically bad one, we're going to stay there. Apart from average hoarity earnings. What might put a spanner in the works in terms of CPI data or the job's reward. I mean, are you anticipating that will continue to see CPI coming down even though I know the last CPI reward you thought might be reflecting better conditions that are actually out there because of medical costs. Yeah, so we've had a couple of head fakes in the past, say twelve to eighteen months, there were two big ones, right, and after each of those they proved to be just that a head fake, right, and the month of months inflation bounced right back. We do know that this quirk in the data involving health insurance and the medical care abroad is going to be a repetitive feature here. So I do think there are a lot of reasons to suspect that there may be a bounce back after this extremely extremely good print last month, but it may still look reasonably good, And it's all going to come down to how good is reasonably good? Is everybody pretty much in agreement at this point, then, Jonathan, it sounds like you think that is the case, except for maybe the tips market, which might be just a little bit behind, or you know, what's going on with the tips market that there is an agreement. I mean, I think tips market is in agreement insofar as it's reflecting a loosening of financial conditions. You know, I think that that's really what's going on across the board. You know, this is where it gets sort of tricky, right, so at the short end of the curve, things remain reasonably tight, but people don't actually borrow at the short end of their or the mortgage is priced off of the ten year and j Paler himself actually talked about this after the last said meeting, And so that's where it gets tricky. And I'm not exactly sure what the FIT can do short of drastic steps like selling bonds off of the portfolio, which will clearly clearly spooks the market in ways that the FED is probably not prepared to do. So, you know, it's basically it's going to come down to what is the data show, and they may have to come up with a new playbook if financial conditions feel like they're getting much looser from here. Bloomberg Opinions Jonathan live In Stay tuned. Alexis Leonder's next with a reminder that your losses this year can be put to use, and later Shuli ran on China's offering to and from big tech. This is Bloomberg Opinion. It's time to start thinking about tax season. Yep, we might be four months out, but you want to start thinking about taking those elves now before December thirty one. Goodness knows, it's been an easy year to rack them up well. Bloomberg Opinions. Alexas Leander's has poured over the rules on loss harvesting. We asked her for a user's guide, and it turns out those losses may not be so painful after all. Alexis, it's a fascinating time to be in the markets. It's also a fascinating time to take losses because you might just end up with more cash than you think. Explain to us what you discovered when you went looking to see what it means for your taxes to quote unquote harvest losses. It's been a painful year for most stock investors. There's really no way around it. And you know, a twenty plunge in the Standard Ports five index is rough, but there is a small consulation prize. Given the downturn in the market, you do have one of the best opportunities in years to lower your tax bill. The US tax code allows you to do something called tax loss harvesting, and that's basically where investors sell off poor performing stocks and then you use those investment losses to offset any capital gains from selling better performing assets than those can be stocks or bonds, even a home or a business. And to take it a step further, if your losses exceed your gains, you can even deduct up to three thousand dollars against your taxable income. And if you have losses beyond three thousand dollars, any losses beyond that can be carried forward every year until death to offset gains in future years. Incredible. Now, there's something just a little bit counterintuitive about selling something that you still think might go up, right, So how do you get around the psychology of that, right, No, that's a great point. So basically what you do is sell those per performers, lock in those losses, don't just sit on paper losses, but then make sure you buy either a similar stock or a sound right away so you can keep your portfolio balance and stay invested if and when the market starts to turn around. Now, if you do that, you have to be really careful because the I R S has something called the wash sale rule. And basically what that is. It says, if you sell a security and you buy the same security are one that's considered quote unquote substantially identical thirty days before or after selling the stocking question, then it can't be considered an investment loss and you won't be able to use that loss against any of your capital gains. So you have to be very careful and either have a good accountant or read the rules very closely exactly exactly, and and keep in mind you won't get fined if you run a foul of the rules, but you won't be able to get the tax right off. So if the whole point of tax offs harvesting is to get that right off, then you obviously want to be careful and make sure you're following the Washdales rule. Now, I'm sure many professional investors know these rules backwards and have been using this to their advantage all their investing careers. But for people who may not be fully aware of it, is there a place they can go to figure out exactly how much they can harvest. Definitely, So a brokerage firm will typically flag for you anything that's disallowed to make sure that you're in apportance with the Washdale rule. They always spend a ten ninety nine form, typically in January, that will detail all of your gains and losses from transactions during the prior year. So it's on that form there'll be a special column about wash sale stuff, So anything that's disallowed should be listed there. But it's important to raise that there's some markiness around what substantially identical means. And you know, some of the tax experts and accountants I spoke to you said there's not that much in the ways case while explaining it, So I raised the example like, if you buy one share class of Alphabet Inc. And then you sell it and you buy a different share class of Alphabet Inc. Is that substantially identically. Or if you have mutual fund shares and you sell those mutual fund shares and that mutual fund that you previously had tracked a specific index but was say a Vanguard index on if you sell that, but you buy another fund that's operated by Black rock or fidelity, but it's tracking the same indexes that qualify, so there is a little bit of it could be confusion, and there obviously could be people who may interpret these things a little bit more aggressively than others. Now, did you find out any answers to those questions or does everybody have a different answer? Everyone pretty much has a different answer, UM, But I would say my rule of them is basically, you're better off being more conservative and just wait for that in total sixty one day waiting period because it's thirty days before and after the sale of the security, and then buy what you really want back, especially considering you know, treating fees are pretty low. We obviously have sites like Roberton and others that make trading these pretty negligible. So because of that, I think the best kind of advice is to just be pretty conservative and then after that waiting period, you know, swap back in if you really wanted to have that share class of Google, or you really wanted to have that specific mutual fund, stick with that. Now, Alexis, we've been talking about single stock US names. Do the rules change if we're talking about a different geography? UM? In the U S specifically, like if you're talking about a single stock or a mutual fund, the same rules apply UM and for mutual fund investors specifically, if you tax boss harvest this year, UM, you know, the benefits of doing so are amplified. That's because it's a little complicated, but basically, the way mutual funds are structured, it's other investors to sell their shares. The fund often has to sell appreciated holdings to meet those redemptions, but the investors who remain in the fund are basically on the hook for any gains the fund makes from selling those shares. So you may be in a fund that's gone down, that has negative returns, but you could end up getting these capital distributions in December, which is someone I was speaking to described it as a real kick in the teeth. Not only did you lose money, but you're also receiving this capital gains distribution, but you didn't actually get any money, And even if you reinvest the gains back into the fund, you're still on the hook for taxes. So that's why selling your losses and then using those to offset these capital gains distributions can be can be really helpful. Now you raise a very interesting question because many retail investors have been involved in crypto in some form or another. Are the rules the exact same for crypto? Um, they are not exactly the same. You can, in fact use crypto. You can sell crypto losses and use any of those losses to offset gains in that way, it's similar. But crypto investors have a really big advantage. Um. The wash scale roll that I was speaking about, it doesn't apply to digital assets. So if you're a crypto investor and you sell something, you can basically turn right around and buy the same coin, especially if people leaeve in that coin. You know you want to stay invested. Um, you don't have to have that sixte day waiting period. Um. But there's a catch. There are some you know, tax experts who say crypto investors could get burned by a separate principle called the I R S is economic substance doctrine. That role basically says you can't do something just for a tax benefit, you have to expose yourself to some sort of market risk. Um. So then the question is, okay, well how long do I have to expose myself to market risk? You know, to then justify turn around and buying that same coin, and you know, whether it's ten minutes or ten days, I think is really anyone's guest. But again my advice goes back to, as with stocks, are on the side of caution just because it DIRS does in fact audit you. And the whole point of what you're doing is to try to, you know, take advantage and make the next April a little less painful. You know, you don't want to then have to backtrack and be you know, having to account for the things that you ended up spelling and Alexis this all has to be done by December thirty first, obviously, yes, year end, So basically any losses have to be locked in by year end and that will count for your two tax returns, which are due next day. Bloomberg Opinions Alexis Lee on us China's president Cheese and Ping has been making small but potentially pivotal changes recently. They may go some way that is towards patching up the COVID battered economy. Certainly investors think so, but they are skittish. I ask Bloomberg Opinions Shulely Wren to give us a snapshot of China's current pretty precarious fiscal and social positions, So surely we're seeing a new approach from China's government. We're also seeing some deaths. What does it all mean for the reopening story? I think investors were painting too much hope on the China reopening store. Keep in mind that for the rest of the world, that reopening was never an easy, smooth process. Even Singapore, which is very very well run, they went through a zigzag open, closed, prolonged process, and we're going to see very similar situations playing out in China. But directionally, China is going to reopen because, as Bloomer Opinion has written quite a few times, the Chinese government physical coppers are getting empty. They will have no choice but to open. And another thing I think investors can watch is that for all the Chinese cities, it's going to be one city, one policy. You're going to see big cities such as Shanghai, guangjoch and do they're going to have very different responses. And some of the cities that do very well, their city mayors are going to be promoted within the China bureaucratics and they're going to be present hiding things. New project is going into twenty three and twenty twenty four. So you're saying cities could actually be in competition with each other to reopen more successfully than the next. Absolutely. I mean cities have been competing with each other over fiscal dollar, over human talent, over all other things, and that they are going to this time compete with each other to reopen in the smooth way because the city mayors they will be promoted. Well, there's so many strands to the story that are happening simultaneously. Another thing that the market is watching very closely is the methods that the authorities are using to punish tech firms, and markets are taking that well in the sense that these punishments might mean that these tech firms will finally be out of the corner. If you like, we'll be back in the good books of the Chinese authorities. Tell us a little bit about what's going on here. It's a realization from the Chinese government that they're stuck in the arranged marriage with the big tech companies. I mean, the last one year to half, the Chinese government was like a leading down big tech. They didn't want olligogues, they didn't want them to be too powerful, right, But at some point they start to realize tech companies they are the major job creators young people, young Chinese. They don't want to go work in the factories, they want to work for tax firms. But going forward, I think what's going to happen is the Chinese government will still advertise and prosperity, and the tech companies also need to think about this notion of effective altruism. They have to think about how to help the local governments where they do business, generate fiscal income, provide social welfare. And what you see with j D for instance, is that the j D see executives they're going to cut their own pay so that they can provide housing for younger twenty three twenty four year old so that they can climb the middle class social letter and we're going to see a lot of that. Instead of direct tax payments big tex they're going to try to find a way to help local governments work, perhaps in the form of private public partnership, perhaps providing housing to the young. Yeah. I mean it's fascinating because it's in line with the pursuit of common prosperity, and it allows season things in some ways to do a U turn and sort of allow the tech companies to distribute their own profits in order to lift up the lower middle classes. Is it a U turn? If this was what season things going to do, why didn't he do it originally? Well, keeping mind that when China started they tack and develop a crackdown, it was in the middle of one and the Chinese government discore coppers worked by food. China's economy were doing pretty well back then. That's when they started a crackdown. And the things have changed. The government has no more money, and then the developers are no longer buying land. That right less, there is a big string of revenue for Chinese government. So at some point they realized that they have to step back in their cracked down towards big tech and then let's big tech pay more taxes and provide jobs. Yeah, and it sort of works to everyone's advantage because of big tech is allowed out of the sandbox back into the markets for real. Then presumably at some point demand will be created and jobs will be created again, and so on. I guess that's how she's in paying in the b BOC are thinking of it. At least doesn't work like that. Actually, I think that's what a lot of market participants are hoping for as well. But it will be tricky. It will be a bumpy road to find a new equilibrium between China's rich basically big tech billionaires and powerful basically the government just like trying to reopening. I think we're going to see a bunch of zigzags and public outcries. But the greater trend is that I think going to three, there will be equilibrium, new equiliber and your social contract between big tech and big summon. Well, and it's not just big tech. I mean, is this the first line of industries. Will we suddenly see gaming industries, for example, do the same thing. Will we see the education companies, the online education companies that are also cracked down upon, suddenly become wealth distributors. I think education companies their best days are over. Unlike gaming education companies. They will never be able to create as many jobs as the likes of tens and some of them are already coming back. So instead of teaching Chinese lessons, they're hosting debate cut right, um. But there will be smaller bloomberg opinions. Shulei Rehn, Stay tuned the University of Georgia's Stephen Mim next with thoughts on how export controls will impact U S China relations. By the way, you do send us your thoughts and opinions. I'm at v Quinn at Bloomberg dot net and don't forget We're available as a podcast on Apple, Spotify or your favorite podcast platform. This is Bloomberg Opinion. The International Monetary Fund says the rise of trade barriers against China and other countries over the past year could cost the global economy one point for trillion dollars one and a half percent of GDP Managing director Krystelina Georgieva told Bloomberg the potential loss for Asia could be double that. For Asia the loss is much more significant because as she is so integrated in global value. Chase I spoke with Bloomberg Opinion columnist Stephen Mim, history professor at the University of Georgia about the history of export controls out of the United States and whether the intended outcome is worth the loss to global productivity. So, Stephen, export controls originated with the Trading with the Enemy Act of nineteen We should maybe think of export controls under that rubric right, because while the language might seem maybe softer, certainly the actions of the Biden administration as under Donald Trump are quite hostile towards the likes of China. That's right. So export controls like the ones that the Biden administration slapped on China relative to advanced computing technologies, specifically semi conductors and like, are without a doubt a fairly hostile action. And as you point out, they began with an act passed on the eve of World War One called Trading with the Enemy Act, which, as the title suggests, is not exactly a conciliate story feature of legislation. And while they were applied someone fairly limited or light touch at that time, they did end up being applied on a much wider scale by FDR during World War Two, and then even more significant and relevant for our own moment, during the early years in the Cold War, when the ease and enthusiasm with which the State Department and the President from Truman onward applied expert controls is really quite extraordinary, and it became a real powerful tool in fighting the Cold War and its attempt to deny Communist countries access to advanced American technology now, isn't the case for certain that without access to U S technology, China is going to have problems? Yes, So this is the real, real looming question hanging over a lot of this. When export controls were previously imposed during the late forties and nineteen fifties, the world was literally divided. It's not like, you know, there were huge numbers of Soviet students studying in the United States as there is now with Chinese students in the United States, and so access to these technologies could be more readily shut off than they can be today. And this is worrisome because on the one hand, the export control that are being invoked aren't quite confrontational, but if they're difficult to enforce, that could prove counterproductive on all sorts of levels. And it works both ways. I mean, it's the obvious thing to point out, but at some point the US won't have access to certain technologies and certain engineers. And you don't see this ending well, do you. Well? There are several things to keep in mind about this action that are noteworthy that stand out as potentially watershed moments. Donald Trump as president had imposed limited export controls, but they were much more selective and somewhat discriminating in their impact. That could have been written off as a one off. But the fact that an ideologically quite different president, Joe Biden, is not only following that lead, but ratcheting up significantly and imposing blanket controls on certain technologies is truly noteworthy and suggestive that we've entered into something eerily familiar to those of us who have studied the Cold War, that there was a time of quite tense relations and the likelihood of retaliatory action was very high, and unlike China or the Reunion, then China has more power to hit back in all sorts of ways. And so this is worrisome on multiple levels. Whether it will end badly, it's hard to know. And they also force the Chinese to the negotiating table. Who knows. Maybe it will have a de escalating effect, you know, escalate to de escalate or argument. Well, you would hope so, especially if you were a globalist, I guess. But it will at some point have an adverse effect on the balance of payments situations. It certainly probably will, and that's incidentally why export controls fell out of favor in the late sixties and seventies was aside from de Pont and lowering of the temperature in the room, during the Cold War, it was starting to hurt US technology companies, automakers and you know, any I'm working in any kind of technology because they were being shut out of markets. So that's something similar might happen here when the balance of payments issue becomes ascending again and forces the reckoning. So when we talk about technology decoupling, how far does it go? Steven? Is it partially done already? Well, the fact that there are so many partnerships between US tech companies Chinese and conversely so many Chinese students studying IS undergraduates and graduates in the US, the decoupling has a really long ways to go on that level, but one could imagine that it could accelerate quite quickly if this continues. Being is actually somewhat indicated that China is starting to turn inward, becoming more a targetic, which may mean that they will take measures to cut those ties as much as the United States. The f teams run up. Ruhar said recently that countries and companies need redundancy and sourcing these days, and that executives are going to have to read think the idea that excess inventory is bad and maybe even just in time supply chains or a thing of the past, is that overstating it slightly or is going to be so? I actually think that spot on. It's staggering sometimes to realize how sophisticated and complex just in time inventories and supply chains became at the peak moment of globalization pre COVID, pre trade war with China, and the fact that they crack so badly under that stress test would probably indicate that we really do need to rethink them, because in all likelihood, given current events, the war in Ukraine or other geopolitical tensions that are starting to bubble up, we can't depend on this kind of moment or phase of globalization lasting indefinitely where you can't construct this kind of intricate supply chain system. So yes, absolutely, I think that we need to rethink inventory and rethink a lot of things. And as you also point out that having multiple suppliers backup suppliers is essential as well as obviously reshoring some of this back to the United States. It really is amazing how things have been changing and how attitudes have been changing as executive actions get taken. You talk about the chance of normalizing trade relations what is a normal trade relationship, Steven Well, a normal trade relationship in the system that prevailed unto quite recently, it was relatively few tariffs and low barriers to trade and in some measure of reciprocity at least between nations that were participating in this postcode war. And the idea is that that made us safer, right, and that's why export controls are in the hands of national security. Right. Absolutely didn't make it safer just because we were trading chips and chip technology and chip making abilities. Arguably not. And part of what you're seeing, I think with the rise of the export controls is a fundamental rethinking the leafs about the transportative power of American technology. There was a kind of ninety belief. In my own opinion, it leaves that by sharing technologies via American corporation, this would generate, through some magical process, a kind of development model where countries like China that have been communist and oppressive would suddenly become liberal democracies. I mean, that's an exaggeration, but there is. If you look back at what people were arguing back in the nineties. That's what they were arguing. If they can get this technology and trade with US and we lower trade barriers, well everyone's gonna you know, start acting better and and and China will become this team player within the geopolitical system. That's probably I don't think it would be hard to argue that that's happened. Given what we've seen out of China just in the last five years or so, it seems to be heading in the opposite direction. Even in things like vaccines. We've seen that sometimes China it doesn't even ask for access to technologies that have been developed in the United States or want them necessarily and eventually develop its own correct and partly out of a kind of national pride, arguably too with bad consequences for China itself. In other words, you know, some of the zero COVID policy that's been put in place is clearly a reflection of the fact that there are significance for us of the population that haven't been vaccinated at all with an effective vaccine in China. So you have this odd like authoritarian attempt to control the virus when there was another way of controlling it with Western vaccine. But that was a no. Note. This is significant. When that came down. I was blown away. When I read the order, I was like, good lord. And it was interesting because you know, you may have anticipated something like this under Donald Trump, but it wasn't necessarily going to be obviously the case under President Biden. No, Like I really would have bet that Biden would have been all about normalization, you know what I mean, that there would have been this kind of like let's just reset. So I don't know what, you know, you've got to assume that they know things we don't. Maybe there's really profound instances of espionage or stated attentions to acquiring the technology for military purposes. I mean, one thing is that the real vexing issue here is what's called dual use technologies, things that have peacetime applications but could just as readily be put towards authoritarian or imperialistic ends. So for example, like quantum computing, well, like you could argue it's great for the tech sector, could also they'll be used for missile systems and things like that. And so the question of how to like keep civilian technology that has military applications out of the hands of China seems to be a growing and abiding preoccupation of finding administration and the Widen administration doesn't seem to be giving China the benefit of the doubt. You know it is not, and that alone is significant and interesting actually and also maybe suggestive that hopes for reset are probably fading and that we're moving towards some other kind of geopolitical equipment that is not dominated by open borders and the free flow of goods and ideas Bloomberg Opinions. Stephen Mim, history professor at the University of Georgia, Well that doesn't for this week's Bloomberg Opinion. Do get in touch with us. We love hearing your thoughts and opinions. I'm at viquin and Bloomberg dot Net and don't forget We're also available as a podcast on Apple, Spotify or your favorite podcast platform. We're produced by Eric mollow Till next time on Bloomberg Opinion.

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