Chris Brightman, Research Affiliates CEO & CIO, talks about the effect of rising Covid-19 cases on supply chains and the stock market.
ZACK GUZMAN: Chris, I mean, when we're looking into it from your point, we're hearing more concerns around maybe some supply issues when it comes to not just retailers, but a lot of different sectors still now impacted by the resurgence of COVID cases here. How are you looking at that maybe as an investor and how it should be impacting people's portfolios?
CHRIS BRIGHTMAN: Well, here in coastal Southern California, I can typically look out the window and see the long and growing line of container ships waiting to dock in the ports of Long Beach and LA. Of course, today, we've got a lot of fog here, so I can't literally see them at this moment. But the point I'm trying to make is that this reopening of the global economy really creates haywire, and it's very difficult to interpret individual releases of economic data, whether we're talking about production or consumption, which leads into unemployment and inflation.
You know, the fact is we're running at 5% year-on-year inflation. That will prove to be transitory or it will not. And I think that's not an answer we're going to get in the very short run. I think looking at what's going on in Washington is probably more important than these very volatile numbers in the present environment.
ZACK GUZMAN: And maybe-- you know, maybe the fog there is a bit fitting for kind of some of the haziness we have into what this recovery might look like. And we're going to get into the tax picture later on since you're right to point out that we do have a bit more clarity in terms of where those increases might be coming to pay for all the social spending.
But when you look at maybe how the slowdown is impacting, I guess, the growth sector versus some of these other names that had been enjoying that rotation on a cyclical side, it seems kind of tough to kind of put it into context for, I guess, what could happen in this next stretch, given the fact that we saw a lot of growth names take off when we started to see maybe concerns on the COVID front re-emerging. So I mean, what do you expect to see in the months to come? Are people just going to overlook maybe some potential impacts to those companies that were enjoying in the rebound?
CHRIS BRIGHTMAN: Well, one of the most fascinating and remarkable aspects of the capital markets over the past year or so is the incredible strength of tech platform companies during COVID. Now, it isn't the disease or even the fact that people are staying home that is causing the enormous growth in the profits that drive the prices of these tech platforms. Rather, it's the policy response. It's the activity of the-- coordinated activity of the Fed and the Treasury to wire transfer huge amounts of money into people's bank accounts funded by the Fed purchasing Treasury debt.
There's an old explanation of how this works. It's called the Kalecki profits equation. Basically government deficits flow directly into corporate profits, and nowhere more so than in these tech platform companies. So if you want to kind of think about how this rotation is being driven and determined by Washington, more deficit spending, more MMT is going to boost the profitability of these tech platform companies more than any other company.
Sure, it's going to boost profits for everybody. But the way our economy is structured, tech platform companies capture the lion's share of these fiscal flows that go into corporate profits, unless we take some action to change that. And you know, it's fascinating watching what's going on in China.
ZACK GUZMAN: It's pretty smart to think about it, I mean, on the margin, right, because to your point, we did get the update in terms of thinking around corporate tax rates, but that would impact pretty much everybody evenly across the board, that being expected to see an increase to 26.5% from 21%. So I mean, people have been focusing in on that in terms of the years to come and how much that could weigh on profits.
And kind of, you know, we always talk about valuation right now and price-to-earnings and kind of what happens if earnings are dented by an increase in taxes. So maybe how does that maybe impact your growth rates for corporations looking out maybe next year? Because we were expecting such big bounce backs. But if it's weighed on the tax changes, I guess, are they even that important? We're talking 5%, basically.
CHRIS BRIGHTMAN: I agree the sausage-making machine in Washington is not the easiest thing to decipher. But to the extent that we're going to have more of the extraordinary money printing to finance whatever the priority is, and, you know, there are-- I think the Democrats have a longer list of priorities they'd like to spend on than they can conceivably raise in tax revenue. And that's not to express any opinion on the merits of the various spending proposals, just to note that they don't square very well with the proposed taxes.
So to the extent that that continues, you can see a continued outperformance of the growth names to the extent that it's going to be, you know, dialed back. And I think the market is reassured from an inflationary perspective just by headlines on taxes, regardless of what they say. If we're actually starting to talk again about tax increases, that probably explains why you're seeing the Dow outperform the NASDAQ this morning.