by Gary Alexander

April 5, 2022

After spending eight glorious days avoiding most of the news of the world on the Big Island of Hawaii with my wife and our daughter’s family, I returned last Thursday to a Twilight Zone of headlines on April Fool’s Day. It was almost like being captured by aliens, but then, that’s what passes for governance now.

Part 1: The Petroleum Follies – Treating the Effects, Not the Causes

Your travelling correspondent – Alex in Wonderland – entered Friday’s Twilight Zone with this headline:

#1-Tapping out: The top-most Page 1 headline of The April 1 Wall Street Journal said: “Biden Taps Oil in Bid to Curb Prices at the Pump.” The President “plans to tap up to 180 million barrels” (of 568 million left) of our oil reserves to try to keep gas affordable, after tapping 30 million barrels last month, calling it an emergency wartime issue. That means he will reduce our emergency stores by about one-third, which will only supply about nine days’ worth of demand, leaving us fewer than 20 days of demand in reserve.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Josh Young, chief investment officer at Bison Interests, reminded us that, “Historically, SPR releases have temporarily sent oil prices lower and are then followed by higher prices as the market prices in insufficient supply,” adding that, “It is likely that oil prices rise after an initial temporary pullback, and that the SPR may have to be refilled at even higher prices.” Of course, a more enlightened common sense policy might be to reverse the decision to block the supply chain, including the Keystone XL pipeline.

#2: Rewarding (and then Causing More) Inflation. Amazingly, three leading House Democrats – Mike Thompson (California), John Larson (Connecticut), and Lauren Underwood (Illinois) – have introduced the “Gas Rebate Act of 2022” to send each American (including dependents) a $100 check in any month this year when the national average gas price exceeds $4.00 a gallon. (The national average gas price has been over $4.00 since the Ukraine War began). This would support and promote higher inflation, sending government (taxpayer) money to help keep gas over $4 when it is in danger of falling to $3.99 or lower.

What are these people smoking? A better solution, as above, is to increase supply and reverse the anti-energy polices of their boss and his Green handlers. That would cause a decline in oil and gas prices.

#3: A Windbag Profits Tax. It was on April 1, 1980 (no fooling!) that the Jimmy Carter administration passed the first Windfall Profits Tax on oil companies. Carter used public anger over gas lines (which his new Department of Energy caused by misallocating distribution chains) to pass the blame along to big oil companies. Today, forgetting all of that history, 12 leading Democrats, including Massachusetts senator Elizabeth Warren, are proposing another windfall tax on American big oil companies.

The champion last time was another Massachusetts Senator, Teddy Kennedy. The result was a decline in U.S. oil production that pushed gasoline prices higher, leading to a big collapse. Ted Kennedy’s windfall profits tax was repealed after the public saw the damage it had done. Apparently, Senator Warren either doesn’t read history books or doesn’t care. Vermont’s Senator Bernie Sanders is also willingly ignorant. The Kennedy tax was 70%. Sanders wants to raise that to 95%, which would do even more damage.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

What these and other predatory tax schemers ignore is that the energy business (like many) is cyclical, going from boom to bust and back again. Profits during the boom times replace losses during the bust. Politicians do not rush to the aid of big oil during the busts. Politicians don’t share their risks. They only attack during booms. And those attacks discourage investment. So, during a boom, when oil companies are flush with cash that can be used to increase production, they are faced with an added cost in the form of a windfall profits tax. That makes them reluctant to invest in new production. In the long run, increased production tends to bring gasoline prices down. However, with windfall profit taxes in place, increasing production in the short run means lower profit margins because of the windfall profits taxes.

Part 2 – Budgetary Madness on April Fool’s Day

The April Fool’s edition of last Friday’s Wall Street Journal was festooned with trips down the rabbit hole. One gem on page A4 was a long article describing the trillion-dollar budget deficits and 2022 GDP growth under 2% for 2022 with an article headlined, “Budget Projections Now Look Rosy.” No fooling.

#4: More Deficits = More Prosperity? Last week, President Biden unveiled his $5.8 trillion budget for Fiscal 2023, which he said would boost economic growth, lower the deficit, and reduce inflation, even though it would do the opposite of all three – limit private growth through more government spending, increase the deficit, and likely fuel inflation. It’s like that magic ice cream that helps you lose weight.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

#5: The Economic Blame Game: There’s no question that 2021 was a great year, but who gets credit? When President Obama came into office after the crisis of 2008, was he to blame for the deep deficit and market lows of 2009? Not really. So should Biden take credit for a great 2021? Not really, but he does. Likewise, there’s little question that the Biden policies of 2021 are leading to sub-par growth in 2022.

After trashing the Trump tax cuts and claiming they mostly helped the rich and large corporations, President Biden unintentionally praised the Trump policies when he said, “[W]e have generated a GDP growth of 5.7 percent, the best economic growth we’ve seen in this country in over 40 years. This has led to a substantial increase in government revenues and dramatically improved our fiscal situation,” but this just continued the pre-Covid 2019 growth under a tax policy virtually unchanged from the Trump years.

#6: Killing the Golden Geese. Biden’s new tax plan includes a 20% wealth tax on “billionaires” with over $100 million in assets. (That’s a contradiction in terms – how does $0.1 billion = $1 billion?) As any rich dude can tell you, they don’t carry that much cash. They need to sell assets to raise cash, and so many rich folks selling so many assets will depress the prices of those assets for themselves and everyone else.

Taxing these “unrealized gains” (i.e., the value of something before it’s sold) is a classic killer of wealth creation. Just imagine your own situation. You might need to sell half your stocks, or your house, to pay out 20% of your net worth. Then taxpayers must calculate and pay capital gains on top of that. Each year.

Then I woke up on Saturday, April 2. This was all a bad dream, right?

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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