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The title refers to the US dollar and section 899 of the tax bill recently passed by the US congress.

For context, a prior post of mine from mid March suggesting that the writing was on the wall for non-US investors in the US, that someone might be coming for your assets.
https://www.shrewdm.com/MB?pid=-2&previousPostID=7...
" But for non-US-persons, the #1 risks are getting pretty plain. You may or may not be aware of moves to curtail inbound investment via taxation of portfolio flows, and (separately) talk of forcible conversion of US debt to non-redeemable perpetuals in some circumstances. Plus many things not already on the policy plate but all too plausible....For non Americans, is there a 1% chance of (say) a huge withholding tax on T-bill redemptions that are not rolled over, or withdrawals from US brokerage accounts, or punishing withholding tax on sales? Would a US brokerage one day be asked/forced to apply some rules that might not be lawful under US law? Note that there is already a rule that if a non-US-person sells shares of a listed LLP, the entire sale proceeds (not the profit) are subject to 10% withholding tax which is (in my case) non recoverable. Buy $100 worth of Sunoco, sell at $105, lose $5.50."

In short, that was fast!
Section 899 (if I understand correctly) allows the imposition of a 20% tax, in addition to any rate already applicable, on individual or corporate holders of US securities or real estate who hail from from countries that are behaving in an unspecified "discriminatory" way according to the US administration, overriding any treaty rates in place. This is likely to be interpreted to apply to places with digital services taxes, such as Canada or the EU, as such taxes endanger future tech bro funding for US presidents and their inaugurations.

It does not appear to impose taxes on transactions which are not already theoretically taxable in some way, so I think it does not [yet] apply a withholding tax on capital gains from the sale of US securities.

Jim

This is huge as it allows the US (unclear if it is Congress or the president) to launch a "capital war" with, or without, a trade war if it wishes. We are trusting an arbitrary US government to determine what constitutes an unspecified "discriminatory" definition. We are currently a country who has a war based on fentanyl and an invasion by Venezuela et al who have been "ripped off" by every nation in the world when it comes to trade.

From the standpoint of a foreign government/entity, if I was assigning "political" risk to nations as a function of what return I desired on bonds (or other investments), this would put a heavy thumb on the scale for me. I would also thing that "retaliatory" wording would begin to crop up as laws in other countries - throwing cold water on investments world-wide.

Jeff

A (very) small silver lining on this from my read is that it appears to ratchet up to the 20% level gradually.

So presumably, if you're an overseas investor and the US government decides your country has been "discriminatory", in theory you could sell your assets and only incur a 5% increased tax rate, not the full 20%.

Of course, making a sale at what might be a very inopportune time just to avoid the larger future tax rate carries its own risks.

A (very) small silver lining on this from my read is that it appears to ratchet up to the 20% level gradually.
So presumably, if you're an overseas investor and the US government decides your country has been "discriminatory", in theory you could sell your assets and only incur a 5% increased tax rate, not the full 20%.
Of course, making a sale at what might be a very inopportune time just to avoid the larger future tax rate carries its own risks.

Yes, it's gradual as written. 5% higher rate the first year, 10% the second, 15% the third, 20% extra at the max.

Rather than thinking about the slow boil, the sensible conclusion for a non-US person is not to invest in the US. Why risk it? Why risk another change to the risks? Don't invest any more in the US, and maybe sell some or all of the stuff you already own before you get caught in more nets. Personally my concern is withholding taxes on capital gains next.

But be of good cheer. There are 1500 tickers on European exchanges with earnings yields over 10% and market cap over a billion. (many duplicates due to multiple listings). I figure they can't all be duds. And that's just boring old Europe.

Jim

the sensible conclusion for a non-US person is not to invest in the US ...... Personally my concern is withholding taxes on capital gains next.

Withholding taxes on cap gains are deductable from the cap gains you pay where you are a tax resident (Double Taxation Treaties), e.g. like in Germany, Portugal and France I think too around 25%. As long as that is not vastly exceed I don't see that as "sensible solution" --- apart from Monaco residents and similar. Otherwise no need to panic.

Otherwise, no need to panic.

I think the threat to other nations is more germane than to particular personal tax interactions. When investing in a foreign environment, the decision (whether by individuals, institutions or governments) should consider a variety of variables - including political/governmental/environmental and other potential risks. If doing this quantitatively, deriving an objective expected value of the investment could be dramatically slewed by this risk - demanding a much higher yield than currently paid on US investment to compensate for the increased risk of ownership penalties.

Of course, to the unwashed masses, this clause doesn't just sound reasonable, but laudable, as it punishes those who have been responsible for pushing us into deficit by buying our bonds (hey guys/gals, I wish this sort of thinking was a joke, but it sits on the shelf next to countries who have been ripping us off for decades by putting us into a trade deficit.

Jeff

As the article rightfully States, foreign investors may just start to think twice before they invest in US Treasuries.
« Scott Bessent is likely to be wary to invoke section 899…after all he has to sell oodles of US government bonds to fund the ever expanding debt. There are already hints of some capital flight ».
Better be careful what you wish for Donnie!

Astore

what chaos\retaliation is next?
based on gop analytical capabilities, it will probably be 'foreign tax treaties'.
after all, this phrase contains at least 2 words trump despises.

and thus another capital control barrier is up, thank xi very much.

Rather than thinking about the slow boil, the sensible conclusion for a non-US person is not to invest in the US. Why risk it? Why risk another change to the risks?

Fair point, and this new tax policy could definitely be changed for the worse again in the future.

But if the US stock market's returns continued to outpace other countries, as they've done for quite some time (past performance not predictive... you know the line), it could still be a net advantage to invest in the US even if a person hypothetically was subjected to the maximum 20% additional tax.

I haven't confirmed these numbers, but here's what AI says were the European stock market performances vs. S&P500 in the last 25 years:

S&P 500 (USA): ~7.5% CAGR
MSCI Europe Index: ~5.5% CAGR
Germany (DAX): ~6.0% CAGR
France (CAC 40): ~4.8% CAGR
UK (FTSE 100): ~4.0% CAGR
Other European Countries: ~3-5% (Limited data for smaller markets (e.g., Spain, Italy, Netherlands)

This doesn't consider valuation levels and may be less relevant for a person who's picking individual stocks rather than indexes, but if these were the next 25 years of returns, and if a non-US investor was subjected to the current worst-case of a 20% additional tax, that would reduce the 7.5% CAGR on the S&P to 6.0% CAGR, which still beats all other European countries (tie with Germany)

I think a key point too is the dynamic nature of US politics. A completely different administration will be in office in over 3.5 more years. A key question in my mind is how likely is the current anti-globalization mentality is likely to continue, especially if the US starts feeling the effects of even a slight decoupling from global markets.

We are currently a country who has a war based on fentanyl and an invasion by Venezuela et al who have been "ripped off" by every nation in the world when it comes to trade.

The US is also the cause of a war in Mexico--because the US refuses to stop the illegal export of massive numbers of guns to Mexico.

Thus, Mexico has a valid and documentable cause to impose massive tariffs on the US for its failure to stop the flow of weapons to Mexico. The US *chooses* to do nothing. Being the cause of the deaths in Mexico is what this administration will never acknowledge--regardless of the validity of the claim.

Thus, both Mexico and China can legitimately require the US to stop its own war-causing activities if the US wants them to stop their drug trade. Catch-22.

... it will probably be 'foreign tax treaties'.
after all, this phrase contains at least 2 words trump despises.

I count three : )

Jim

But if the US stock market's returns continued to outpace other countries, as they've done for quite some time (past performance not predictive... you know the line), it could still be a net advantage to invest in the US even if a person hypothetically was subjected to the maximum 20% additional tax.

I haven't confirmed these numbers, but here's what AI says were the European stock market performances vs. S&P500 in the last 25 years:

S&P 500 (USA): ~7.5% CAGR
MSCI Europe Index: ~5.5% CAGR
Germany (DAX): ~6.0% CAGR
France (CAC 40): ~4.8% CAGR
UK (FTSE 100): ~4.0% CAGR
Other European Countries: ~3-5% (Limited data for smaller markets (e.g., Spain, Italy, Netherlands)

This doesn't consider valuation levels...

I think that in this context it is very important--nay, dominant--to consider valuation levels. Because that's the entire reason that a US stock has risen in price more than a non-US stock.

Much of the rich world's equities could be divided into three buckets:
(a) A half dozen obscenely profitable US giants
(b) The rest of the US market
(c) European-listed equities

Obviously (a)+(b) taken together, the US broad market, have obviously delivered mark-to-market returns better than (c) for a long time.

Ignoring (a) for the moment, the interesting thing is that profits have grown faster in group (c) than in group (b). Surprise! Typical European firms have grown in value faster.

Again, ignoring a few wildly profitable firms like Alphabet, Meta, Apple and Microsoft, the market price outperformance of the US market in the last 30 years is entirely due to getting more expensive: rising valuation multiples. This trend is obviously not something you would want to extrapolate.

The US productivity miracle is mostly better thought of as the US bubble. Or secular bull market, if you prefer.

If you run a trend line through the CAEY earnings yields of the S&P 500 in the last 40 years, you see that about 1.58%/year of the S&P 500 total return in the last 40 years has been multiple expansion. That's based on reported earnings; you get a bigger number if you use sales to take out some of the one time run-up in net profit margins from lower interest and taxes in the last 10-15 years.

A pair of nice images from a Fed paper that makes the point visually, covering the stretch roughly 2002-2022
https://www.federalreserve.gov/econres/notes/feds-...
https://www.federalreserve.gov/econres/notes/feds-...
The last sentence of the paper from which those were cribbed:
"The overall conclusion, then, is that—with the expected slowdown profit growth and the associated contraction in P/E multiples—real longer-run stock returns are likely to be notably lower than in the past." In short, a cyclical factor on profitability combined with a cyclical factor on valuation multiples. I think the S&P 500 is up around 40% since that was written.


A completely different administration will be in office in over 3.5 more years.

I admire your optimism! Not about the election outcome, but about the election happening. I have the working assumption that will not be any 2028 US election, merely an "election". As always, I hope to be pleasantly surprised.

Jim

the US broad market, have obviously delivered mark-to-market returns better than (c) for a long time.

Ignoring (a) for the moment, the interesting thing is that profits have grown faster in group (c) than in group (b). Surprise! Typical European firms have grown in value faster.

Jim, are you aware that you sing you a completely different tune than not long ago?

For completely different reasons you investing wise left the US. That was just in the 2nd half of last year. Directly before you posted why Hershey is a great investment, why Carmax, DG etc. etc. --- and not why European companies are better investments.

This 180° turn in your song reminds me, always interested in psychology, on Lionel Festinger´s theory of cognitive dissonance: You turned the back on the US, out of your own will, and this changes your mindset accordingly.

Please don´t feel offended. It´s just that (unfortunately) I have a trait bringing me in trouble with people, that I want to open their eyes for what they don´t (want to) see in themselves.

Jim, are you aware that you sing you a completely different tune than not long ago?

Necessity is the mother of invention : )

More seriously, there are different issues to consider, which give different pros and cons.

I don't dispute that the US has usually been a great place for capitalists, at least in the past. I did my big divestment for other reasons--I just don't like the notion of investing in a country whose official policy is to take over my home country against the emphatic wishes of its government and population. It's not a reality show, it's the real world.

US valuation levels are an entirely different reason not to want to be a US investor. But not a fatal one. First, this will pass: prices fluctuate. But more importantly, you never see *everything* overvalued. The valuation level of the broad US market is so high that the next N years will of necessity be poor: the same old stream of distant future earnings costs twice what it did not long ago, so you'll end up with half the future earnings for a portfolio starting today. But it's not a problem if you don't invest in the broad US market. I didn't before, and I don't now, so while valuation is a big red warning for indexers, it remains mostly irrelevant to me. I pick stuff that isn't plainly overvalued, no matter where it's based. Even if I were a die-hard US investor, I wouldn't own the S&P at these levels, but there are still lots of individual firms that are attractively priced.

In terms of geography and the attractiveness and hurdles of investing in Europe or elsewhere, the main difference isn't the lack of firms with good prospects, but information. For US equities it's just so much more available, and easily read and compared. As I mentioned, the European firms can't be all bad--I'm sure there are plenty of fine keepers. But it's starting from near zero by comparison in terms of my learning about them, so I don't know very many attractive ones well enough to risk serious money. Yet, anyway. Rationally speaking, I don't expect to be able to read enough to get the market beating results outside the US that I have managed in US equities. There are only so many days, and only so many years.

Jim

Jim,

It might be interesting to, rather than try to filter European companies, look for opportunities which effect a particular field and then sort through the handful that specialize in that area.

If hypothetically, you thought the war in Ukraine was a "forever" war, you might look at arms manufacturers. If not, you might look at companies involved in electrical infrastructure, for example. While that second group would include firms like Eaton, Emerson or Hubble, in Europe they might include ABB (Swiss), Schnieder (French), Siemen (German), Philips (Dutch) for example.

For "fast fashion" it might be Inditex (Spanish company which owns Zara), H&M (Swedish), Shein (Chinese) and (my personal favorite Fast Retail (the Japanese company which owns Uniqulo).

Just a thought.

Jeff

It might be interesting to, rather than try to filter European companies, look for opportunities which effect a particular field and then sort through the handful that specialize in that area.>

Sure. And thanks for the names, always good to hear new thoughts.

Right now I think the main thing is to read as much as I can for a couple of years. But of course I'm interested in finding specific ideas for industries and companies to kick start that process, which is why I suggested the creation of the non-US stocks board : )

So far I have put money into only three new names this year (non-US), one of which I've read about for years and owned briefly in the past. I'm still heavily in cash (non-US), which seems just fine at the moment. A lot of my strategy for now will be building lists of what I'd buy if [when] prices got really compelling, as I think I can subsist on interest until that happens.

It takes an enormous amount of effort to learn enough to realize how little you know about a firm.

Jim

The US productivity miracle is mostly better thought of as the US bubble. Or secular bull market, if you prefer.

And what better way to pop that bubble and crash the markets than to shrink the number of those who seem to wish to invest at any price? It seems to be a good time to consider that the current administration is focused on making us poor and dumb, while enriching themselves. We are easier to control that way.

IP

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