The Week Ahead: Jackson Hole

1. Hottest News This Week

📣 Fed Chair

Fed Chair Powell is set to speak on Friday at the Jackson Hole Economic Symposium, where markets are eagerly anticipating his remarks. This will be his first address since July's CPI data showed inflation falling to its lowest level since March 2021.

📣 Retail

This week, several large retailers will report their earnings, following July's unexpectedly strong retail sales. Investors will be keen to see if these companies benefited from the robust consumer spending or if rising costs impacted their margins.

📣 DNC

The Democratic National Convention kicks off on Monday, with markets closely watching Vice President Harris’s economic policy discussions. Investors will be particularly interested in any proposals that could impact fiscal policy, taxation, and regulatory changes.

2. Matt Allen’s Corner

Tax Inversion

Back in the mid-2010s, a wave of U.S. companies started doing something that caught everyone’s attention—especially the government’s. They began moving their headquarters overseas, not because they were packing up and leaving the country, but because they wanted to pay less in taxes. This strategy, known as a tax inversion, became a hot topic in corporate finance and led to a major showdown between big business and the government.

What’s a Tax Inversion?

A tax inversion is when a U.S. company merges with a foreign company and then officially moves its headquarters to the foreign country. The big appeal? Lower corporate taxes. At the time, the U.S. corporate tax rate was one of the highest in the world, around 35%. By moving to countries like Ireland or the Netherlands, where tax rates were much lower, companies could save a ton of money.

The thing is, these companies didn’t actually move much besides their legal address. Most of their operations and management stayed in the U.S., but on paper, they were now based overseas. This loophole allowed them to slash their tax bills without really changing how they did business.

Several big-name companies jumped on the tax inversion bandwagon:

• Pfizer and Allergan: In 2015, Pfizer tried to merge with Ireland-based Allergan in a $160 billion deal that would have moved Pfizer’s headquarters to Ireland, cutting its tax rate significantly.

• Burger King and Tim Hortons: Burger King made headlines in 2014 when it merged with Canadian coffee chain Tim Hortons. By moving its headquarters to Canada, Burger King was able to take advantage of lower taxes.

• Medtronic and Covidien: Medtronic, a medical device company, merged with Covidien, an Irish company, in 2015 and relocated its headquarters to Ireland to enjoy a lower tax rate.

These moves were financially smart but politically and socially controversial. Critics accused these companies of dodging their fair share of U.S. taxes, which didn’t sit well with many people, including the U.S. government.

As more companies pursued tax inversions, the U.S. government started pushing back. The Obama administration was particularly vocal, arguing that these moves shifted the tax burden onto smaller businesses and individuals who couldn’t afford such maneuvers.

In 2014, the Treasury Department rolled out new rules to make tax inversions less appealing. These rules aimed to close some of the loopholes that companies were exploiting. But the corporate world is creative, and companies kept finding ways to work around the new regulations.

The real turning point came in 2016. The Treasury introduced even tougher rules specifically designed to stop the Pfizer-Allergan merger. These rules made it much harder for companies to use inversions to dodge U.S. taxes, and the Pfizer-Allergan deal was eventually called off.

The crackdown on tax inversions, along with the public backlash, pretty much put an end to the trend. In 2017, the U.S. corporate tax rate was slashed from 35% to 21% as part of the Tax Cuts and Jobs Act. This move made the U.S. more competitive internationally and reduced the incentive for companies to move their headquarters overseas.

Even though tax inversions have faded from the spotlight, the debate over corporate taxes and tax avoidance strategies is far from over. The inversion craze was a clear example of how far companies will go to lower their tax bills and how governments have to constantly adapt to new strategies.

Cheers,

Matt Allen

3. Comin’ Up

EARNINGS AND ECONOMIC DATA

💰 Earnings:

Monday: Palo Alto, Estee Lauder

Tuesday: Lowe’s

Wednesday: Target, Snowflake, Zoom Video, Macy’s

Thursday: Intuit, Workday

Friday: N/A

📈 Major Economic Events:

Monday: U.S. Leading Indicators

Tuesday: Fed Vice Chair Michael Barr

Wednesday: FOMC minutes

Thursday: Initial Jobless claims

Friday: Jackson Hole Speech

The author of this newsletter owns ETF’s (exchange traded funds) that may hold ownership interests in the companies discussed in this newsletter as of the published date of this newsletter.