Income trusts and the stock market

Nov. 1, 2006 10.27 am

The decision by Canadian finance minister to end the special tax exempt status of distributions from income trusts to unit holders in order to plug a major loophole in corporate taxation has had an instructive impact on todays Toronto stock exchange. The decision which incidentally is phased in over four years came as a big surprise to stock market major players who had recently heard from University of Toronto economist Jack Mintz, an expert on income trusts that there was a close to zero probabilty
that the Conservative government would move in this way to tax trusts.

So the first lesson to draw is that probability has to be adjusted for the unknowable and the uncertain. The government acted in an unpredictable manner which illustrates from an investor's point of view all risks cannot be accurately discounted for by quantifiable probabilities- an insight of Keynes in his famous treatise on Probability published way back in 1921.

Second just look so far this morning as to how the market has responded to the news. On opening the market's composite index fell over 300 points a close to one percent drop. Over the next hour it recovered some of that loss rising back to a drop of 213 points by 10:30 am. It will be interesting to see how it finishes the day.

Will the stampede and near panic abate as it probably should. Or will last minute late in   the day bears drive it back down to its opening drop ? It is an interesting case study of mass psychology and market irrationality in action. All stock players and professors of economics should pay some attention and revise their theories accordingly.

As Keynes long ago pointed out the stock market is a precarious base on which to build investment intentions.Irrational pessimism and irrational optimism can and do prevail. Uncertainty is a fact of life all of the time.Probability cannot capture it all.
Something more stable   is needed to ensure that the business cycle is not ruled by the vagaries of the stock market.Hence the role of the balance wheel of government.