Outside of the stock market being priced at one of its most expensive levels relative to underlying cash flows on record, there aren't many things to be bearish about going into 2018. But the Wall Street Journal's James Mackintosh has managed to come up with three risks that could derail the ongoing low volatility climb in the equity market. To wit: Monetary tightening. The Federal Reserve raised rates three times this year, yet it became easier to borrow and over long periods actually got cheaper. Instead of rising, long-dated bond yields fell, and global monetary conditions were further … [Read more...]
Fake (and Biased) News Still a Problem for Investors
You might have hoped that after all of the media attention, the problem of fake and biased news would have been solved by now. But any objective evaluation of the media’s coverage of the tax bill that was just passed by Congress dispels that myth. The coverage of the tax plan has been so uniformly negative that almost half the people polled disapprove of the tax plan and a shockingly high 50% of people think their taxes are going up. The press has fed the narrative that taxes are going up on middle-income Americans and only the wealthy are going to benefit from the plan. Senators and … [Read more...]
Will Tax Cuts Fuel a Rise in Bond Yields?
John Authers suggests that while the tax-cut is mostly priced into equity markets, the bond market could be in for a surprise next year if the reforms have the impact the GOP is hoping for. Bonds globally suffered a sharp sell-off on Tuesday, with little obvious news to justify. As the sell-off was widespread, it is hard to attribute this entirely to events in the US. However, it was noticeable that the rate effect swamped any tax cut effect. Rate-sensitive sectors such as real estate sold off most; financials were more robust. And the stock market overall dipped a bit. Once the details in … [Read more...]
What Tax Reform Means for You: The Final Bill
The House and Senate conference committee worked out differences in their respective tax bills last week. The final bill was released Friday evening and a preliminary read indicates the compromised bill is an improvement from either individual bill. The tax-reform bill is still far from perfect, but it is a marked improvement over the current system, especially with respect to corporate taxation. Our last two pieces on the tax-reform bill were focused on two provisions that we thought needed to be killed—the FIFO capital gains provision and the alternative minimum tax (AMT). The … [Read more...]
This Savvy Group of Investors is Cashing Out
The FT reports that Private equity investors are selling assets at the fastest pace since the financial crisis. Private equity doesn’t always get it right, but strong demand from yield-starved investors has made the market ripe for exits. That isn’t necessarily a sign of a market top, but it is an indication that the sales opportunities may be more attractive than the buying opportunities today. Private equity groups are selling businesses at a faster rate than in the years leading up to the financial crisis as they look to cash in on record-high prices while the global economy remains … [Read more...]
The Economy Hasn’t Done this in Over a Decade
According to the Atlanta Fed GDP Now Forecast, economic growth in the fourth quarter is on pace to surpass 3% for the third consecutive quarter. As you can see in the chart below, the American economy hasn’t put together three consecutive quarters of 3% plus growth in over a decade. Burdensome regulation and anti-business sentiment apparently had a bigger impact on the economy than many assumed. The economy has grown at such a subdued rate for so long that economists started to assume the U.S. wasn’t capable of growing at 3% again. Three percent is above average growth with today’s … [Read more...]
Is the Fed the Biggest Risk to the Economy?
Phil Gramm and Thomas Saving write in the Wall Street Journal on the challenges the Fed will be faced with as economic growth returns to normal. To compensate for stifling regulation and misguided economic policies that held back growth during the Obama years, the Fed went full-bore on monetary stimulus. And it didn’t just stimulate during the depths of the last recession. Short-term rates were effectively held at zero until 2016, there were three quantitative easing programs, a twist program to force down long-term rates, and regular jawboning. What does the Fed have to show for its … [Read more...]
Household Net Worth Hits a Record High: Is that a Good Thing?
We have run this chart before, but a recent update from the Federal Reserve shows that the ratio of household net worth to income is now at a record high. On the surface, higher net worth would seem to be a plus for the economy. Consumers don’t have to save as much which should boost growth and there is an equity cushion to soften the blow of a recession. But increasing net worth is only a positive when it is supported by greater underlying cash flows. The record high in the ratio of net worth to income is an indication that the underlying cash flows of financial assets aren’t keeping pace … [Read more...]
Is the GOP Tax Plan as bad as You’ve Heard?
If you listen to the mainstream media, you might get the impression that the GOP tax plan is a disaster. Yes, there are some problems with the bill, but none outweigh the awesome benefit of slashing the corporate tax rate to 20% and lowering the rate on pass-through businesses. Small businesses seem to be ecstatic about the GOP tax plan. The NFIB Small-Business Optimism Survey just hit its highest level in over three decades, and only once in the survey’s 44-year history has it been this high. The hiring plans sub-component of the survey also hit a record high. A net 24% of small … [Read more...]
China’s Coal Problem is Really a Debt Problem
Like most subsidies, China's subsidy for electric power has generated a wave of misallocation. Chinese power producers, taking advantage of high subsidized electric prices, have borrowed $1.2 trillion, mostly for building dirty coal power plants. Those power plants now need to produce in order to pay back their debts. Meanwhile, the Chinese government would like to move toward cleaner forms of energy, but its own subsidies have built a dirty power infrastructure system that can't be undone so easily. Nathaniel Taplin reports: In the West, bad children get coal in their Christmas stockings. In … [Read more...]
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