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Tuesday, October 24, 2017

The tax cut process is taking form in Washington. President Trump and his team – including Treasury Secretary Mnuchin – are touting 3% growth as a result of the tax program. Count on it; history is on their side. Note the following:

  • The final phase in of the Bush Tax Cuts led to 4% growth in 2004
  • Clinton 1997 Tax Cuts on Capital led to 4.5% growth in late-1990s
  • The 1983 final phase in of the Reagan Tax Cut led to 8% growth in 1984
  • The Kennedy Tax Cuts (passed by LBJ) led to 8% growth in 1966
    • While markets have taken notice of the progress, it is difficult to determine how much of what is actually priced into asset prices. That is because the ‘whats’ and ‘whens’ are up in the air. The broad outline appears to be straightforward: a reduction in tax rates and the number of tax brackets, a doubling of the standard deduction, a reduction in the business tax rate towards 20% and accelerated depreciation and repatriation.

      It seems that the market has priced in just a better general macro environment to come from tax rate reduction, with many specific details still to be pieced together. That means that there is likely risk asset upside as the shape and timing of the tax plan takes form. Treasury Secretary Mnuchin has argued that equities have cuts ‘baked into it…(given) reasonably high expectations” for a cut in the corporate rate. I believe that’s correct. What’s more, if the tax cut is phased in then the market is likely to adjust as such a move will be negative for the economy until the phase in is completed. The stakes are high, but I believe that there will be a positive outcome in the coming few months. Special Guest Blogger: Tim Kearney

      Please watch Karyn Cavanaugh on CNBC's Squawk Box to get her thoughts on tax cuts and the current state of the market.

    Friday, October 20, 2017

    The housing sales numbers have been lackluster lately, constrained by limited supplies. However, September existing home sales unexpectedly snapped a three month losing streak, rising .7% to an annual rate of 5.39 million homes. Not that the Teflon market would have noticed if there was a decline. In fact, housing starts of new homes were down 4.7% in September and building permits dropped 4.5%, suggesting that the housing supply woes are not going away anytime soon. The market continues to grind higher on the accelerating global synchronized expansion. Any progress in Washington regarding tax reform will make the nonstick coating even thicker. Investors waiting for a pullback to jump in to the market had one yesterday – for a few brief hours the market was down, before closing up – again. Please read the Global Perspectives comments about this Teflon market in the latest Global Perspectives™ Quarterly Market Outlook.

    Thursday, October 19, 2017

    Political commentators are hung up on legislation and when tax cuts will actually happen. Businesses are indifferent because they have already gotten the clear message that taxes most certainly are not going up and the cost of regulation is already going down. It seems like practically boom times. This week’s economic reports continue to confirm the steady supply of good news:

    • Today’s “Philly Fed” manufacturing report surged to a 5-month high of 27.9
    • Today’s “Philly Fed” employment index reading surged to an all-time high of 30.6 from 6.6
    • Today’s employment “initial claims” plunged to a 44-year low of 222k
    • Monday’s “Empire State” manufacturing report rose to an 8-year high of 30.2
    • October 2nd’s ISM Manufacturing report of 60.8 led the way this month with its second highest reading in 30 years
      • This will carry into 2018 and businesses that wait for Washington to act will be left behind.

        Meanwhile, politicians continue to misunderstand how tax cuts work. Here is a primer: tax cuts allow businesses and individuals to keep more of their capital so they can invest and spend more freely. This subsequently creates economic growth, jobs, and higher wages. It turns out that a dollar in the hands of the businesses and individuals that “earn it” is more productive to the economy and creating jobs than giving it to the government. Wow, who would have thought? Please see the Global Perspectives™ Q4 2017 Market Outlook to find other ways of getting the economy going - like reining in the Federal Reserve.

      Wednesday, October 18, 2017

      Deregulation is contributing mightily to the US economy and aiding sentiment. Expectations are the leading edge of growth, given the importance of ‘animal spirits’ to risk taking. Importantly, ISM New Orders are still rising, with ISM Manufacturing hitting 60 for the first time since 2010. The Empire State Manufacturing Survey hit +30, up from -17 in January 2016. The NFIB Small Business Optimism Index is holding at 13 year highs. The University of Michigan Consumer Sentiment Index is at 16 year highs. It’s no surprise that the IMF in its annual review revised upward US growth to over 2% in both 2017 and 2018.

      Now it’s up to Congress to push for a tax reduction package. There is some talk about a ‘roll out’ of tax cuts over a few years: in no uncertain terms, this would be a major mistake. Economic activity happens at the margin. When it becomes clear that economic actors will face a lower future tax rate, what activity can be pushed out will be. This is the story of the Reagan tax cut, which saw growth explode when the phase-in to lower rates was completed in 1983. Another mistake being mooted would be ‘temporary’ tax cuts. Economic theory holds that temporary increases to incomes are saved, not spent. That’s been borne out in practice, as shown by temporary tax cuts by Presidents Bush, Bush and Obama. (It’s important to remember that reducing debt is a form of saving). The clock is ticking; passage of a Q4 tax program seems unlikely. But as Senator Lindsey Graham recently noted, if Republicans don’t pass tax rate reduction the 2018 election could be lost. The stakes for the market and the outlook are high. For more insights on the global markets, please see our most recent quarterly commentary: The Teflon Markets, Growth and Reflation. - Special Guest Blogger: Tim Kearney

      Tuesday, October 17, 2017

      The Dow just hit 23,000 for the first time. Are you surprised? Well, you shouldn’t be. All year, Global Perspectives has been advising investors that the bias is to the upside. Fundamentals are robust and earnings continue to forge ahead. Yet investor skepticism abounds. Investors are worried about the age of the bull market and higher than historic valuations and the Fed raining on the parade and the Washington drama and the recent hurricanes and wildfires. Do you see a theme here? Aha! It’s a lack of Global Perspective. The global economy continues to accelerate and that is what is feeding earnings and the seemingly insatiable market. Here are a few anecdotal global tidbits from Evercore ISI Macro Views:

      • German IP accelerated to +4.5% y/y.
      • Taiwan exports accelerated to +21% y/y.
      • Japan machine tool orders accelerated to +46% y/y.
      • The MSCI WORLD accelerated to a +18% y/y increase.
        • Those investors enjoying the ride up need to make sure they don’t get too complacent and remain diversified across asset classes to help level any bumps in what has been a remarkably smooth road. Please see page 55 of the Global Perspectives™ Book for a snapshot of some key global economic data.

        Friday, October 13, 2017

        Friday the 13th is often thought to be unlucky. Not today. September retail sales surged 1.6%, the fastest pace in more than two years. Automobiles, gas stations, and home building suppliers were big contributors to the increase, benefiting from a post hurricane bump. Hurricane effects were also evident in the latest inflation numbers. The hurricane related disruption in the oil industry led crude prices higher and the consumer price index (CPI) rose 0.5% in September to post the largest increase in eight months. Although year over year consumer prices are only up 2.2% (1.7% excluding food and energy), slightly below expectations, inflation is slowly creeping toward the Fed’s target. But the biggest positive data element released today was a mammoth leap in consumer sentiment. The University of Michigan Consumer sentiment reading soared to 101.1, the highest reading since 2004, shattering expectations of 95. So go ahead and walk under a ladder, break a mirror, spill some salt and let a black cat cross your path. Then maybe buy a lottery ticket. And follow the latest Global Perspectives on the market here.

        Thursday, October 12, 2017

        The Q3 earnings season party has begun. Financials are usually the first to report and so far the big banks have been exceeding expectations. However, the financial sector is still expecting negative earnings growth for Q3. The Insurance sub-sector is the culprit, dragging Financials down due to the impact of the hurricanes. But a big pop in insurance company earnings is expected in Q4. The Consumer Discretionary sector is also forecasting a negative growth quarter, but a subsequent huge surge in Q4 - especially in the automotive sector - is anticipated. Overall earnings growth in Q3 will most likely be mid-single digits; not as high as the growth reported in the last two quarters, but not too shabby either. These earnings estimates are mostly baked into the market cake and barring any huge surprises, the market is already looking forward to Q4. The fourth quarter anticipates strong positive growth across all sectors, continuing to support the bull market. Can it get any better than this? Yes, corporate tax cuts would be the icing on the cake. Maybe it’s time for investors to dig in. Please watch Karyn Cavanaugh's latest comments on the markets and corporate earnings (Karyn appears at the 10 minute mark).

        Wednesday, October 11, 2017
        Core and headline inflation remain subdued with the Fed’s preferred measure of inflation, Core PCE, remaining slightly below target.

        The FOMC released the minutes of the September 19-20th meeting this afternoon. Participants worried that forces keeping inflation down could be more persistent than previously thought, departing from comments earlier in the year regarding the influences of one-time factors such as cellphone plans being more transitory. The bulk of the committee still see a December interest rate hike as appropriate, however some remain data dependent. Participants acknowledged that upcoming inflation and growth data could be influenced by the effects of the recent hurricanes, but don’t see the storms affecting medium or long term growth. Some participants also questioned whether the estimate for the natural rate of employment is lower, implying more slack in labor markets.
        Market responses to the minutes' release were muted, with 10-year yields falling 1 basis point and the expectations for a December interest rate hike staying put at 77%. The effects of the hurricanes will allow the committee to look through at least a few data points as hurricane-influenced, and we share the market’s view that there will be a hike in December. If lower than target inflation indeed persists and there is slack remaining in the labor market, the FOMC should move slower in normalizing policy and risk assets should benefit. Please see page 59 of the Global Perspectives™ Book: “Inflation - Consumer Price Index”. - Special Guest Blogger: Pavel Dekhman

        Thursday, October 5, 2017
        Taxes matter. High U.S. corporate income taxes have spawned a recent wave of tax inversion deals.

        Tomorrow’s Non-Farm Payroll report has had its decade in the sun. It has been all the Central Banks, pundits and media could focus on. Now it’s time to focus on something far more important and meaningful to the U.S. Consumer. It is “take-home pay”. The government seems so concerned about rising wages – I call it “alligator tears” – and what that means to the “middle class”. Really? I am not buying it. If Congress is so concerned about the middle classes’ income they would not just cut taxes but slash taxes. Tax cuts would immediately increase “take home pay”, increasing the well-being of congress’s constituents – a true bipartisan issue. Taxes were responsible for the Boston Tea Party in 1773 led by Samuel Adams, beginning the Revolutionary War. Every relatively recent president that took the ax to taxes created an economic boom that raised the standard of living for all. These included Presidents Kennedy, Reagan, Clinton and hopefully Trump. Yes, close the loopholes, rid the markets of Central Bank interference, make it simpler, fairer and more reasonable. Did you know that the top 50% of AGI taxpayers pay 97.5% of all taxes or that the top 10% pay 70% of all taxes? Here is an idea – make it pro-business – unleash capitalism. There is indication that even the discussion of tax cuts and a meaningful reduction in wasteful regulation is spurring the economy. So ignore tomorrow’s employment report – which is near full employment – but we can always use more and focus on wages and tax cuts. Please see page 73 of the Global Perspectives™ Book to find that the USA has the highest tax rates in the world.

        Wednesday, October 4, 2017

        Globally, deflation is no longer the major risk and inflation is under control. The G-3 Central Banks have done a good job of escaping deflation though they are still not at their (generally) 2% inflation targets. We expect that 2018 will see both the FOMC and ECB begin to normalize their balance sheets and that the BoJ will remain accommodative well past 2018. There are likely to be unanticipated effects from the normalization since it is uncertain how exiting from QE will work in practice. As a result, we expect the Fed and ECB to move slowly and on net, global monetary policies will remain accommodative in 2018. With the G-3 growing at above trend rates, this is a good scenario for riskier assets.
        Globally, inflation is not a major problem. The IMF measure of GDP-weighted CPI inflation has averaged 3.6% over the past 10 years, sub-3% over the past three years. Importantly, global liquidity has stabilized in 2017 after a long decline. The IMF measures total world foreign exchange reserves. We see this as a form of a world-wide exchangeable monetary base. That’s because it is basically the total of all the foreign assets on all central bank balance sheets. The rebound is positive for maintaining global growth. For more insights on the global markets, please see the full list of our latest commentaries. - Special Guest Blogger: Tim Kearney


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