March 5, 2018 Tariff

Risk/Reward Vol 383

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

All major indices lost ground this week with the Dow now negative for the year, the S&P 500 barely positive and the NASDAQ up 5% but still well below its January highs. Two factors were to blame for this week's negative vibe. The first was predictable; the second came out of left field. As you may recall from last week's edition, I highlighted as a threat to market stability the Fed's decision to raise rates at the short end of the bond curve while simultaneously reducing its holdings on the longer end. Former Chair Yellen's ability to explain this policy in soothing economic double speak heretofore had lessened market jitters even as the cheap money punchbowl was slowly withdrawn. Not so her successor. Frankly, Chair Powell's first appearance before Congress on Tuesday was a disaster. He eschewed double speak and intimated that the Fed may raise rates four times this year instead of the universally expected three times. Mr. Market freaked at this surprise testimony and headed to the door. The Dow dropped over 390 points from its intraday high. And speaking of surprises, Thursday brought something no one anticipated. Against the wishes of most of his advisors and catching his communication team completely off guard, The Donald announced 25% and 10% tariffs on steel and aluminum respectively. The Dow shed over 550 points from its high that day. What these tariffs mean in the longer run is yet to be determined.

Despite turbulence in the stock market, the bond market has remained remarkably stable. The all important 10 Year US Treasury Bond closed the week within a tight range of where it has been for a month. The fear of impending inflation which sparked the sudden rise in rates in early February has lessened. The bond futures "breakeven" numbers indicates that inflation over the next 5 to 10 years will remain below 2.5%. Since a majority of economists believe that the number one contributing factor to inflation is wage growth one should keep an eye on the jobs report scheduled to be issued March 9th. Recall (vol. 379 http://www.riskrewardblog.blogspot.com/ ) that it was last month's reported hourly wage increase of 2.9% that has caused much of the market turmoil we have been experiencing recently. I expect continued choppiness but this time hopefully with an upward tilt.

Trigger warning: soap box. As I have noted before, the popularity of passive investing has resulted in a massive increase in the assets managed by the three major sponsors of passive investing vehicles: BlackRock, Vanguard and State Street. Together they are the largest shareholders in over 90% of the companies comprising the S&P 500. That means of course that they are the largest shareholders in companies that directly compete with each other---every airline, every major bank, every player in every industry. Let that fact sink in, Dear Reader. Until now each of these companies has taken pains to be passive in regard the management of these corporations. They have done so to avoid antitrust scrutiny. Note I said until now. With the tragedy at Parkland in constant focus, BlackRock, Vanguard and State Street have all indicated that they intend to "engage" the management of the largest gun manufactures (in which not surprisingly these three behemoths hold the largest block of shares) as to their intentions toward reducing gun violence. As well intentioned as one may think this new activism is, it portends a great threat. Suppose these Big Three come to dislike the robust debate occurring on our news channels and "engage" the management of Disney (ABC), TimeWarner (CNN), Comcast (MSNBC, CNBC, NBC) and other outlets in which they hold the largest blocks importuning them to tone down or even slant their rhetoric? Would this be healthy? No way! I would rather face Russian interference in our political process (BTW have you ever seen such amateurish propaganda?) than have all of our major news outlets controlled by an oligarchy, the danger of which is clear and present. Just sayin'