June 4, 2017 Paris Accord

Risk/Reward Vol. 354
 
THIS IS NOT INVESTMENT OR TAX ADVICE.  IT IS A PERSONAL REFLECTION ON INVESTING .  RELY ON NOTHING STATED HEREIN

Reading newspapers and watching telecasts one would conclude that no one in the world agrees with The Donald's decision to abandon the Paris climate change accord.  No one that is other than Mr. Market.  Did you see the indices jump following the President's announcement?  And the momentum it created powered them to record closes on Friday despite a disappointing jobs number.  I suspect Mr. Market's reaction was less a ringing endorsement of Mr. Trump's environmental position than it was a recognition that the President would stand by his campaign promise to put America first in all matters---no matter how unpopular the action may be.  Mr. Trump believed that the burden of the accord fell too heavily on the US in comparison to other countries and that was his rationale for the walk away.  Good policy or bad is of no moment to me as an investor.   Indeed, when it comes to investing, I am apolitical.  I cannot afford to be otherwise---just like Mr. Market.

So with unemployment now at a multi year low of 4.3% why was the jobs report deemed disappointing?  Two reasons come to mind.  First, although unemployment is low it is so, in large part, due to a declining labor participation rate.  Only 62% of eligible workers are employed, fully 5% below the pre-2007 participation rate.  The delta between the unemployment rate and the unemployed rate is the huge number of eligible workers who are not seeking work.  The second reason is that wages are growing at a snail's pace.  Without wages increasing, demand remains depressed a fact borne out by the anemic growth in gross domestic product and a sub 2% inflation rate.  The "laws of economics", particularly the Philips curve (low unemployment is supposed to result in higher inflation) upon which the Federal Reserve sets its policies, simply have not worked as postulated.  I have my beliefs as to why (e.g. an aging work force) but that discussion is for another day.

So what does this mean to investors?  To index buyers and the buy-and-hold crowd, I see no end insight.  The S&P 500 is up nearly 9% year to date; the NASAQ is up 17%.  Do I see them rising at such a clip going forward?  No, but I see nothing to cause a precipitous drop either.  For me and other interest rate sensitive investors I see more of the same;  a sub 2.5% rate on the all important US Ten Year Bond and nothing on the horizon scheduled to rocket it higher.  Even with a June rise in short term rates "baked in" , the 10Year closed on Friday at 2.159%.   With no foreseeable need to reset, I will hold what I have and collect monthly dividends.  I may add some more preferred closed end funds to my portfolio, but finding undervalued assets in that space is becoming more difficult.  In addition, with the President so unpopular, the likelihood of significant tax reform is lessening.  The prospect of tax reform has depressed tax free,municipal bond funds since the election.  With reform fading and with low, stable interest rates, I will investigate deploying some taxable dollars into that tax free arena.