November 12, 2017 Tax Flop

Risk/Reward Vol. 370
 
THIS IS NOT INVESTMENT OR TAX ADVICE.  IT IS A PERSONAL REFLECTION ON INVESTING.  RELY ON NOTHING STATED HEREIN.

OK.  So as a result of the collapse of the President's tax plan the Dow Jones Industrial Average suffered its first negative close in eight weeks.  But c'mon guys, down a measly 0.5%?  That is hardly a blip.  I stand by my previous statement that tax reform or not, the stock market will continue at current or higher levels until a reasonable alternative arises.  And that alternative does not appear to be bonds any time soon.  The rate on the all important U S Treasury 10 Year Bond continues to hover around 2.4%, hardly an attractive return.  I highly recommend a read of Martin Wolf's column in Saturday's Financial Times.  He addresses the entire low-interest-rate=stock-bubble debate in a succinct yet comprehensive manner.  His take is that even though stocks are in historic Shiller PE territory (above 30x) we are also experiencing historically and persistently low interest rates.  For a host of reasons, he does not see this predicament ending soon.

And speaking of historically low rates, I do mean HISTORICALLY LOW rates.  Recently the Bank of England (the British central bank) did an analysis of world wide interest rates back to the 13th Century.  That was at the dawning of a banking renaissance in Siena and Florence; banking that had not been so robust since Roman times.  The BOE found that the rates prevailing in the spring and summer of 2016 were lower than at any time since at least 1273.  Given the depth of this interest rate trough and how little rates have risen in the past year,  I do not see bonds providing a reasonable return for conservative investors any time soon. Those that play the bond market for capital gains (think shorting) may do well if rates start to climb, but I suspect  it will be a long time before traditional fixed income securities provide a livable return.

Lost in the news surrounding tax reform (or more appropriately the lack thereof) is the amazing story in oil.  Do you appreciate the level of turmoil afoot in Saudi Arabia right now?  Between sabre rattling with Iran and arrests in the royal family, the world outside the US is getting very nervous about a secure supply of petroleum from its largest producer.  Indeed, the price of oil on the international market (Brent) is now above $64/barrel.  In contrast, WTI (US price oil) is $56/bbl.  Indeed, had the problems in Arabia arisen before our post  2008 oil boom they would have dominated our headlines.  Now they are a page 3 item at best.  Between our record high domestic production (thanks to fracking) and the improved supply from Canada, North America is getting close to energy independence.  And frankly were supplies to be totally cut off, between our reserves and our ability to ramp up production we could get by.  Not so the rest of the world.  This gives us a 'uu-uge advantage.  One that is rarely discussed these days outside this publication.