December 24, 2017 Blessings

Risk/Reward Vol. 376

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

Another week, another record as Mr. Market celebrated enactment of the President's tax reform bill.  Articles pro and con are yours for the reading, but a few things are clear.  Corporate tax rates for both Subchapter C and Subchapter S filers have dropped.  People in high tax states are disadvantaged.  And the amount exempt from estate tax has been doubled.  Will any of this impact you?  Probably, but as my banner above reads "This is not tax advice."  

The most underreported story of the tax bill is its impact on interest rates.  The rate on the all important 10Year US Treasury Bond is now almost 2.5%, a meteoric rise in just a few days.  Why?  Well for several reasons.  One, the tax bill is deemed inflationary and the rate on the 10Year is most responsive to inflationary pressures and expectations.  Second,, the tax bill has been scored to create a $1.5 trillion deficit over the next ten years which can be gapped only by more borrowing by the US government.  With more debt available it arguably will become cheaper to buy.  And remember lower bond prices means higher rates.  Third, as reported last week, the spread between the rate on the 2 Year and the 10Year was out of whack given the health of the economy.  The two year rate was not going to drop so the spread had to widen on the long end. Fourth, bond buyers are becoming nervous as the biggest buyers in the world's bond markets, central banks via their quantitative easing policies, have signaled that they are curtailing bond purchases and reducing balance sheets in the coming months and years.  All of these factors contributed to the fact that bond mutual funds experienced their biggest outflow of the year last week.  Parenthetically, this may be a buying opportunity for me.


I would like to take this time to wish all of you who celebrate the holiday---Merry Christmas.  We do celebrate it.  It is our favorite time of the year.  Our Christmas card this year is entitled "Blessings."  Barb chose it, but the more I look at it the more I embrace it.  I keep a framed copy on my credenza and look at it every day.  It serves to remind me of all the blessings that have been bestowed upon me and for which I give thanks everyday.  May all of you be so blessed.  And for those who have been challenged this year, know that our thoughts and prayers are with you.