Cut Me A Break…

Not sure you’ve ever been unhappy to get a tax break, but this tax cut may be causing some near term pain if you want/need low interest rates.

Good news, I don’t see this event as the end game.  Like data points, this is an event to trade around and in no way provides any permanent direction.  It’s mostly been priced in, so I’m not certain we see a ton of pressure resulting from it.  In fact, we are at slightly better levels v prior to the vote closure.  Either way, it will make for a choppy year end for sure.  If you’re floating right now, I don’t see the need to rush to lock.  You’ve already missed it.  Play it day by day and be careful.

Getting back to the review of the day’s events;  The real result of this won’t be felt until we figure out if this money is actually going to go back into the economy.  My bet, not so much.  I suppose this is why I write.

Long time followers have noticed I’ve been mostly absent recently.  No, I’m not getting lazy. I’ve mentioned several times as my post have become more infrequent that I’ve grown tired of the repletion and find it senseless to write just for the attention.  I’ve communicated my general bullishness on rates since I started these posts internally 4 years ago, that continued through the more public iteration of my rantings over the last year or so and it persists even today.  In fact, I’ve found myself most resolute about low-ish rates when they most look to be going up.  Why?  Many of you already know my answer, but I will reiterate; nothing is broken and therefore nothing needs to be fixed.  Specifically today, I’m still not sure how anything is going to change.

 

QE(s) – check

Home appreciation – Check

Crazy stock valuations – check

Crazy inflation, new highly paid jobs and 4% GDP – CHHHHH

 

So what I’m supposed to believe now is that roughly $1000 in the average consumers pocket is going to drive inflation and growth.  Moreover, are corporations who largely haven’t pushed the profits resulting from QE through to the workforce all of the sudden going to treat tax savings differently? I’ll believe it when I see it.  Last I checked, if a bonus is paid on stock prices and stock prices are driven by profits, what exactly is the motivation to spend this tax savings in a me/today society?

 

Amazon isn’t going away.  Neither is the internet, information, productivity, globalization, automation, etc, etc.  As you know my thesis for perpetually low rates is that to have inflation you need pricing power.  To have growth, you need some combination of increased consumption, price or both.  Well if the population is shrinking and there is a race to the bottom in price, we could only drive growth through consumption.  One can’t consume incrementally more each year without disposable income.  Wage growth has been non-existent for over 20 years.  All this $90/month does is get us a little closer to effectively earning slightly more than we did in ’96.  So I’m not sure that does it.  Lastly, there’s the little wrinkle called debt.  Despite some degree of deleveraging over the last decade, we are still a payment society.  So history has told us over the last decade or so, every time rates go up, the economy doesn’t.

 

Long story short is  I’m saying the same thing I always say I guess.  Don’t bet on 3% just yet.  I’m still waiting for to see something to change my mind.  Maybe by q2 I will.  I doubt it though.

 

Bulls and bears…

Phil Mancuso,

Chief Investment Officer, Equity Prime Mortgage

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