InnOvation Capital & Management, LLC
IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
DECEMBER 20 , 2017
Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues. Material may not be reproduced, forwarded or shared without express permission.
This is the final publication of IntelDigest in 2017. We will take a break over the Holidays, and resume publication for 2018 in the second week of January.
This issue has been delayed by one week pending final votes in Congress on the new Tax Bill. Now, the votes are in and the Tax Bill has passed. We don’t yet know all the provisions of the new tax law, but we will learn that over the next few weeks and months … at the same time that the Senators and Representatives who voted for it will learn what they voted for!
We did highlight one provision of the (then-proposed) tax reform in the November 29 issue of IntelDigest when we discussed year-end tax and investment planning. That provision will severely limit itemized deductions for taxes levied by states or local governments, e.g., income taxes and real property taxes. So, we recommended:
Pay your 4th Quarter Estimated Taxes in December, to preserve your deduction for State and Local Taxes. Similarly, pay property taxes in December, and make Charitable Contributions before December 31.
We would add: inquire about the possibility of pre-paying some of your 2018 real property taxes this month … otherwise, you could find that you lose some of your deductions next year.
Initial Impressions of The New Tax Law
We discussed Tax Reform proposals in IntelDigest earlier this year … from mid-March through mid-April … where we supported changes which would facilitate American business putting more private money into growing the American economy. We still believe that lowering tax rates on businesses … large and small … has the potential to increase the competitiveness of U.S. corporations in world markets, and allow smaller businesses to employ more Americans.
By the way, among the many beneficiaries of lower tax rates on small businesses: Donald Trump and his family, and other real estate developers.
IF these tax cuts prove to be stimulative to the economy, and IF business owners truly plow their new-found tax savings into business expansion and hiring thousands of workers, then we will have taken a large step toward attaining 3-4% growth in the American economy in the coming years.
However, we also believe that massive changes in individual taxation are not warranted at this time, most especially because of the likelihood that this wholesale Tax Cut package will add another Two Trillion Dollars to the national debt in the next few years. It is also worrying that the Republicans chose to discriminate against the middle class, i.e., making the small tax cuts for some families expire after a few years while tax cuts for corporations are permanent.
The fear is that these tax changes will:
* amount to nothing less than a redistribution of resources from the middle class to multinational corporations, millionaires and billionaires, and the same banks which were responsible for the 2008 Financial Crisis
* drive up the cost of premiums in the health insurance exchanges
* pave the way for large cuts to social programs such as Medicare, Medicaid, and Social Security
We will certainly devote much digital ink to Tax Analysis and Tax Planning in the New Year.
Challenges Ahead
In our last issue, we pointed to a number of financial challenges which we all will face in 2018 or 2019. The most serious is the Debt Explosion:
* Government debt (both federal and state) has been growing exponentially in the last 17 years. Because the Federal Reserve cut interest rates to almost nothing, government borrowing costs have not exploded (yet!)
PLUS
* Consumer debt has returned to an all-time high (less than 10 years after a Financial Crisis which reverberated across the globe)
The Problem: Interest rates will eventually rise to more “normal” levels, and all this Debt will prove to be unsustainable and unserviceable.
But, for now …..
The Importance of Interest Rates
Low Interest Rates are still supporting a growing economy. Despite a hike in short-term rates last week by the Federal Reserve, investors realize that there is still no better choice than stocks in the current environment.
We have expressed our view … repeatedly, like a mantra … over the last several months:
“…. expect the stock market to stay strong through the end of this year, attributable in part to a ‘melt-up in earnings’ … interest rates remain at historically low levels …
“…. we believe that the single most important factor in the current market climate is Interest Rates. While ultra-low rates have done immense damage to fixed-income investors over the last several years, investors in equities have done very well. There have simply been no easy options for investors, so they have invested heavily in stocks and stock funds, driving Price-to-Earnings Ratios to unusually high levels.”
Looking further into 2018, there is the probability of future hikes in March and September. If they occur, short-term rates will still be no higher than 2%, less than half the 4.5% normalized interest rate.
So, there’s still plenty of fuel for the “Melt Up” in stocks deep into 2018.
Warning Sign for The Turning Point
There is one indicator which we will watch carefully in the coming year, because it has been a reliable warning of a major market peak and impending recession. That indicator is an Inverted Yield Curve. As the Federal Reserve continues to raise short-term rates, the yield curve could “invert” … the spread between short-term and (usually higher) long-term rates falls below zero.
This indicator is straightforward … it compares short-term interest rates (which the Federal Reserve “controls” and artificially adjusts) to most other interest rates, which are set by market prices.
Historically, when the Federal Reserve has artificially pushed short-term interest rates ABOVE long-term rates, the stock market has peaked, sending the economy into recession. The last three times that short-term rates moved above the 10-year Treasury were in 1989, 2000, and 2007 … leading to the most recent recessions in the U.S. economy.
Therefore, we will keep an eye on this and other indicators so we can keep you informed in the pages of IntelDigest.
Happy Holidays to all! Best wishes for happiness and prosperity in the New Year.