Rates

Last Wednesday the Federal Reserve woke from slumber and stumbled out of its burrow only to glimpse its shadow, signaling a longer than expected winter and higher than expected rate hikes. Truthfully, at this point I sort of wish the central bank would rely on a groundhog to signal when to increase rates. I don’t want a rodent to determine all monetary policy, but I’m willing to make an exception here. The market reacted accordingly to this surprisingly aggressive move and, as I drove to work in two feet of snow, I was able to live the analogy perfectly. Despite the fact that every year we drive through the ice and snow, it’s somewhat of a tradition to treat the first snowfall with childlike wonder. As in, I wonder what it would be like if I drove my car like a child? Michigan drivers treat the first snow of the year as though they have never driven an automobile before. That’s what happened this week – the markets responded like they had never heard of interest rate increase before. This was followed by the predictable onslaught of chicken-little commentary. While it does lend some credence to my theory that the market is currently fueled by hopes and dreams, I’m still disappointed. First, the Fed constantly changes its mind. Sure, they can’t do this forever, but seriously: they said they would raise rates four times in 2016 and they raised them once…at the very last minute! Second, Janet Yellen herself stated they would take a “wait-and-see” approach. I could talk about when and why the market is fueled by gossip vs actual news but that’s more Jeff and Dave’s things. I would rather dissect the wait and see approach. What?!? Janet Yellen graduated summa cum laude from Brown and has a PhD in economics from Yale. Nobel laureate Joseph Stiglitz called her one of his brightest students! She has a long and storied career in economics…heck, her husband is a Nobel Prize winning economist! Janet, what should we do about rates? “Meh, let’s just wait and see?”  

More Rates

So what happens if rates do go up? Part of the recent sell off has to do with promises made on the campaign trail. The fuel added to the fire, if you will, is Trump’s tax plan. As municipal bonds are exempt from taxes, a general rise in interest rates is less meaningful for investors that would purchase munis. Additionally, sometimes tax reforms propose to repeal muni bond’s tax exempt status. Finally, the same interest rate increase would effectively reduce the value of bonds across the board. Since the election, US munis have returned negative 3.1% and average daily trading volume has tripled. Like I said before, this response has been insane. Some people might say insane in the membrane, insane in the brain. Let’s unpack these ideas. First, would Donald Trump’s tax proposal render tax free income less meaningful? Trump’s economists have repeatedly stated that they plan to lower tax brackets while also eliminating deductions, leaving total taxes unchanged for high income earners. These are the people buying munis. People that don’t make very much money aren’t worried about municipal bonds. Second, sometimes tax reforms propose to repeal muni bond tax exempt income. Ok, so sometimes when people talk about changing taxes they also talk about this other thing related to taxes. It’s never actually been changed, and no one is talking about it now. But once, somewhere, someone mentioned both and now we’re worried. Finally, rising rates reduce bond prices. Well, this is true and rates cannot get any lower. They must go up. And while bond portfolios will lose value there are a lot of positives too. Rising rates help curb inflation and signal an improving economy, which allow companies to increase their profit margins and possibly create more jobs. As people work more or earn more they are able to purchase more. This is compounded by reduced inflation. Plus, you know, gold assets tend to do poorly so I get some time off from those annoying ads.

Trump

Donald Trump held an “innovation summit” this week with key leaders in the tech industry. Amazingly, no one from Twitter was asked to attend! The president’s office stated that the tech company was not included on advice from Peter Thiel, co-founder of Pay Pal. Many have also speculated the snub was in retaliation to Twitter’s reticence to build Donald a Hillary Clinton emoji. Seriously. Well, I’m torn. I feel like Twitter probably can’t build emojis for every person that asks but also, come on! He’s the president-elect. On the other hand, he’s the president-elect! Why is he asking for special emojis? There has to be bigger issues he’s dealing with. Right? Anyway, Silicon Valley had good reason to be nervous about the meeting. Many of those in attendance were vocal Hillary supporters. Following the election, Trump called a similar meeting with news executives and mostly just berated them. He took a more forgiving tone this time, and most of the feedback coming out of the meeting was that it was informative and constructive. Surprisingly, many employees of these firms were not supportive of their executives’ involvement, and attendees found themselves inundated with letters, petitions, and public admonishment from staff and colleagues. To me, this signals a change in tone in our country. Admittedly, this may just be the first election I’m paying this much attention to, but I feel like in the past if you were invited to meet with the president you always said yes, you smiled for the camera, and you said something polite after the meeting. Certainly, meeting attendees followed these rules. However, many critics suggested this summit should be used as a platform to confront the president-elect. Which leads me to my second thought. This is definitely a signal of change in corporate culture. This reminds me a little of the chatter around the Facebook fake news stories. When founder Mark Zuckerberg first heard about accusations that news stories on the social media platform had influenced the election results, he dismissed the idea as silly. As he should. His staff then formed a secret task force to investigate the issue further and press the company to make changes. I can’t conceive of a world where I publicly or privately admonish my firm’s CEO without also expecting that I will get fired immediately.

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