The Dividend Cafe - A New Fed Chair and New Tax Code: Just Another Week In Paradise

Episode Date: November 2, 2017

A New Fed Chair and New Tax Code: Just Another Week In Paradise by The Bahnsen Group

Welcome to the Dividend Cafe, financial food for thought. We are a wealth management firm in Newport Beach, California and New York City, New York, managing a little over $1.2 billion and unbelievably dedicated to our clients, which is basically the reason we do this podcast. We obviously love it when outside folks listen to it, get a clear idea of what it is we believe in and what we do from an investment standpoint. of what it is we believe in what we do from an investment standpoint but to the extent that it is our clients we are here to serve podcast our weekly commentary writing videos these things are done to serve our clients to give them a better idea as to how their money is being managed and to enable them to become smarter investors to have more confidence in the processes by which their money is being stewarded. This week, we're going to focus on a couple of different things.

It just happens to fall not only in the same week, but actually happened within a few hours of each other on Thursday, each one of which would really be one of the biggest news market events of a year, let alone of a day. And that is both the appointment of a new Federal Reserve chairman who will go before Senate for confirmation after the new year, and then where we are with tax reform, the House of Representatives pushing out their 429-page tax bill this week that will be attached via reconciliation to the already passed budget resolution requiring only 51 votes in the Senate.

And of course, it we expect your own pal, President Trump's new nominee to chair the Federal Reserve to receive appointment. Let me recap for you these tax reform kind of highlights. Effectively, I really do think that the biggest meat of the changes, the reform side, largely centered around the business tax, corporate tax portion of the tax code, a massive reduction from 35% to 20%

in the corporate tax rate, the repatriation of foreign earnings that will be done at a 12% one-time rate on cash, a 5% rate for non-cash illiquid type assets held offshore, then moving to a territorial tax system going forward, which will practically eliminate incentive for U.S.-based companies to move offshore, will allow for full expensing of new equipment, changing a lot of these complicated and somewhat asinine depreciation schedules and things of that nature.

It does preserve a couple of the little tax credits that I frankly can't stand, but we're not surprised they're sticking around, but it gets rid of the bulk of them, kind of targeted, I would call crony capitalist components of the business tax code. And then it does allow a 25% tax rate for pass-through entities, and the legislation did not further limit or qualify which types of entities would qualify. Like, for example, saying only manufacturing businesses would apply. So we were very happy about that.

And it will really, I think, be a big boon to small business owners that happen to be set up as an LLC, a partnership, a sole proprietorship, a subchapter S corporation, those now will achieve a 25% tax instead of passing through the much higher individual tax rates that they likely are in. On the individual tax code, we are going to four tax rates, which is up from the three they had originally proposed, but down from the seven we currently have, with a doubling of the standard deduction, a substantial increase of the child tax credit, the creation of a so-called family tax credit that will give a little tax relief to those caring for a non-child family member,

perhaps a sibling or an aging parent or something. And then they did not touch 401k or IRA tax deductibility. I think there was a lot of really kind of idiotic chatter going on around that, that was not coming from any of the legislators or policymakers, but just sort of media hype. But there was never really anything going with that. They ended up keeping up to $10,000 deduction for property taxes.

They had said that would be going away altogether. And then they did stick to their guns on getting rid of the state tax deduction altogether. So state tax payers, those paying a high amount in state taxes that have been deducting its federal taxes will no longer be able to do so. been deducting its federal taxes will no longer be able to do so. However, many have already not been doing so because they fell into the alternative minimum tax, the AMT, and that is going away altogether. A $500,000 limit on the mortgage interest deduction going forward, meaning new mortgages either through purchase or refinance. The deductibility will be limited to $500,000, or refinance. The deductibility will be limited to $500,000, which is a step in the right direction. So $1.5 trillion worth of tax cuts, which is exactly how much they were able to do without having to deal with the whole filibuster aspect of the Senate. And I think it is very likely to pass

the full repeal of the estate tax in six years and phasing out of it over the next six. Like, for example, starting off with a doubling of the estate tax exclusion in the very first year, I think is unlikely to stay in. I suspect that a total repeal is something the Senate will end up taking out, but we'll see how that goes. And then in terms of the retroactive nature of this, I find it fascinating. They're talking about bringing it back all the way to January of 2017. And therefore, that would mean that a lot of people would be getting refunds from this year because, of course, we're already well into the year. And basically people have already paid their withholdings and quarterlies and so forth. So the next step is for the Senate to kind of play with it.

And we'll have a better idea of the political path forward in the days ahead. in the days ahead. As far as the central bank chair, Jerome Powell, very much in line with Janet Yellen, no real change in the expectation for interest rate hikes before or after the announcement. So I don't suspect that you're going to see a real paradigm shift. He's cut from that same cloth. He's very much dovish on monetary policy. I hear from and what I read is that he is compatible with a less burdensome and onerous form of financial regulation, particularly on regional and mid-sized banks. And so to the extent that he now becomes essentially the de facto chief regulator of the nation's financial system. I think it's important to understand where he's at philosophically on those things. And we really are quite interested in where the president will appoint the vice chair

and some of the empty governorships that exist, because you could very well end up with an ideologically conflicted board of governors, which could make for some very healthy debate, but some real interesting questions around policy direction. Look, a quick little tidbit for you to think about as you hear over the next week and a half about President Trump's trip to Asia. He's going to be gone for 11 days. And obviously, there's going to be all these normal discussions in China and elsewhere around trade, around agreements, around the geopolitical aspect, North Korea. But there is a particular nugget that I don't think is going to get a lot of press. I've read a great deal on. I mean, there are billions of dollars, energy deals.

This administration's discussing with China, talk of the China Petroleum Company investing into a 700 mile pipeline that would carry oil and gas from the Permian Basin down to the Gulf Coast and be available for export to Asia and so forth. This type of project approval only needs to go through the executive branch. So you may very well see these types of things happening on this trip that I think are needle-moving in the energy sector. And I don't think we'll get a whole lot of press. So between the tax reform bill this week and where those things stand, and then obviously President Trump's announcement around his Fed governor. It's been a big week. Markets are humming along. Something's doing very well through earnings season. Something's struggling, blending together to be a pretty what you'd expect response, but with high dispersion of return. And we continue to work hard. I think that there's no easy returns right now. I think that people need to really have a clear understanding of asset allocation, where their risks lie. We saw the UK

today raising interest rates for the first time in a decade. We know from last week, the European Central Bank plans to keep rates at zero for quite some time, perhaps as much as two or three more years, but start peeling back a little bit, or as they call it, tapering from their aggressive balance sheet. So some monetary normalization somewhere in the world starting to take place, not nearly as much as we think there ought to be. But in the meantime, risk markets like it. So we're being prudent, as always.

We're taking your questions because we want you to understand what we're doing with your money and why and I'm going to close by offering my heartfelt condolences to the families of those who lost loved ones at this ghastly and despicable attack in New York City

this week, 8 dead, 12 wounded the hands of a barbaric jihadist we pray for their comfort and we pray for justice. And with that said, we do thank you for listening to Dividend Cafe podcast. We'll be back at it next week. Look forward to what we haveend Cafe, financial food for thought. The Bonson Group is registered with Hightower Securities LLC, member FINRA, MSRB, and SIPC, and with Hightower Advisors LLC, a registered investment advisor of the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities.

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