The Dividend Cafe - The Fed Walked Into Alabama to Buy Some Bitcoin and Their Taxes Went Down - Dec. 15, 2017

Episode Date: December 14, 2017

The Fed Walked Into Alabama to Buy Some Bitcoin and Their Taxes Went Down - Dec. 15, 2017 by The Bahnsen Group

Welcome to the new podcast environment that we're going to create for 2018 figuring out what we want to do delivering great compelling interesting actionable podcast content reframing all that going into the new year. But for now, our weekly Dividend Cafe, a pretty amazing week in the news cycle. A big special election in Alabama. You had significant movement in the conference where the House and Senate are trying to reconcile their tax bills. The Fed moved on interest rates. Bitcoin began trading in the futures market. So through it all, the world continues to turn. Let's cover all these things and get into it.

The significant development in tax reform this week is that the conference presently underway to reconcile the House and Senate bills apparently concluded, and successfully concluded at that, according to reports. They've produced some meaningful improvements improvements and I'll go through what they've released about that. I am somewhat exhausted by all the moving parts. I'm tempted to just wait till the very, very final release, but the reality is we're quite close to that and we have most information that we need at this point. The big surprise to me this week is the reduction of the top income rate on the individual tax code coming down to 37%.

It had been at 39.6% previously, and then in the Senate bill it was at 38.5%. So they ended up with a lower top rate than either the Senate or the House had. And I think that's a meaningful difference, particularly in those states that are more heavily impacted by the loss of the SALT deduction, the state and local tax deductibility going away. They did push the corporate tax rate from 20 up to 21, not a meaningful difference and still obviously far lower than the 35% rate we have right now. This is presumably the pay for relative to the reduction in the marginal income rate. But the other issue is that they will have this effective going into 2018,

just two weeks away, as opposed to 2019, which is what the Senate bill is doing, making it wait for a full year. The mortgage interest deduction was at $500,000 going forward for new home purchases in the Senate bill. Excuse me, in the House bill, but it was left at a million in the Senate. They've compromised and met in the middle at $750,000. thousand um they are getting rid of the uh silly thing they were trying to do with corp with capital gain taxes getting uh basically making people sell their first lots of stock uh first and and so the lowest basis stock would end up being sold out. And it was a stealth way of increasing capital gain tax as opposed to letting investors choose which tax lots they wanted to sell whenever they sold security. And corporate AMT is being scrapped altogether.

That was thrown in there in the Senate bill and it appears that they're now ready to get rid of that. Some deals are still forthcoming around pass-through entities, but again, it really appears that they're ready to send a reconciled House-Senate bill for vote and then to the President's desk for signature. Our assessment on it is that they're largely very market-friendly changes. Pro-growth capacity coming out of the legislation is high and so we're um we're we're a big believer i uh i i think that this could be a historical event set to take place for the end of the year um in terms of bitcoin not not likely to stop all the hype and everything. It's a maniacal move higher, very violent, that's requiring some talking points on something I'd really rather not be having to get into at all.

If people wanted to have an economic conversation about the idea of cryptocurrency becoming a substitute to fiat money into the future, to fiat money into the future, if there was some sort of monetary policy or even cultural divide conversation to have, it would be more interesting. I actually have very strong opinions on that as well. But to the extent we're talking about the price of Bitcoin as some sort of an investable, chase-worthy item, it's certainly nothing we intend to touch it is it's not for me to predict how far it will drop or when it will drop or if it will drop our avoidance of this is not based on some crystal ball reading it's based on the rather emphatic lessons of history anytime hordes of people begin buying something they don't understand for no other reason than speculative hope, it usually ends in tears. There's always lucky souls who had the good fortune of sold their dot-com stocks or flipped out of their Vegas condos in 2007 before major, major drops. But again, this is that these reference people that are gambling, not investing.

It's delusional. This is not a comment, as I said, about Bitcoin as a future medium of exchange. Although I will say that's something else that we think will end badly. What this is is a comment about the history of manias, for which there are no exceptions. The most naive and uninformed become the greater fools in a vicious exercise of greater fool theory. Unspeakable economic value deterioration is done

when these types of things happen. There's just not a substitute for diligent, fundamental investing, and there never will be. With jobs like this, who needs tax cuts? It actually saddens me to think anyone may read that headline and not read the paragraph I'm about to go through. Yes, there is a school of thought that says with the economy at near full employment, tax cuts are bad ideas. They risk overheating the economy. But this school of thought, Keynesian, traditional Phillips curvers, fails to recognize the difference between inflationary growth, that's monetary driven, and productive growth, the heart of a free enterprise economy.

It's monetary-driven and productive growth, the heart of a free enterprise economy. Of course, the presupposition and the belief is that the purpose of tax cuts is merely economic stimulus and not returning to taxpayers what is rightly theirs, that the most optimal allocation of capital exists where there is profit mode of private enterprise. That needs to be the driving thesis. But yes, I mean, the unemployment picture is truly strong. 228,000 new jobs in November, low 4% unemployment rate. Average hour earnings are ticking up. Of course, this also helps to kind of facilitate what the Fed will end up doing. So we believe that the tax cuts are necessary from a global competitiveness standpoint,

but we don't worry about how tax cuts fit into the unemployment picture. Speaking of the Fed, yeah, they did raise rates a quarter point on Wednesday, as expected. I mean, it was highly priced into the market that that was coming. And right now we see a pretty high chance of another rate increase into March. So we shall see a lot of changes coming in the personnel of the central bank. It's something we're watching very, very closely. Very excited about the energy sector going into 2018. Are we perma-bulls on the sector? Not at all.

We've always been highly selective in our energy sector weightings and preferences. We have been rather long-term energy infrastructure bulls, especially around midstream assets, primarily the pipelines for transportation and some degree of storage, has a lot more to do with commodity price agnosticism, dividend yield, dividend growth, than it does even the secular story behind it, which we also are quite fond of. We became bulls on the integrated energy plays, those with revenue in the upstream and midstream and downstream aspects of the energy cycle in early 2016 due to the value that was offered after the oil price

downturn. As value investors, energy became a focus because of that collapse. But of course, value and timing are two totally different things. We're, you know, we were richly rewarded for coming in the integrated space about a year and a half to two years ago, but on the midstream side we think it remains a sort of perpetual call that requires a lot of selectivity. Global economies are growing. We think that means more fossil fuel consumption. We believe the presidential administration is extremely friendly from a regulatory project deregulation standpoint. The pricing of the sector is nowhere near reflecting current commodity trends, let alone cash flows of the industry. So all things being equal, we're quite bullish on energy going into 2018.

Go to DividendCafe.com this week. Read more about the free trade policies of the Trump administration, our perspective on fixed income. There's a couple good charts, as always. But for now, we'll leave it there thank you for listening to different cafe podcast and please feel free to shoot us any emails with suggestions for format content and different things you'd like to see done as we go into the new year with this podcast thanks for listening to the Dividend Cafe, financial food for thought. Thank you. opportunities referenced herein may not be suitable for all investors all data and information referenced herein are from sources believed to be reliable any opinion news research analyses prices

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