The Threat of a Damaging Trade War

The Trump administration is raising fears of a possible trade war, a development that is unsettling markets around the globe, upsetting some of our closest allies, and causing great concern to both a wide swath of US business leaders and to leaders of the President’s own party. Following the President’s announcement last week that he intended to impose sharp tariffs on steel and aluminum imports, our concerns increased substantially when Trump claimed that it would be “easy” for the US to win a trade war. We strongly disagree. There are no winners in a tit-for-tat trade war; every country including the US would lose. And Monday we learned that the President’s top economic advisor, Gary Cohn, has chosen to resign rather than support the President’s stated intention to implement a protectionist trade policy.

Gary Cohn has been the steady hand on the tiller of the administration’s economic policy and deserves considerable credit for the economic achievements of the past year, in particular the tax cut package. Investors are concerned that Cohn’s departure leaves the White House only with advisors pressing for a confrontational, protectionist trade policy. Cohn fully understands the importance of open markets for the US economy and US workers and businesses. Cohn’s decision to resign implies he believed he could not succeed in his year-long battle to convince the President of this view. We share the concern expressed by Senate Majority Leader Mitch McConnell that “this could metastasize into a larger trade war….” Reports that the administration is considering limits on Chinese investments in the US and tariffs on Chinese products add to this concern. Reportedly, he is seeking a $100 billion reduction in China’s trade surplus with the US.

The President’s lack of understanding of basic trade economics and both historical and current trade developments is striking. His statement that “Trade wars aren’t so bad” conflicts with the painful lessons from the history of past trade wars. The Smoot-Hawley Tariff Act of 1930 was followed by tariff increases by Canada and Europe in tit-for-tat restrictions that greatly slowed the US and global recovery from the Great Depression.

Following the Second World War global leaders, determined to avoid future trade wars, came together in 1947 to negotiate the General Agreement on Tariffs and Trade (GATT), with the purpose of achieving a “substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis.” Eight global rounds of trade negotiations followed, with the Uruguay Round in 1994 ending in the creation of the World Trade Organization (WTO). That organization provides a forum for negotiating further reductions of trade barriers, settling trade disputes, and enforcing the agreed global trade rules among nations.

The United States economy and global trade have prospered under this global trading system, which contributed greatly to the recovery of the war-torn economies of Europe and Asia, and more recently fostered the remarkable growth of South Korea following the Korean War and spurred the development of many emerging-market economies. Moreover, the benefits of an open trading system are not just economic. Nations with economies that are increasingly integrated through trade, investment, and financial flows are less likely to undertake actions that could lead to war.

The President says he cannot find any country with which the US has a trade surplus. Really?? CNBC quickly noted that the US has a merchandise trade surplus with more than half of our trading partners, including Britain, Brazil, and Belgium. Our trade policy should not have the objective of reducing all bilateral trade deficits to zero. Nor should the President neglect the facts that the US is now a service economy and has a $243 billion trade surplus in services. Five times as many workers are employed in the service sector as are employed in manufacturing. Evidently the notion of comparative advantage, one of the few matters on which almost all economists agree, is not understood in the White House in the absence of Cohen.

As one learns in Economics 101, the law of comparative advantage states that a country should produce, and export, those goods or services which it is most efficient at producing and buy from other countries those goods or services for which its comparative advantage is less. All countries benefit from free trade, specializing wherever they have a comparative advantage. Technological and other structural developments can make significant changes in a nation’s comparative advantages. Consider, for example, the effect of the development of fracking to produce oil and natural gas, which has given the US a huge production advantage. In the case of steel production, however, the US’s large coal-fired steel blast furnaces that have been shut down are unlikely to be put back in production as a result of the projected tariff on steel. That technology is no longer appropriate for the US, which now makes much of its steel from scrap, and it would be an inefficient use of resources.

The United States could certainly benefit from a more effective trade policy aimed at reducing barriers to trade through well-thought-out and forceful negotiations and taking actions that are consistent with global trade rules. Efforts should be made to strengthen the effectiveness of the WTO’s enforcement of its trade rules. Confrontation and protectionism, on the other hand, are most likely to lead to retaliation in kind, with all becoming worse off.

On Thursday the President imposed a 25% tariff on steel imports and a 10% tariff on aluminum. Softening his message somewhat, he excluded Canada and Mexico as key regional allies and left the door open for other exceptions based on national security grounds, hinting Australia also may be exempted. There also is the possibility that some US firms will be exempted if they show a need for some types of steel unavailable from US producers. This is a step in the right direction. Equity markets now appear to be somewhat more relaxed about the risk of a trade war.

Nevertheless, we have not yet seen the anticipated action on China. Perhaps the most effective response to the many challenges posed by China, including restrictive trade measures and weakness in intellectual property protection, would be for the US to negotiate a return to the Trans-Pacific Partnership (TPP), a trade agreement among the major trading partners of the Pacific region with the exception of China. On Thursday, 11 nations including Japan, Canada, Mexico and Australia, signed the TPP agreement in Chile. A return of the US to the TPP would strengthen the collective negotiating strength of these countries. Taking actions that risk starting a trade war with the country that is the largest holder of our debt and whose cooperation we need on a host of issues, including North Korea, would not be welcomed by global markets. China’s Foreign Minister has warned China would take “appropriate and necessary responses”, noting that no one wins a trade war and adding that China and the US should strive to be partners rather than rivals. House Speaker Paul Ryan observed with respect to China’s trade practices “the better approach is targeted enforcement against those practices.” We are monitoring these developments closely.

Bill Witherell, Ph.D.
Chief Global Economist
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A Short Note on Bank Muni Holdings

The Wall Street Journal had a story on the front page of the “B” section Wednesday morning about banks getting some relief with regard to counting municipal bonds among their “liquid assets.” On Tuesday the Senate voted to formally debate a bill containing that provision, and it should have enough Democratic support to pass. The debate over this issue has been going on for some time, and we wrote about it in 2015 (http://www.cumber.com/hqla-and-lcr/).

We always thought it was a mistake on a number of fronts that munis were left off the list of high-quality liquid assets (HQLA). First and foremost is the importance of banks in the marketplace. Because of the tax exemption, banks have been buyers of tax-free municipal bonds for years. The level of taxation on municipal bonds clearly has an effect on banks’ decisions to own tax-free or taxable debt. So changes in the tax structure are one input into the buying decision. The banks’ book (purchase) yields are another input, and the designation of bonds as either “available for sale” or “hold to maturity” is another input. (Without getting overly complicated, the distinction is that realized gains or losses from “available for sale” bonds flow into the income statement, while bonds in the second category are generally held to maturity and recorded at cost.) However, one of the most important purchase considerations is the generally high credit quality of the overall municipal bond market. Moody’s publishes a study that is updated approximately every two years in which it compares municipal bond and corporate bond default rates by rating categories over a ten-year period. In the last report, for 2016, in the broadest category, “A”-rated municipal bonds had a cumulative default rate over ten years of .07%, while that of corporates (globally) was 2.22%. While both numbers are low, the corporate default rate is 31x that of municipals in the “A” category. If you look at the numbers cumulatively, including AAA to A, the default rate for munis is .09% in total and 3.38% for corporates. In this case the corporate default rate is 37x that of municipal debt, which implies that there is higher event risk in corporates (e.g., in high-quality bonds subject to the stress of takeovers).

The fact that high-quality corporates were included in the 2014 bill as high-quality liquid assets but municipal bonds were not has always stuck in our craw. General Electric was rated AAA by Standard & Poor’s up to 2009, when it lost its gilt-edged credit status and is now rated A, yet the State of Maryland has been a AAA credit before, during, and since the financial crisis. Our point is that on a credit quality basis municipals have outshined corporates for many years and in most cases have provided better taxable-equivalent, risk-adjusted yields for banks. Why would regulators be prejudiced against the muni credit? Our thought is that lobbying by state and local governments was lacking four years ago when these regulations were first promulgated. And there tends to be inertia among banks to modify rules once regulations are in place. But make no mistake; this new bill is a winner for banks and a winner for the muni bond market. Banks may have a lower tax rate but that will not necessarily disturb higher purchase yields. And the fact that munis should be able to be counted as high-quality liquid assets will further cement their part in banks’ portfolios. Indeed, this bill will help Congress put the “quality” into the “high-quality” designation.

John R. Mouseau, CFA
Executive Vice President & Director of Fixed Income
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A First Look

As a part of his first semiannual monetary policy report to Congress, Chairman Powell made an appearance this week before both the House Financial Services Committee and Senate Banking Committee to discuss monetary policy and the state of the economy. How did he do?

First, his statement was short and sweet, hitting just the high points, with little of the minutia often presented by previous chairs. Markets and commentators interpreted his remarks on the economy as upbeat and perhaps a bit more positive than was suggested by the FOMC’s most recent statement in January. He stated that the economy grew at about a 3% rate in the second half of the year, supported by consumer spending and increased confidence. Labor markets improved, with the unemployment rate now standing at 4.1%, while inflation was slightly below target. He viewed policy as still being accommodative, and he supported the basic gradual approach to removing that accommodation put in place by Chair Yellen’s FOMC. Interestingly, given House Financial Services Committee Chairman Hensarling’s predilection for imposing a policy rule on the FOMC, Chairman Powell at least made a bow in that direction, concluding his statement by indicating that the FOMC routinely looked at such policy rules and that he, personally, felt they provided a useful reference.

Markets pulled back on his remarks, reflecting the conclusion of many that his remarks suggest that perhaps more than three policy moves might now be on the horizon. However, that kneejerk reaction overlooked several facts. First, the economy didn’t grow at 3% in the second half of the year, but rather by somewhat less. Moreover, Q4 growth at the now-downward-revised estimated rate of 2.5% was substantially less than the 3.2% experienced in Q3. Furthermore, data released in the last two months suggests that several key growth indicators have continued to moderate. To be sure, housing has remained strong, but pending home sales were off in January, due in part to lack of supply. On the other hand, durable goods orders were off 3.7% in January versus the expected decline of 2%. Interestingly, as new data continue to come out, the Atlanta Fed’s GDPNow forecast as of Feb. 27th stands at 2.6% for Q1 2018, down from 3.2% last week. Downward pressure reflects the decline in durable goods orders, reductions in estimates of nonresidential equipment, and inventory adjustments. The flow of recent data in February has resulted in a continued decline in the Q1 GDPNow estimate from a high of 5% in early February to its present 2.6%. All of this suggests that markets may be reading too much into Chairman Powell’s rosy picture for growth in early 2018 or the likelihood of four rather than three rate hikes this year.

What else might we have learned from Chairman Powell’s testimony? First, he was relaxed, confident, and clearly at home testifying. Perhaps more importantly – and this is a clear reflection of the fact that he has been a Board member for several years – he exhibited a broad knowledge of the various issues pertaining to regulatory policy, the treatment of derivatives in proposed supplemental leverage standards, and the implications of work being done in the US by the Fed and others to devise an alternative benchmark should LIBOR cease to be a useful reference rate, just to name a few examples. He did so without even having to stop to reflect or collect his thoughts. Particularly impressive was his response to a question about a very sophisticated research study that questioned the effectiveness of the Fed’s QE policies, a study that had only very recently been presented at a monetary policy seminar in New York City sponsored by the University of Chicago’s Booth School. In plain English, he noted that the study attempted to isolate the effects of policy surprises on interest rates, and he then went on to indicate how that approach might not provide a full story with regard to the effectiveness of QE.

Finally, he displayed extreme patience as several House committee members used their allotted time to grandstand and give speeches pushing their pet agendas, most of which were totally outside the scope of the subject of monetary policy or the Fed’s authority. The Senators focused mainly on regulatory issues, wage inequality, and the impacts the tax proposals and budget decisions had and will likely have on the pace of policy. Chairman Powell indicated that it is difficult to isolate what the likely impact of those changes will be on the economy and subsequently on policy. Powell was respectful but at the same time did not dismiss the members’ concerns, despite the fact that most of these issues are beyond the Fed’s control. All in all, this was an extremely effective first-time performance, and it appears that the Fed is in the hands of a competent and informed leader.

Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
Email | Bio


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Guns: Part 4, The Journeys of Others

Many thanks to all who emailed a response to Guns 1-2-3.

I want to quote a tweet from Georgia Lieutenant Governor Casey Cagle, @CaseyCagle, who sent this message on the afternoon of February 26. Readers can decide for themselves if this behavior is helpful or harmful to the policy debate. Georgia voters can also decide. Here’s Cagle: “I will kill any tax legislation that benefits @Delta unless the company changes its position and fully reinstates its relationship with @NRA. Corporations cannot attack conservatives and expect us not to fight back.”

Some example of “calm discussion” and debate!

As expected there is a wide range of views among our readers, intensely and intelligently articulated. No surprise there. What did surprise me and is very appreciated is the encouragement people offered to engage in the discussion. Many readers thanked me for trying to articulate the debate from the political center and for inviting their input. It is confirming for me to get messages that encourage discourse. Many opinions were thoughtfully expressed and well-researched. Others recited personal stories. Why not? I did it; why shouldn’t others?

Here is a sampling of readers’ opinions, and I’ve tried to make it representative of various points of view. I have disclosed writers’ identities where I received explicit permission. Otherwise I used first names only.

Fred Feldkamp argued:

If one reads the law applicable to interpretation of statutory English for legal purposes, a modifier placed at the beginning of a sentence is deemed to modify the entire sentence. In the second amendment to the US Constitution, the phrase “the right of the people to keep and bear Arms, shall not be infringed” comes AFTER:

“A well regulated Militia, being necessary to the security of a free State,…”

There is, therefore, a clear right (indeed, for the protection of the people of “a free State,” a duty) to “regulate” the “Militia.”

Moreover, it is clear that “keep and bear Arms” does NOT include shooting the darned things. The very concept of a “well regulated Militia” is antithetical to an unlimited ability to shoot weapons without controls that protect other people. No army of any civilized state permits soldiers to “fire at will” except under the most dire circumstances.

There is no reason, in ANY well-reasoned case law, why the US can’t mandate electronic identity lockouts for ALL weapons to assure that only the licensed owners use them and that they are ONLY used lawfully.

All we need is the will to make sure our 290 million-weaponed Militia is “well-regulated.”

There is no excuse for refusing to protect those that choose not to be armed from being killed by our “Militia” because our elected leaders will not lead.

Each and every gun death in America is the result of inexcusable dereliction of duty by each and every leader who refuses to do what is needed to protect our people.

By the way, I always found a rabbit killed by a shotgun to be inedible by the fear of chipping teeth on stray buckshot.

If helpful, feel free to pass this on. I’m happy to debate any and all gun regulation with anyone. We CAN (and therefore must) do whatever protects us from us in the use of guns, and there is no Second Amendment limit to doing that, as long as the rule is correctly written.”

A thoroughly researched commentary came from Jay Simkin, International Representative, The Stratecon Group LLC. He wrote:

At end-2015, there were about 380,000,000 firearms in the US, more than one per resident, including infants, who usually own little. (See US Dept of Justice, “Firearms Commerce in the United States”, 2000 and 2017; military firearms excluded). Things so abundant and concealable cannot be controlled. That what foredoomed Prohibition, the nationwide ban on alcoholic drinks (1919-33).

Then, as now, the ingredients for home-brew could be bought in any grocery store. In some regions, distilling alcohol (“moonshine”, “white lightning”) was a tradition older than is this Republic. Prohibition made some “moonshiners” wealthy. Those, who backed Prohibition bequeathed to us well-organized criminal cartels, still a plague on the land.

Further, since 1980, the number of firearms in the US has doubled, but the murder rate has halved. In 1980, the murder rate was 10.2 per 100,000 residents (Dept. of Justice, “Homicide Trends in the United States, 1980-2008”, p.2). In 2016, the homicide rate was 5.3 per 100,000 residents (FBI, “Crime in the United States”, 2016. Table 1). If firearms drove the incidence of criminality, the murder rate should have doubled. It didn’t. The murder rate halved.

“Gun control” is a concept alien to US jurisprudence. In the US, police forces have no duty to protect the average person. The U.S. Supreme Court so held in 1855 (South v. Maryland, 59 U.S. 296 (1855)). In the modern words of a U.S. Appeals Court decision: “But there is no constitutional right to be protected by the state against being murdered by criminals or madmen. It is monstrous if the state fails to protect its residents against such predators but it does not violate the due process clause of the Fourteenth Amendment or, we suppose, any other provision of the Constitution.”(Bowers v. Devito, 686 F.2d 616, 618 (7th Cir. 1982)). This is “good law”, i.e., this decision has not been overturned. If we have no right to protection from the government, it follows that we are responsible for our own protection.

Background checks provide an entirely false sense of security. Only 62 Federal prosecutions followed 76,142 denials (in 2010) of purchase applicants. For the data see, Regional Justice Information Service, “Enforcement of the Brady Act, 2010”, 2012, p. 7. https://www.ncjrs.gov/pdffiles1/bjs/grants/239272.pdf

Some denials may have been erroneous, i.e., applicants were actually eligible to buy firearms but were mistaken for ineligible persons. Even so, it beggars logic to think that all but 62 denials were unjustified. It is a Federal felony for a “prohibited person” to possess or to try to acquire any firearm. Such a small number of prosecutions shows that Federal authorities care little about stopping those who seek to abuse firearms.

In the wider World, “gun control” laws have repeatedly promoted genocides, in which millions were murdered. Germany enacted “gun control” on 13 April 1928, before the Nazis took power. The goal: to curb fights between Nazi Party and Communist Party thugs.

When the Nazis lawfully took power in 1933, they found in police stations lists of firearm-owners. Plainly the Nazis did not allow those whom they hated – of whom Jews were only one group – to hold onto firearms. It was not the disarming of Jews that mattered most: Jews were only one percent of Germany’s population. It was the prompt disarming of other Germans – many of whom did not like the Nazis – that was critical.

The Nazis were not wildly popular in 1933. They won 43.9% of the vote in an election held on 5 March 1933. During the election campaign, Nazi party thugs terrorized other parties’ candidates. Even with that help, the Nazis did not win a majority. They formed a coalition, that gave them a small majority in the Reichstag (parliament). By promptly disarming those whom they hated, the Nazis ensured there would be no effective resistance. Indeed, there was virtually none.

More recently, in Rwanda, some 800,000 were murdered in just 119 days (7 April – 19 July 1994). Those who write about this genocide do not explain how so many were murdered so quickly. Unlike the Nazis, the Rwandan murderers did not set-up murder facilities. Instead, village-level murder squads – armed with machetes and nail-studded clubs – sought out those, whom they knew to be Tutsi – the targeted group – and murdered them on the spot.

The victims were defenseless, because Belgium bequeathed to Rwanda a “gun control” regime. Rwanda enacted its own “gun control” law, Decree-Law No. 12/79, 7 May 1979 published in the Journal Officiel (Official Journal), 1 June 1979, pp. 343-346; in French and Kinyarwanda. This law remains in force, as amended by Law No. 13/2000, 14 June 2000.

The intended victims had been targeted in prior years. But because they could not get permits to acquire firearms, they were helpless when murder squads arrived. A “fortunate” few, who had cash in their pockets, sometimes were able to pay their murderers to expend a bullet. Those without cash were slashed and/or had limbs hacked-off. Many, who had taken refuge in churches, were incinerated when churches were set ablaze.

Some will argue that armed citizens cannot stand against professional soldiers. To them I reply: read about “Blackhawk Down”. Several hundred Somalis – with AK-type rifles and some rocket-propelled grenades – prevailed against top-notch US troops in Mogadishu (3 October 1993). The Somalis suffered far heavier casualties. But the US troops did not seize their quarry, a top Somali paramilitary leader. (See: http://novaonline.nvcc.edu/eli/evans/his135/Events/Somalia93/somalia93.html ).

The sources I cite are public and published. I can provide copies of the cited enactments or court decisions. I made these copies myself, so can vouch for the originals’ authenticity.

As to the rash of things wrongly called “school shootings” – they are mass murders – note that while Courthouses (filled with adults) are guarded, schools are not guarded. Further, those expelled from schools because of attacks on students or teachers – or threats of such attack – are not made to wear GPS monitoring devices that trigger an alarm if the wearer gets within 500 feet of any school’s perimeter. Classroom doors are not equipped with bullet-stopping steel plates and locks controlled by teachers and first-responders. Most of these things are simple.

The bottom line: “gun control” is a policy that seems attractive: a false promise of safe streets or safe schools. Behind “gun control’s” shiny façade is a nasty reality: mountains of corpses. If European countries included in their crime data those not born – because their grandparents or great-grandparents were murdered by the Nazis – European murder rates very likely would not be below those of the U.S.

Jay Simkin further offered this data and analysis:

Some further data: New Hampshire – which has few laws regarding firearm ownership – has long been one of the three states in the U.S., with the lowest incidences of violence crime:

I note that Vermont has not had – at least in recent decades – a requirement for licensure by those, who wish to carry firearms, openly or concealed. Maine abolished compulsory concealed licensure at end-2015. New Hampshire abolished compulsory concealed carry licensure as of 22 February 2017. In Maine and New Hampshire, those who wish to obtain other states’ non-resident licenses can still obtain a license.

Murders are so infrequent in New Hampshire, that all are prosecuted by the State Attorney General: no county prosecutor sees enough homicides to be adept in their prosecution. For many decades, the incidence of murder in New Hampshire has been a fraction of the U.S. murder rate.

Massachusetts, by contrast, has myriad laws governing firearms, ammunition, etc. In Massachusetts, unlicensed possession of a single spent cartridge case is a crime.

Methinks the focus on firearms misdirects the public safety debate. In a population of 324,000,000 there are bound to be a handful – a few tens of thousands – who are disposed to commit murder. We have no processes whereby such – before they commit murder but after they have made dire threats – can be restrained.

So, a suggestion. If a student is expelled from any school for: (a) attacks on other students, teachers, or administrators or (b) making credible threats of such an attack (e.g., social media posts that show such intent) – why should that student not be made to wear a GPS monitoring device? Such a device – now imposed on probationers – could be set-up to trigger an alarm, when the wearer gets within 500 feet of any school. The alarm would go to the school and to law enforcement. Said student should be required to wear such a device until age 25, at least.

Another suggestion. Why should not classroom doors have a bullet-defeating panel and locks controlled by the teacher and the principal? Should not classrooms have chain ladders for emergency escape?

Yet another suggestion. Should not some teachers and staffers be trained to carry concealed, if those persons are large enough to keep control of their weapon, when a football-player-size student tries to grab it? Those, who are small, are unlikely to be able to fend-off a 6’6″ fellow who weighs 275 pounds.

Finally, someone should explain why, when an accused murderer is in custody or dead, that person’s name should be mentioned or their likeness reproduced. Some of these murderers seek their “15 minutes of fame”. That should be denied. It is one thing if an attacker is “on the loose”. But once a murderer is dead or in custody, said person should be referenced by the place name or via the names of their victims.

 

Nat added lots of substance to the argument:

I have to take issue with your comment that those who trained and served in the military rarely commit mass murder or go on shooting sprees. This is simply incorrect. I’m attaching a spreadsheet of mass murders back to 1982 and an article from a person who looked into the backgrounds of some of these murderers. There is also an interesting history of the NRA and their historic shift from an organization devoted to teaching proper marksmanship to one that is embedded politically in most of our elections in the US. The training and respect and maturity to care for weapons designed for killing, as you point out, is key. That is fundamentally different than allowing deranged 18 year-olds to purchase assault weapons with limited or completely incompetent background checks. And unfortunately I don’t think military service assures that the person holding the trigger has the respect you speak of.

https://docs.google.com/spreadsheets/d/1XV4mZi3gYDgwx5PrLwqqHTUlHkwkV-6uy_yeJh3X46o/edit#gid=0.

http://worldbeyondwar.org/u-s-mass-shooters-disproportionately-veterans/.

https://www.npr.org/2017/10/10/556578593/the-nra-wasnt-always-against-gun-restrictions.

Will said:

Your email is very thought out and you go a step further by a little of your life history, Thank you for sharing. Now I’ll play devil’s advocate: So what’s the remedy to stopping them from using our schools for killing fields? Just one thing? My guess the only thing to stopping them is for someone to shoot the sick bastards before they shoot. Once they feel force they will stop going to our schools. They are cowards. I’m all ears for just one remedy, and banning assault rifles won’t stop them.”

Tony added:

A nice background and relevant personal story. Like you, I had gun experiences at Camp Kimball, although I have never owned a weapon. I trust your thoughts will get to the elephant in the room – automatic weapons and large magazines. The love of guns and their role in so many lives is understandable; automatic weapons in the hands of civilians is not.

An excerpt from Brian’s remarks:

Common sense has to prevail at some point. Military-style weapons have no place in society. If gun manufacturers go broke, why do we care? Other industry has throughout history, and I bet politicians will find funding from others.

Michael offered:

The GOP is acting ignorantly by not budging on their gun positions, which will haunt them during midterms. I logically understand that tougher gun laws won’t prevent most bad people from causing harm. I expect elected officials to represent their voters’ needs and concerns. Doing nothing to make people feel better is a complete failure. I look forward to the millennials, the group so often bashed, to be the catalyst for overdue change and lasting positive impact. Ironic, isn’t it?

Jon added:

I was a Marine infantry officer in Vietnam. Enough said. I grew up in a house where bird shooting and skeet shooting were our active interests. Allowing anybody to have a weapon – a rifle with a capacity of more than three shells – is insanity. My solution, since we are not going to get the guns back nor should we, is to limit possession to inside a person’s premises. You want to go hunting, ship the gun UPS. What we have now is insanity. First thing to do when in a hole, quit digging. All freedoms have limits. Nothing is absolute save perhaps insanity.

Paul wrote:

Does your client consider the share of her personal income tax payments that support the largest military budget on the planet? And that this military budget supports all sorts of gun manufacturers? (The AR-15 is based on the M-16, after all.) Why can’t you measure the amount of dividends and capital gain contributions that gun makers contribute to various ETF returns? You could debit that from your client’s account and divert the funds to a charity of her choice; or she could do that on her own. I don’t want to be dismissive of this issue. It is serious and our country has to address it. But looking at it as an investment matter trivializes it rather than deals with it.

From Kim:

Given the desire of some of your investors to avoid supporting gun sales, I thought you should see the attached article from yesterday’s Seattle Times, which I will summarize for you here: It reports that a Washington State law requires the Washington State Patrol to auction off or trade most of the guns it confiscates. A batch of 331 guns they sold last year to a Tennessee dealer included five assault rifles. Washington sheriffs’ offices and police departments have also sold dozens of assault weapons since 2010, although these organizations were not all required by law to sell their confiscated guns. Some, such as the Yakima Police Department, chose to melt them down instead.

Apparently other states – Arizona, North Dakota, and Georgia – have legislation in place requiring sales of all guns confiscated by law enforcement agencies. Supporters defend such sales by saying they “provide law enforcement with needed revenue.” It seems to me that many of the municipalities whose bonds you have long specialized in trading must be among those that benefit from having their local police or sheriff’s departments sell confiscated guns. In the states where there is a law requiring sales of all confiscated guns, it would be impossible for municipalities to avoid benefiting from those sales, even if they wanted to. The arms sales must reduce the need for other local sources of revenue including taxes or bond issues and must therefore improve the overall financial health of these municipalities. I presume that would make any bonds they do offer appear more attractive to your firm, according to your usual standards for evaluation.

I am therefore wondering, could you start offering as investments a class of municipal bonds from municipalities like Yakima that don’t benefit from gun sales? Are there enough municipalities in the US that are both free of dependence on gun sales and financially healthy enough to make that feasible? If it were feasible, such an offering should appeal to your anti-gun customers, even at a somewhat lower rate of expected return than your general offerings in municipal bonds. I would not want any investment firm to be constrained to sell only such bonds, but your firm’s voluntarily offering them as a new instrument to serve potential customers could be a win-win situation.

From Daniel Alpert, Managing Partner, Westwood Capital, LLC and affiliates:

This is certainly outside my usual portfolio, but I (probably like yourself) am deeply distressed the apparent inability of the U.S. to engage constructively in a debate over gun control. After last week’s terror, Cornell’s Robert Hockett and I put forth a few points in The Hill on the desperate need for national reconciliation on the issue. There are many in the country who, like me and Bob, can’t imagine why the U.S. is alone among nations in ensuring the right of private citizens to possess all manner of firearms. We may even enjoy our sporting clays (I do), hunting, or firing off a few rounds at a gun range, but don’t feel we need a weapon for self-defense, couldn’t imagine carrying one around openly or in a concealed manner, and don’t believe any civilian needs a semi-automatic rifle or more ordnance at any one time than the six rounds a revolver holds. But many of our fellow citizens fervently disagree with us – and their point of view is enshrined in the language of the Second Amendment to the U.S. Constitution, especially in light of its most recent interpretation by the Supreme Court in District of Columbia v. Heller (2008).

So the only option we have for reconciliation, as a practical matter, is to acknowledge the two fundamental/natural rights to possess firearms that some of us, not so inclined, often find incomprehensible if not merely offensive. And, in acknowledging the legitimacy and irrevocability of same, the issue of gun rights can be supplanted by the more important issues of gun safety in terms of licensure, sale, possession and carrying. We believe the more extreme arguments of the National Rifle Association would be far less compelling to gun rights advocates (many of whom are quite level headed when it comes to the above issues) in the absence of being able to pander to those fearful of “having their guns taken away” and, with that, their right to defend against both crime and tyranny. And what better era to discuss the concept of tyranny with those on the left, then the era of Trump? Read on.

Sigmund:

I’m confused. The shooter appears to be a mentally disturbed young man for whom there have been numerous Police encounters and ample warnings that this was and is an individual in need of serious mental treatment. The failures to act by the Broward County Sherriff’s Department are stunning. The FBI ignored a rational warning, and the school which managed to toss him out did nothing to refer him to psychiatric and or social services. Altering the gun laws will do nothing to ameliorate the occurrences of the shooting. Fixing the mental health system will do something about the rate of occurrence. Even so it may well be that we are witnessing a relatively constant Percentage rate of occurrence against a population base that has doubled; i.e., 1% of 150 million is 1,500, and, 1% of 335 million is 3,350. Couple the numeric increase with the recently developed speed and ease of communication. Has made us very aware of what may well be a relatively constant problem that has been ignored, and that is the problem failing to improve the treatment of mental and neurotic illness. I view the Second Amendment as being my right to revolution. Take that away and you might well rip up the Constitution.

Here is a thoughtful and detailed analysis from Greg:

I am somewhat of a gun guy, but first and foremost I am a reasonable person that’s always in search of the truth and reality. Perhaps to a fault, but that’s my nature. I point this out because it’s clear that you and your firm operate with the same mindset of finding order amidst the chaos. I agree that changes need to be made, but if we’re going to have a meaningful dialogue in this country about reducing senseless shootings then this kind of rigor needs to be somehow brought to bear to counter the emotion-driven reaction whose impact will be more to trounce on the 2nd Amendment rather than to have a meaningful impact on the number of senseless shootings. In the end everyone will be disappointed.

Perhaps it was just an oversight or mistake, but what triggered this response was the statement in part 2 of your essay that “Sturm, Ruger & Co., the maker of the AR-15”. I suspect others have already responded that Sturm, Ruger is one of many makers of the AR-15 and there are as many makers of it as there are hedge funds. In fact, parts are so standard and widely available it is easy to make your own where you are effectively the manufacturer. I seized on this point because it is so representative of the kind of misinformation with the AR-15 in particular that is so rampant in the discussion and the media. Jumping to the chase, the thinking that ridding society of the AR-15 will somehow eliminate some or most of the shootings is wishful thinking at best. Maybe it will have an impact initially, but only until the uninformed shooter becomes informed and simply purchases another type of weapon with the key feature of easily reloadable high capacity magazines. And there are many alternatives that In a practical sense of how most shootings take place at close range some of these alternatives could even be more deadly by virtue of the ammunition that’s used. .45 ACP for example. I say this because the advantage of the AR-15 is that it’s also good for longer range shooting (e.g. Las Vegas) but most shootings are in fairly close quarters so many other guns are equally or even more effective.

As for the mention of Vegas, that was well planned out and the perpetrator would likely have acquired appropriate weapons even if AR-15s were not an option. The point here is that the dialogue is going to be forever handicapped, for starters, until the public has a realistic understanding of guns and in particular the AR-15. For what it’s worth I do think the 2nd Amendment is due for an update to reflect the realities of modern society while still respecting the original intent. In a practical sense I have no idea how we can do that given the public’s emotion, extremists on both sides, and lawmakers and politicians that have their own agendas at heart. But for sure we need to begin with getting our facts and information correct and a good place to start is with a better appreciation for what an AR-15 is and is not.

Jim wrote:

Perhaps you’re unaware of the new AR-15 platform rifles from Savage, a Vista Outdoor company. VSTO also owns OLIN and the Winchester brand of ammunition. Smith and Wesson, aka American Outdoor Brands, makes the M&P series of AR-15’s. So all three U.S. public gun companies are involved in the scary looking rifle business. With the plethora of European gun manufacturers, some may be included in foreign and European ETF’s.

You can count me among those who blame criminals and crazies for the murders, not guns. The focus should be on more security for schools, better data for the NICS, and better enforcement of straw purchase violations. Abandoning Obama’s young criminal coddling program, implemented in Coward Broward County, and reform of the FBI are also needed. Increasing the authority and resources of the thought police is a slippery slope. but it may be the time to try. Gun registration is a necessary precursor to confiscation and thus won’t be widely tolerated, as such laws were ignored by about 90% in California in 1990 and Connecticut in 2014. Many of the refuseniks were LEO and military folks, so any attempt to deploy the army to confiscate would likely result in mass desertions and eventually civil war.

Larry added:

I also own a shotgun and two revolvers. Hunted dove and duck until recently. All beside the point. Why can’t we just have a one-week waiting period for background check for any firearm purchase, make gun shows illegal (highly regulated) and ban the future sale of AR15 type weapons except to police and armed forces? If you own one, great, sleep with it, have sex with it, brag that you own it.

From George came this correction:

I would call your attention to an small error in the second paragraph. Unless you were firing machine guns, the weapons you used were semi-automatic and not automatic… a common misunderstanding. The latter are regulated under the 1934 Firearms Act along with suppressors and sawed off shotguns.

John forecast:

Demographics will win over time. Assault-style rifles will be banned.

Another John said:

Like you I was raised in a family that had guns, primarily shotguns, for hunting purposes. I was taught how to use a gun safely. I was taught that a gun on its own never causes a problem, it’s the operator. All or at least most of the mass deaths using an AR-15 style weapon have been caused by a person with mental problems that were known to others that did very little to prevent the person that did the mass murder from obtaining the firearm. A thirty day delay on obtaining a firearm, stronger background checks and a magazine capacity limit all would be good ideas. They will help with some of these horrific crimes but at the price of the loss of more rights.

David wrote:

Banning guns will not work anymore than for example banning drugs or alcohol sales (briefly during prohibition) stopped them. The criminals always have/had access to the outlawed items. If we look at it rationally, it is clear that banning guns is not the solution. It takes on average 8 minutes for law enforcement to respond and the typical shooting takes about 3 minutes so that doesn’t solve the problem either. The only solution is to have trained and armed employees at the schools. The Broward teachers that used their bodies as human shields certainly had the courage and willingness to sacrifice themselves to protect the kids. If they were also armed they would have stopped the shooter as well. This is the only real solution that I see that will work both short-term and long-term.

Another David added:

It is no wonder that the Sheriff’s Deputies who stood outside the school were afraid. They could have as easily been dead or responsible for shooting students. Pistols against AR-15’s are no match. There is no reason a hunter needs an AR-15, nor a gun collector to have 10 or 100 of these weapons unless we think that the Russians are coming to invade us, the only Russian invasion is sitting in the White House now. I don’t think there is any excuse for the NRA’s position from anyone. The Constitution says a well regulated militia not an armed posse.

Gerry sent this note:

From here, the debate always comes down to: “look how hard it is to get a gun permit in Israel” (which it is, contrary to the belief that everyone has one) and the only gun deaths come from terrorists and then it is more often a suicide bomb, or a truck or a knife. You may be right when you say there is no conclusion because the culture in the US won’t permit it. Still, if the students who are and will be the future leadership in this country have enough fire in the gut and enough support to sustain their momentum, who knows what change is possible. Just as people can’t understand why Israel and the Palestinians can’t come to terms and why it is currently impossible, looking at it from afar it is just as hard for many here to understand why the US can’t outlaw assault rifles, or raise the age limit or …or…or…. Glad you said what you feel, and I’m a pessimist by nature, so my expectations are low in any event. Time will tell…

And this from a longtime friend whom we will call Mr. X:

I think Switzerland ranks as number 1 or 2 in how many guns citizens own per capita. We have very few problems with it but the history of how this happened is important. Switzerland is a neutral nation or we call it “armed neutrality”, which means Switzerland does not act militarily outside the country but uses its military for defending its own territory only. Every Swiss citizen of age 20 has to perform his military education for 4 months. This involves some basic training (6-8 weeks) followed by specialist training. As I was a top athlete when I was 20 (among the top 5 of the nation decathlonists), I became a member of the elite troop and was educated in street fighting, city fighting and manufacturing bombs (would be dangerous today!).

After that basic education, every member of the army had to perform 8 x 3 weeks until age 32, 4×3 weeks from age 33-40 and 4×2 weeks from 41-50. This was the reserve. And all the reservists had to keep their guns at home and had to perform a shooting test EVERY year. If not qualified, one had to spend an extra day of practicing with army instructors until one performed… We were accustomed to have our guns at home and still are. But in today’s “politically correct times”, members of the military CAN store their guns with the army. This is because the liberals asked for it. We have an incidence or a murder with an army gun about once every 10 years (the last mass shooting took place in my town in 2001 when a crazy man entered the state parliament and shot many dead, including himself). But perhaps that murder would take place, too, if we had a different organization with guns. My point is: Guns are dangerous and you need to have a people that are responsible enough to act correctly and responsibly. Unfortunately, our times have moved far away from originally conservative thinking and behavior and we have “educated” our people in a way of “everything goes” and everybody can do what he wants. We have lost our religion (whatever religion it is – at least in Europe), we have lost our conservative manners and behavior and the result is often chaos. Another law here and another law there – as we keep doing in every respect of life – will not improve the situation. It may control it for a while but will eventually simply lead to more prisoners…. But to really improve this, our people have to become more conservative again. This is only possible via economic hardship. The hardship of the 1930s bred conservatism and conservatism bred liberalism …..and perhaps one day, liberalism will breed conservatism, again. I am in favor of responsible behavior and very much in favor of policies that encourage it. The behavior of our elite (in the Western world) does not encourage this, unfortunately.

Here’s Marv:

I respect the Second Amendment and agree with the content but believe that it has been used by others in an Unhealthy manner!! The Government has been LAXED in NOT having BETTER checks & balances when people try to purchase guns!! High powered AK-47 type of weapons or the ability to retrofit MORE magazine power should be UNACCEPTABLE!! When I was in the USAF and the BASE MEDICAL COMMANDER I was taught how to use a weapon for MY protection! It is HIGH time to create BETTER RULES to prevent the BAD GUYS from doing HARM and still allow the GOOD GUYS to use GUNS!!

Joe sent this:

I also have a personal journey, which I shall truncate. I learned to shoot a 22 caliber target gun at age 10 at a summer camp on Lake Winnipesaukee. Competitive target shooting took hold and over the years I became rather adept; 22 caliber, pistol and rifle, shotguns in various gauges for skeet, 12 gauge for trap and shooting clays. Almost 70 years since I started, and I still shoot on a regular basis. 22 caliber “Olympic Style” pistol. Highly accurate 22 caliber rifle, and my Browning over and under skeet gun.

Still an NRA member, as they control and run competitive shooting matches. I love my guns; clean them, caress them. And so why am I writing this? I am upset! I have enclosed a photo of my highly accurate 22 caliber rifle. I would guarantee that today, ignorant people, reacting to a tragedy, might condemn this 22, and call for its ban. It most probably would not have killed your first rabbit, unless a great shot. Today, three people told me that “AR” as in AR15 stands for “assault rifle”, it does not. It stands for Armalite, the company that ‘invented it’. I am upset, because too many people, reacting viscerally and without proper knowledge, are attempting to influence not just gun control, but the type and extent of gun control. NOT GOOD.

Harold observed:

Thomas Jefferson bought 2 semi-automatic, magazine-fed rifles in 1780. They had a 22 shot capacity and fired at .46 caliber round. This rifle, called the Girardoni, was adopted by the Austrian army in 1780. The whole Constitution and Bill of Rights happened nearly a decade later. So, the founding fathers obviously knew that there were semi-automatics. I’ve seen photos of other repeating arms that were produced before this time as well.

Gene sent this:

Reasonable gun regulation is not prohibited by the second amendment. My brother specializes in this area (See below). There were extensive regulations at the time of the amendment’s adoption, and of course entire classes of people were prohibited from owning guns back then. All most people want are reasonable regulations, things like background checks, limits on assault weapons and magazines. Note that during the roaring twenties the Supreme Court had no issue with bans on automatic weapons, and these are still prohibited today, so what makes semi-automatics sacrosanct? Nobody is taking away all guns. Even Scalia said that regulations were permitted in Heller.

Listen to LaPierre’s speech at CPAC. It was nuts. This is just an excerpt:

“The shameful politicization of tragedy is a classic strategy right out of the playbook of a poisonous movement,” LaPierre said.

The NRA leader took broad swipes at his detractors, who he claimed sought to “eliminate the Second Amendment.” “Their solution,” LaPierre said, “is to make you, all of you less free.” He was critical of the Federal Bureau of Investigation, questioning why their “rogue leadership” and “unethical agents” had not been confronted over why they didn’t follow up on tips regarding the suspected Florida shooter.

LaPierre sharply criticized efforts by numerous Democratic lawmakers to bolster gun laws, casting their actions as part of a “socialist” plot to strip law-abiding gun owners of their “firearms freedoms.”

Guns have been regulated since before the revolution, as the history shows. It’s only recently that it has gotten to this extremity of resistance. Note that a lot of the rhetoric speaks of guns as a necessary defense of the people against a tyrannical government. That wasn’t the way the militia was conceived. It was to defend the government without having a standing army. Note Shay and Whiskey rebellions.

And there is only one crime defined in the Constitution:

Treason against the United States shall consist only in levying war against it.

I don’t think the purpose of the amendment was to enable rebellion.

I think most people want something done. The Onion recycles this headline for every shooting: https://www.theonion.com/no-way-to-prevent-this-says-only-nation-where-this-r-1819576527.

Bill reminded me:

I like your columns, but this one missed the mark. You failed to mention the 2008 Scalia Supreme court decision which defined the limits of the second amendment and could provide a path forward for the next few years.

Kevin criticized:

That there is no agreement about a policy does not mean that there is no best policy. For instance, Americans disagreed about segregation in the 1950s. However that does not make it impossible to discern the differences between segregationist and integrationist policies. It’s up to everyone to discern the differences and then support the best policies. But you are saying that since there is no agreement, you can’t know what the best policy is. That’s classic bad faith.

Branden wrote:

Consider you are under immediate threat from a deranged person that possesses the means of harming or killing you and your children. You are backed into a corner and under attack. How would you respond? Realistically, the only option is to fight back or die or watch your children die.

Sadly, the above describes the state of our children that attend school. They are under attack, or threat of it – NOW. There is no time for debate or forum for a national policy discussion – something needs to happen today that protects our children. Once this immediate step is taken, then we can focus more on prevention and better controls.

I believe this is the thinking behind arming teachers or other individuals to safeguard our children. Personally, it is very disturbing to me to think my children have to be put in a situation like this; however, this is the sad state of a country that no longer values the family structure.

And now we end with this from Phil, a very good and longtime friend:

Horrible way to end a commentary, but we’re lucky to have that commentary. One big issue for me is that what measures we have to promote safety seem to fail. The school guards, the warnings about Cruz’s behavior. If that’s a given, then it does seem we have to attack the source. One person suggested liability laws for the sellers, they have to check certain boxes when they sell a gun or they are partially liable for what happens next. But you’re right; I don’t see how we come to any kind of agreement. The slippery slope argument is deeply entrenched. Since there are such high stakes maybe we could buy back assault rifles above market price and stop selling them until we figure out what to do. Assault rifles can be used on a range, or to kill people, but not for hunting. If you miss a deer on the first shot you don’t get a second, no matter how fast, and, as a hunter pal put it, if you were planning to eat the deer, there would be nothing left. And for people who think assault rifles will stop a rogue government, they will stop the first wave, after which drones and bombs, so that argument doesn’t really work either.

__________

Many thanks to all those who responded to our series (see below). Clearly, there is a lot more dialogue needed. Maybe the Lt. Governor of Georgia, whose tweet opened this list of comments, will reconsider his use of a threat instead of a dialogue.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


The first part in this series, “Guns: Part 1, A Personal Journey,” can be read online here: www.cumber.com/guns-part-1-a-personal-journey/

The second part in this series, “Guns: Part 2, The Investment Journey,” can be read online here: www.cumber.com/guns-part-2-the-investment-journey/

The third part in this series, “Guns: Part 3, The Policy Journey,” can be read online here: www.cumber.com/guns-part-3-the-policy-journey/

The fourth part in this series, “Guns: Part 3, The Journey of Others,” can be read online here:


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Trump, Protectionism, Triumph or Truculence?

“16 US steel stocks market cap up $1B as a result of tariff announcement today. Rest of S&P 500 down $400B. “Making Americans Poor Again.” (H/T Smails)”.
– Doug Kass, March 2, 2018

Readers are invited to research the following words: protectionism, tariffs, quotas, trade barriers, Smoot, Hawley, history, learning from history, lessons of the past.

Following that research, readers are invited to forward a summary of their inquiry to the White House.

Address the envelope to the committee that gave poor advice to President Donald Trump and therefore managed to temporarily undo all the benefits of deregulation and all the benefits of the tax code revisions. Readers are invited to send copies to their Senators and to their Members of Congress regardless of political party.

Also send copies of the research to the District Federal Reserve Bank in which you reside and to the Board of Governors of the Federal Reserve in Washington. The Fed now has to add protectionism effects to its forecast path; this is a nearly impossible task for a central bank.

Now consider that we have a gradual and thoughtful Fed policy of tightening while we also have what was a predictable and measurable path of fiscal easing. All the benefits of tighter monetary and looser fiscal policy have been threatened by the actions of a president who seems oblivious to the potential outcome of the blunder he has made. His braggadocio about his effect on the stock market has been undercut by events of his own doing. He is losing his staff. He is isolated and beleaguered. And in the midst of crisis he tosses an ill-thought-out bomb called protectionism that punches out the best of our allies and friends while it strengthens our nation’s adversaries.

What the Congress does remains to be seen. What the markets will do now is difficult to determine. What Trump will do is impossible to predict.

But we do know from history that protectionism results in higher inflation and slower growth over time. It doesn’t happen all at once. The rise in steel and aluminum prices won’t show up for a while. The cutback in Chinese buying of soybeans will take time. And what our closer trading partners like Mexico and Canada will do is uncertain.

What we do know is that this Trump protectionist policy can lead only to trouble if it is pursued. The other side of this argument is that Trump is a master negotiator and is using this tactic to renegotiate trade deals. There is no way to know if that is true.

For now, the more predictable forces of tax policy, fiscal policy, and monetary policy are overshadowed by the incendiary news flow and protectionist rhetoric. That is either setting up a massive buying opportunity in US stocks – which is what we believe – or it is setting up an economy that will be forced into recession by protectionism (which we do not believe).

Either outcome has become less predictable. Trump has raised risk premia in all markets. Stay tuned.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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VITA

VITA stands for “Volunteer Income Tax Assistance.” There are additional specialized programs like it. The key to success of the new tax reform law is to have these programs used. Why?

For folks like me, the cut in my taxes means I will have a few thousand more dollars to save or invest. It is highly unlikely that my spending patterns will materially change. The same is true for many Cumberland clients that I have polled. As a group we are in the upper decile of income and wealth. We like lower taxes, of course. But the relative impact on our household spending habits is muted. Remember, please, that I’m talking about individual taxes and not corporate taxes.

But what about those households whose incomes are in the low or mid five figures? These households have a large percentage change in disposable personal income from the extended and enlarged standard deduction and the special tax credits directed at children. In many cases throughout the United States, the average income gain in those households is about $2000, and that is an annual and permanent shift upward of that household’s spendable personal after-tax income.

The first issue is, do these lower-income households know how to take advantage of the tax code change? The second issue is, have we expanded financial literacy to those households so that they can learn about ways to prepare and file their tax returns and be rewarded for their efforts?

And the third ramification is economic. If the millions of eligible households of the United States receive a permanent shift of disposable income of about $2000 each, what will they do with that windfall? There, the answer seems to be “spend it.” Hence the spending on consumption by the household has a multiplier effect and benefits US economic growth meaningfully.

But how will each household learn to use the new tax rules? There is a mechanism, as the extended quote below shows:

“Representative Carlos Curbelo (FL-26), a member of the House Committee on Ways and Means, led a group of 55 bipartisan Members of Congress today to urge leaders of the House Appropriations Subcommittee on Financial Services to protect Internal Revenue Service’s (IRS) Taxpayer Services. These programs include Low Income Taxpayer Clinics (LITC), Tax Counseling for the Elderly (TCE), Taxpayer Advocate Service, and Volunteer Income Tax Assistance (VITA) grants – all programs specifically targeted to ensure tax payers have access to services where they can confidently file returns without fear of being scammed by fraudulent preparers.

“As you begin work on the Fiscal Year 2018 Financial Services and General Government Appropriations bill we respectfully request that you provide increased funding for the Internal Revenue Service Office of Taxpayer Services, including the Community Volunteer Income Tax Assistance (VITA) grants, Tax Counseling for the Elderly (TCE), Low Income Taxpayer Clinics (LITC), and Taxpayer Advocate Service,” the members wrote. “The work being done with funds provided for Taxpayer Services is commendable and worthy of your full and fair consideration.

“Funding for these essential services has received bipartisan support under both Republican and Democratic Administrations,” the members continued. “The House and Senate Appropriations Committees have continued to include strong funding for taxpayer services regardless of which party is in the majority. We appreciate your past support of these programs, and respectfully ask that you increase funding for the I.R.S. Office of Taxpayer Services programs in FY18, including Low Income Taxpayer Clinics, Community Volunteer Income Tax Assistance matching grants, Tax Counseling for the Elderly, and Taxpayer Advocate Service. These programs have already proven to assist the most vulnerable in our country and we thank you for your consideration of this request.”

Here is the link to the full release, and in it a reader will find details. https://curbelo.house.gov/news/documentsingle.aspx?DocumentID=1843.

Here is a link to use your zip code to locate a volunteer facility that may be helpful to anyone you know who needs tax assistance: https://irs.treasury.gov/freetaxprep/.

Please note that this initiative is truly bipartisan, as you can see by the list of the 55 members of Congress who signed onto the initiative.

We think the new tax bill will have its optimal benefit not only for households but the economy if financial literacy is part of the community response. Add $2000 of disposable personal income to millions of American households, and the impact is huge. Our job as upper-decile recipients of the tax bill’s largesse is to expand financial literacy so that lower deciles can benefit. If we succeed, the economy grows more robustly, and the society flourishes.

At Cumberland, we are sharing this information with all of our 45 households and encouraging them to take advantage of the services available. We are also helping a charter school in Bradenton with an initiative to educate the 100 households of their students. We are also looking for philanthropic ways to expand the volunteer aspect of this program.

We applaud the work of Congressman Carlos Curbelo and his 55 colleagues, who have set aside partisanship on this issue. They are an example of the way government should work. We and any readers who are motivated can help this effort. Please use your pen to publicize their effort and invite other readers and media to do the same.

And if your congressional representative is not one of the 55 who have already signed onto the bill, please ask them to do so.

And please remember that Cumberland is hosting a Financial Literacy Day on April 5 in Sarasota. Details may be found here, at the GIC website: https://www.interdependence.org/events/browse/programs/second-annual-financial-literacy-day-update-financial-markets-economy/.  Note that this date falls within National Financial Literacy Month in the United States.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Guns: Part 3, The Policy Journey

In part one of this series, I wrote about my personal journey with guns. Part two involved the US stock market and bond market and Cumberland’s investment policy and how it relates to the three public companies that constitute the gun makers whose shares trade on the US exchanges and are thus part of a stock index. Part three follows and is an attempt to discuss policy issues calmly.

In post-Parkland America it is hard to discuss guns calmly. With sequential school shootings galvanizing political conversation on all sides, such rational discourse may be impossible to achieve. Some of my colleagues are advising me not to touch this subject. We see many institutions and individuals electing silence. My personal view is that silence is a convenient escape. How can anyone ignore this subject, given the flow of news and the continuing revelations about Parkland, the sheriff’s department, the perpetrator, the FBI, the warnings? Every day new information is the top of the news, and the proposals mouthed by many seem outrageous to others.

There is a forum for a national policy discussion and debate. But it, too, is charged with emotion; and it, too, is caught up in the political fight of the NRA versus the anti-gun constituents. And the many caught in the middle, including me, find themselves battered by each side.

A Republican friend was appalled when Florida Governor Rick Scott uttered his comments about the FBI.  Scott is in a political fight for the Florida US Senate seat. The incumbent Democrat, Senator Nelson, took a hard stand against guns as a response to Parkland. His detractors ask why he didn’t do it sooner and harder. Florida is a gun-friendly state. There are rules about how to carry a gun and where to place it in your car and what you can and cannot do with it. In Sarasota, I know many folks who own a variety of guns. Some of those guns are for hunting and sporting clay usage. And I have also watched the firing of high-capacity weapons on shooting ranges at Florida private clubs. In the earlier days of my personal journey, I was a member of a gun club and stored a gun in a locker there.

So can we find a way to have a debate? Is there a mechanism by which a national consensus is reachable? What are the outcomes if we don’t reach one?

The extremes of the debate are clear. Anti-gun activists say NO to weapons. No guns allowed. That is a minority view, but it is intense.

Pro-gun individuals say there is a US Constitution, and a Second Amendment that extends to Americans the absolute right to own guns. Well that, too, becomes a mini-debate over what the full Second Amendment really says and what it really means, whether it is currently applicable or outdated, and whether there is any construction to change it or specify which kinds of guns private citizens can own.

Here’s the full text of the Second Amendment to the US Constitution:

“A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.”

One way to change this amendment is to have a constitutional convention. That path is very unlikely, as the process is cumbersome and requires a massive wave of political support of a bipartisan type. It would open a Pandora’s box of legal questions so daunting as to discourage the effort. The other way is via congressional action and state ratification. But changing or amending the Constitution can take a very long time, as the Twenty-Seventh Amendment shows. It was initially submitted to the states along with the original ten amendments (Bill of Rights) on September 25, 1789. The first ten were ratified effective December 15, 1791. The Twenty Seventh Amendment wasn’t ratified until May 7, 1992, by the vote of Michigan. Source: Cato Institute. My guess is we don’t want the anti-gun versus pro-gun debate to last another 200 years. Or do we?  Just think about the gun-toting drones and who can fly them and where they may travel.

Another classic American way to deal with a political divide is to turn the issue over to the states. The repeal of Prohibition was accomplished that way. Many argue now that the method of removing marijuana laws from the national debate will follow the path of Prohibition repeal.

But can that work for guns? It appears not to be the case. There are very tough anti-gun laws in some cities and jurisdictions, and those cities and jurisdictions also have high gun crime rates. So, passing a local law may help somewhat, but it certainly doesn’t clear up the problem of crimes involving the use of guns. And there is also a substantial weapons export business. American-made guns are sold worldwide. Do we have a national consensus to reduce this economic sector?

So can we do something else? Can we raise the age threshold for gun ownership and usage? Can we establish gun safety testing? Can we achieve national registration? Can we use a taxation policy or an annual licensing policy of a national mandatory transfer of title policy as a way to establish some form of preventive restraint that would avert another Parkland? Can we uphold the original intent of the Second Amendment and still prohibit certain types of guns? The Second Amendment didn’t discuss semi-automatic or automatic weapons, because they didn’t exist at the time. The second Amendment didn’t talk about hunters versus sports shooters versus murderers.

American history does not offer promising precedents here. High passion tends to erupt with gun-related events, and then it subsides, and we become inured again until the next event. And we seem less and less shocked. The regional and local nature of gun violence events also adds to an “it can’t happen here” attitude. Of course, it does happen here, or there, and then the shock intensifies.

My conclusion is that there is no conclusion.

As a nation we are too divided to reach a consensus that eliminates guns. There are so many guns in America that such an attempt would appear to be futile unless it were monstrously imposed by the US military. And then it would be a nightmare. Many would ask if banning private ownership would be wise and might point to Venezuela as an example of an unarmed citizenry that now lives in a failed state without freedom, having once had some of it in the form of a legitimate legislature and courts and general upholding of the rule of law.

And we are also too divided to allow full and unrestrained gun usage and ownership? Do we want a society where everyone is armed, and citizens have to shoot it out for survival? Some say that is better than what we have now. They want to arm the teacher to be able to shoot back quickly.

So no national consensus, and no way to achieve it, means that we will be debating the details and not the broader elements. We will change some rules, and we will dilute others. We will enhance a national registration system. We will try to train more sheriffs on what to do when a mass shooter opens fire. We will add to the costs and demands for more security forces in schools and in other places of assembly.

We will discuss the issue of shooting back, with all of its fiercely articulated viewpoints. And we may even allow guns in schools in some jurisdictions and prohibit them in others.

All in all, the outlook grows more serious, and the likelihood of a peaceful and generally accepted resolution of this pro-gun versus anti-gun debate seems intractable. I fear there is no happy ending in sight. What a horrible way to have to end a commentary.

The first part in this series, “Guns: Part 1, A Personal Journey,” can be read online here: www.cumber.com/guns-part-1-a-personal-journey/

The second part in this series, “Guns: Part 2, The Investment Journey,” can be read online here: www.cumber.com/guns-part-2-the-investment-journey/

The third part in this series, today’s piece titled, “Guns: Part 3, The Policy Journey,” can be read online here: www.cumber.com/guns-part-3-the-policy-journey/

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Guns: Part 2, The Investment Journey

“I don’t want to invest in any gun makers,” said our client. She was and is passionate and adamant. “This shooting stuff has to stop.”

“I agree with the goal” is my repeated reply. No one wants to see the scenes we are witnessing. But let’s talk about the investing issue and not the shooting itself. We agree about the shooting.

Part of your account is invested in high-grade bonds. Some are tax-free or taxable municipal bonds, and others are investment-grade corporate bonds and government bonds. There is no junk credit there. None of the bonds are directly used to finance any gun maker. We don’t own bonds of companies like American Outdoor Brands (formerly Smith & Wesson) or Sturm, Ruger & Co., the maker of the AR-15. So the Cumberland bond accounts meet the client’s test.

But the ETFs become much more difficult. In the case of the larger and broad-based ETFs, it is almost impossible not to have some exposure to a gun maker. Barron’s examined this issue deeply and found that Blackrock and Vanguard together own 26% of Sturm Ruger. American Outdoor Brands is part of the Russell 2000 Index. So owning an ETF of that index automatically includes that gun maker. The amounts involved are relatively small. Barron’s says that “The gun companies generate huge controversy, but not much in the way of investor value — the market cap of all three gun stocks combined is just $2.5 billion, a rounding error in the trillions of dollars managed by Vanguard and BlackRock.”

Will there be any changes coming to this landscape? We shall see. Can pressures cause mutual fund companies and institutional investors to alter the composition of portfolios and indexes? We know the revelation that the Florida Retirement Pensions System had a small investment in gun manufacturers is an embarrassment to that organization and to the government of Florida. The amount is only $4 million out of $163 billion, according to Barron’s, and about half of that comes from an index fund that tracks the Russell 3000 Index.

So what is an anti-gun investor to do?

At Cumberland, we do not pick single stocks. We favor low-cost and diversified ETF strategies as an efficient and favorable way to invest in the stock markets of the US and the rest of the world. It is impossible to apply that approach without some very small exposure to gun makers or ammunition makers or the chemical companies that support them or the shipping companies that deliver guns or the retailers that sell them.

That fact doesn’t dismiss the possibility of activism by an individual who is anti-gun. There are many ways to express your views. You can see that in the news flow about organizations that are delinking with the NRA. As for the pro-gun investor, the single-stock approach allows you to put your money directly with the company that makes the AR-15 if you want to.

Lastly, we advise every investor to dig deeply and do research. Then decide for yourself. At Cumberland, we will continue to use the broad-based ETFs in the composition of our US ETF portfolios. We will apply the same standard to foreign portfolios. We think that is the best approach for investors to follow.

The first part in this series, “Guns: Part 1, A Personal Journey,” can be read online here: www.cumber.com/guns-part-1-a-personal-journey/

The second part in this series, “Guns: Part 2, The Investment Journey,” can be read online here: www.cumber.com/guns-part-2-the-investment-journey/

The third part in this series is titled, “Guns: Part 3, The Policy Journey,” can be read online here: www.cumber.com/guns-part-3-the-policy-journey/

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Guns: Part 1, A Personal Journey

Each year at the Camp Kotok gathering in Maine, there is an optional morning for those who want to shoot. A variety of weapons are available. All shooting is supervised and all is on ranges or safe venues. We debated doing this for a few years and then tried it. The response was large. Many of the attendees hadn’t experienced guns and wanted to learn more about them.

The teachers of weaponry come from among the local fishing guides; many are also hunters or hunting guides. Some folks shoot pistols, others shotguns, and some automatic weapons. Some are doing it for the first time. I recall a 60-something financial professional whose experience with the outdoors was derived in Central Park. Her reaction to firing a weapon was surprise and respect. Conversations at lunch or dinner reveal that respect.

All realize the destructive capacity of the weapon. And all articulate additional respect for law enforcement agents who have to face such weapons daily. Several of our guides have or had law enforcement roles during their careers. Many households in northern Maine have a weapon. The same is true in Wyoming or Montana or Florida, where we also gather. Guns are part of the culture in those places. Like it or not, in America, that is not going to change.

Among our group of invitees and also among the Maine guides there are supporters of the National Rifle Association, and there are also detractors. Supporters argue that the NRA is the leading defender of their constitutional right to own a gun. Detractors say the NRA is now an intensely rigid and purely political organization. Passions run high on both sides and at all levels of the arguments. That said, the New York City resident who hates guns and the NRA member and fishing guide who taught her how to shoot a gun didn’t shoot at each other.

Both of them behaved as mature, collegial adults. She learned more about the weapon she hated. He learned more about her fear. Each of them acknowledged that our nation has a problem. And each agreed with the other that something must change when a teenager can shoot up a school. In Maine, we have had this discussion every year for a while. It is not a new subject. We will have it again this coming year. Our Maine guides are just as saddened by the news flow as are their visiting guests.

Some personal notes.

My farmer grandfather (everyone in the family called him Papa; neighbors called him Jake) had a gun. In those days nearly every farmhouse did. The first gun I learned to shoot was a single-action twelve-gauge, full-choke, long-barreled shotgun. You pulled the hammer back with your thumb. The trigger action was stiff. There was no cushion on the end of the wood stock. Papa used to say it “kicked like a mule.” By age eight I could hit something and fire a few shots before my shoulder hurt.

The first life I took with that gun was a rabbit’s. I hunted the rabbit, stalked it and killed it. Thinking about that rabbit today, I regret shooting it. The rabbit didn’t do anything to me. But as a young boy on a farm with a gun, well, hunting seemed like the right thing to do. I remember looking at that dead rabbit after it had encountered a full-choke twelve-gauge. The impression of the gun’s power is still with me.

We hunted in my town. David B. and his older brother Jerry; Gary (whom we nicknamed “Gobble” because he knew how to call wild turkeys); Vic, who took me into duck blinds and taught me to row a duck boat; and Bob M., who showed me how to “jump shoot” ducks in ditches – these were among many who owned guns and shot guns and cleaned them and stored them in cases in their houses. The Boy Scout troop was proud of teaching gun safety and respect for guns; the NRA supplied the learning materials. Several merit badges involved rifle handling and shooting. As an Eagle Scout, I earned those badges.

I remember the Remington pump twelve-gauge that was a source of pride when I saved up enough to buy it. It could hold five shells, but New Jersey law then limited shells to three, so you had to have a plug inserted to shorten the magazine. Pete’s gun shop was the place to get that modification done. Everyone in town knew Pete’s gun shop. Boys were in there looking at the guns that were behind the locked cases. Hunters were swapping stories. Yup, Pete’s was the place. Having a gun from his shop was something else, indeed.

The advantage of that Remington was that you could also use it with buckshot for deer. And my shiny new pump had a ventilated rib that allowed better “pointing,” since the heat generated by the barrel would more easily dissipate through the ventilated rib. That meant the heat waves above the barrel were less distorting. That factor becomes important when you are shooting a five stations, 25-shell round of trap (clay pigeons).

Rifles came later. My favorite was a lever-action 30-caliber Winchester. Felt like something out of a cowboy movie.

Yes, there were guns and hunting and shooting. But not one of the kids I knew would shoot up a school or even think about shooting another person. Guns were respected. Households stored them properly. Supervision was clear and careful. Hunting licenses required tests. Gun ownership required meeting standards. And infractions were punished. I do not recall any shooting incident in a school in those days. Maybe such things happened from time to time, but I don’t remember them. There was nothing like the spate of shootings we seem to have in the United States now, with what now seems to be one happening every few days.

Later, life with guns got more complicated. The pistol whipping I encountered in front of the post office on Landis Avenue in Vineland involved an angry man threatening a woman with a handgun. “Whoa! Slow down. You can kill someone.” Talk and talk and talk while backing slowly away. Hands held open and palms showing. Wait and wait and wait while every second seems like an eternity until the Vineland police arrived.

In those days the police walked up very slowly. First, the car would carefully approach. No sirens, no noise. The slow cruising of the patrol car was part of the protocol then so as to allow the gunman time to reflect. Slowly the officer would exit the car. Slowly he put on his hat. Slowly talking and slowly walking. “Put it down,” he said. “Be careful. You really don’t want to hurt anyone.”

Slowly. Talking. Walking. The victim and bystanders were terrified, me included. We were frozen in time. I think about that experience even now, many, many years later.

But that was a handgun, and that was on the street, and that was out in the open, and that was in front of the US Post Office on Landis Avenue in Vineland, New Jersey. It was not an AR-15 being fired by a 19-year-old inside a school building in Florida. It was before Columbine in Colorado. It was in a different era.

Some years later, on the corner of 17th and Lombard in Philly, came the shots fired at me. I had parked in the garage on 16th street near Pine Street and was walking up the north side of Lombard Street, carrying my briefcase in my right hand. Near the corner, a pickup truck stopped at the traffic light. The first shot missed because the gun was fired just as I started to move behind the bus stop enclosure. The second shot missed and shattered the enclosure covering. I was already dropping to the ground. The US Army teaches you to get down fast when you hear the first shot.

The light changed. The truck pulled away. I didn’t see the license plate, and I don’t know why I was the target – perhaps simply because I was there, perhaps I would have been a robbery victim. Later I found the bullet mark in the brick wall of the building next to the bus stop.

The US Army teaches that guns are for killing people. Military veterans respect weapons. I was fortunate when I wore a uniform in the 1960s – my job kept me away from the gunfire. Many were not so lucky. Some remain silent to this day about their Asian experiences. Today, that silence is about other places but the characterization of internalizing is unchanged. Then and now, some have friends who didn’t return. But in the most part there is a rare and deep respect for weapons among those who served in the 1960s. And it seems that deep respect continues through today. Think about it. How many can you name that served in the military and then went on shooting sprees? Sure, it happens, but it is rare.

Every vet I know has the deepest respect for the power of a weapon. That is regardless of branch of service or rank or expertise. Everyone I talk with is dismayed by what we are seeing in the news flow. All say that this has to stop. Whatever we are doing isn’t working, so if we keep doing it, if we change nothing, how can we expect a different outcome?

In my personal journey, I don’t shoot guns any more. I don’t even shoulder my lightweight Browning, over-under, 20-gauge quail gun. As much as I liked it, I sold it, and I know the new owner will treat it wisely. He is a good shot and a safe gun owner. I do not belong to the NRA and haven’t for years.

If I had a way to do it, I might even reach back in time and forgo that shot I took that killed that rabbit. But history cannot be revised away although revisionists can try to distort it. The question facing America now is can we learn from it?

The first part in this series, “Guns: Part 1, A Personal Journey,” can be read online here: www.cumber.com/guns-part-1-a-personal-journey/

The second part in this series, “Guns: Part 2, The Investment Journey,” can be read online here: www.cumber.com/guns-part-2-the-investment-journey/

The third part in this series is titled, “Guns: Part 3, The Policy Journey,” can be read online here: www.cumber.com/guns-part-3-the-policy-journey/

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




The Classic DuPont Model

In their February 15 DataTrek newsletter, Jessica Rabe and Nick Colas refer to the classic DuPont model in discussing how to deal with equity valuations. They admit that “Permanent changes to the tax code shift returns higher.” We agree. They then temper their outlook by introducing the deficit issue, inflation expectations, risks of higher interest rates, and other factors. We agree with their list, but we don’t agree that those factors are a reason to reduce the classic DuPont model valuation results.

Let’s use a hypothetical. Assume for a minute that the 500 companies in the S&P 500 Index all merged and are a huge global conglomerate that has diverse businesses that are represented by the sectors of the S&P large-cap index. The company’s 2018 earnings were estimated at $140 per share before the new tax code was implemented. And the expected growth rate of those earnings for the next 10 years was 6% per year. Therefore the earnings estimate for 2019 was 1.06 times $140, which equals $148.40 per share next year.

Now along come the tax code changes. The 2018 earnings number is revised upward to $154 per share. The 6% growth rate is unchanged. Thus the new estimate for 2019 is $163.24. Readers can quickly see how this works. Start with a higher threshold, and the growth rate is applied to a larger number. Thus the future years’ earnings numbers will be higher than they would otherwise be, and the trajectory of that future growth is based on a higher compounding rate than it would otherwise be.

So how do we value the tax code change? Do we use the same multiple of earnings that we used for the original $140 but apply it to $154? Or is it higher? Or lower? We think it is higher.

Here is where the DataTrek list becomes a challenge. Of course, future paths of growth and interest rates and inflation and other factors alter the future earnings estimates. That would be the case with or without the tax code changes.

The critical question is whether the compounding of the earnings growth rate is altered so that it is lower than the effects of the changes introduced by expectations of inflation and interest rates. And we must remember that inflation is a nominal item, so that stated earnings (in nominal terms) can be increased by inflation. That used to be a detriment, because higher tax rates were applied to those nominal earnings. That impact too has changed, since the baseline corporate tax rate has declined from 35% to 21%.

So a second item in the calculus is the reduction of the inflation tax premium. DataTrek mentions real returns in general terms. We agree. But we think that too needs more elaboration.

Note that we won’t see earnings reported for Q1 of 2018 until April. But all we have seen for 2017 revealed a very positive picture. Credit Suisse stated (February 16) that 85.9% of the S&P 500 market cap had reported earnings for Q4 of last year. They note a “beat rate” of 4.9%, with 73% of companies surpassing bottom-line estimates. They remind us that this compares with 4.7% and 68% over the past three years.

In sum, the earnings reports of the S&P 500 were pointing to an improving trend before the tax code change. Add in the new tax code, and it only gets better.

Note that we haven’t mentioned the repatriation effects. They are coming. Cisco, for example, has announced its intention to repatriate $67 billion and to use $44 billion of that for share repurchases and dividends. Clearly, Cisco’s earnings per share are positively impacted, as is its stock price. For details see https://www.nytimes.com/2018/02/14/business/cisco-repatriation-tax-law.html. Dan Clifton of Strategas adds this observation on February 20, 2018: “We also note that Cisco’s repatriation in 2018 will be nearly as large as the combined tax cuts for all US companies in 2018 – just one company’s repatriation.”

The stock market correction took US stock prices down to levels below those that preceded the tax code passage. In fact those levels were even lower than the prices that preceded the expectations that the new tax code change would be passed. The average stock corrected about 14%. We think that was way overdone. It created an entry opportunity, and we became fully invested in our US and US Core ETF accounts. We remain that way today.

We still expect an S&P 500 Index above 3000 by decade’s end, and we still believe the disaggregation of the classic DuPont model has merit today, given the permanent nature of the tax code changes.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.