Stocks continued to rally on Friday and the momentum appears to be carrying through in early morning trading overseas. Friday’s employment report extended the string of good economic news with solid growth and few signs of accelerating inflation.
Over the weekend, the big news story was the commencement of trading for futures in bitcoin. The bitcoin story continues to explode both in terms of volume, rising prices, and cocktail party conversation. Few seem to understand bitcoin, and those that profess they do explain it in such esoteric terms that those out of the know remain confused. So far at least, what bitcoin isn’t is a functional currency, except possibly, in the underworld of crime, drugs and rogue nations. The bulls make the case that it is a store of value similar to gold. The bears liken it more to tulips. Time will tell. But, for now at least, most of the buyers, sellers and bitcoin miners are speculators. Normally, retail speculators are the last ones to tread into the land of bubbles. Bitcoin proponents hope the speculative craze will find eventual institutional support. They point to the start of futures trading as a step in that direction. What we do know is that you can’t handle a bitcoin, you can’t see a bitcoin, and you can’t go to the store and spend a bitcoin. Bitcoins don’t pay interest or dividends. They provide no one-time or recurring cash flow. All you can do if you own a bitcoin is hope that someone will buy it from you at a higher price. That seems to me to be the root of speculation. Can it be a store of value? For the moment, obviously the answer is yes. But gold has been around for thousands of years. Bitcoin has existed for hundreds of days. Perhaps a little more seasoning is needed before most of us have confidence in the ultimate value of bitcoin or any cryptocurrency.
This week the focus will be on Washington, specifically the outcome of the tax reform legislation. Washington has two weeks to iron out the details. Almost daily there are reports of flaws that must be fixed. There was even one example over the weekend of how a hypothetical upper income New Jersey couple could have to pay more than 100% taxes on incremental income beyond a certain level. While this is a somewhat unique example of a trap few will fall into, it clearly highlights just one flaw of a hastily conceived and passed package. Indeed, having two weeks to scrub the legislation for outliers like this is almost certainly a good thing. Taking a broader prospective, there are still the cosmetics needed to try and demonstrate that this is a tax package that provides at least some meaningful relief to a broad swath of lower and middle class Americans. Republican leadership has mouthed those words since Day 1, but so far, the package has been heavily skewed toward corporations. Republicans and supply siders want everyone to believe that corporations will take the tax savings and invest for growth. But history shows that corporations respond to demand, not a buildup in cash. If cash hoards get too large, companies simply return the excess to their owners, shareholders. Demand has to come from the bottom up. While nothing is going to radically change the package to skew the majority of benefits away from corporations, it appears some effort is being made to ensure that individual tax relief is spread in a way that favors the middle class more than the original bills might indicate. Whether changes are substantive remains to be seen. I would expect to see a lot of trial balloons floated by the conference committee or some of its members this week to solicit public reaction. The final bill remains a work in process and will probably be just that until the last minute deadline. Conservative Republicans in the House and key Senators (you all know their names by now) are going to withhold support until the very last minute. Until then, there will be waves of both optimism and pessimism and stock markets will react to those waves. But all Republicans know that, politically, they have to pass something, and that is the emotion that will most likely rule the day in the end. The bill won’t be perfect for sure. Time will tell whether it is a net positive.
Congress must also pass a spending bill before it recesses before Christmas. As the spending bill will require a minimum 60-vote majority in the Senate, it will have to be bipartisan, meaning Republicans are going to have to make some concessions to the Democrats. At the moment, the Democrats are looking toward the Dreamers Act as the place where they want Republicans to give ground. Trump won’t give easily on this, but perhaps he will, if he gets more funds to “build his wall.”
In the meantime, stocks will likely continue to drift higher amid an absence of any signs at all of either economic weakness or inflation. At some point, tighter labor markets and other capacity restraints should evidence themselves through higher inflation. But so far, these signs are fairly muted. December is usually a month for year end rallies, particularly in the second half of the month. Momentum alone should continue to push prices higher for now.
Today, Hailee Steinfeld is 21. Jermaine Jackson is 63.
James M. Meyer, CFA 610-260-2220
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