A pretty good year, lots of all time highs, the FTSE creeping towards 10,000, rates falling, no recession, a Federal Reserve that can’t believe its luck, peace of a kind in the Middle East.
So inevitably thoughts turn to banking profits, selling some high fliers, cash for next year?
How so lucky ?
Much of the feel good, is because we had backed ourselves into a corner of deep despondency, and a fear of the unknown.
We should celebrate outbreaks of peace, especially in the Middle East, a lot of misery has been halted, in Syria, Kurdistan, Lebanon, Gaza, at what cost, time will tell, but stopping hot wars is a great first step. Wars seldom have real winners; they destroy both sides.
Some equity markets do look high, but that is reliant on a few hot stocks, many with no reason to rise further. The great bulk are just grinding up, hurt by weaker demand, helped by lower interest costs.
It is quite striking how poorly smaller companies have fared, they appear not to be seeing cheaper credit, nor stronger demand.
What is high ?
We have liquidity, but it is chasing around, rotating, and flourishing in pretty pointless places, like gold and crypto, or on valuations that make no sense. This rally is not broad based yet.
Nvidia is on 50 times multiple, some 30 times trailing sales. It feels like the new Tesla, with an unanchored price, just used by traders.
Although here it is the hope that it stays as profitable, more than it becomes profitable, but both concepts assume a monopoly position far into the future, which is not credible.
Home stretch
Jerome Powell was in relaxed mood on Wednesday, after the latest cut; he can see the golf course unfurling ahead of him now. A few warning comments about statistical fog, and a confident prediction that the Government shut down (remember that?) would hurt growth, but not by a lot.
Tariffs would one day cause inflation, but not by much.
From this website – read the asterisked explanations to take a rounded geopolitical view
Pretty happy that loan quality was good, he felt the bad debt issue was just in sub prime auto loans, and restricted to that; I guess he should know.
Pretty chilled about the Federal Reserve Balance Sheet at 20% or so of GDP, to most of us a staggering number, but he felt it was OK now, not quite back to pre-COVID, and he would now be buying Treasuries to keep it there, in nominal terms. QT is over. Pretty chilled on AI capital spend, he seemed convinced it would end up being worthwhile.
Directed tax reform – a useful aim
The rapid capital formation in the USA is on AI, which of course governments like: higher values, more tax take off sales, and buy backs. But are the right firms reaping the benefit? Construction jobs may help American workers, but in the Rust Belt, which Trump cares about most, is the bull market helping?
US tax policy favours high growth stocks, because dividends are more highly taxed. While so does inward stock market investment, most UK (and I suspect global) portfolios are dominated by US stocks, and again, growth is favoured.
So, I wonder if there is a case to now ditch the extra territorial reach of FATCA (Foreign Account Tax Compliance Act)? This is an Obama tax, from when the US cared less about value stocks, and needed less external financing.
It is an appalling law, needing a deep bureaucracy, and in its tedious impact on non-American investors. It is also harshly applied by intermediaries and an awful waste of time.
It hurts US value stocks too; might that mean it could go?
And back in the UK
But then what else could go, to help just UK investors?
I wonder if the REIT regime remains fit for purpose. The idea was to encourage property developers by stopping assets with high capital gains being stranded, because the tax hit on a sale was too high – this no longer applies.
Recent REIT additions seem to be on residential portfolios, and maybe turning those over, that is selling secondary to fund primary building, is still valid. But the other part of the deal was that they must distribute almost all their income, so that HMRC could bite on that instead of capital.
So, if asset values are falling, stagnant, or below cost, the CGT angle does not help either side, tax payer or tax collector. If you must distribute 85% of your income, on falling values, and tighter credit, meaningful de-gearing is impossible. Legislation has created a value trap.
I tend to see the REIT regime as a distortion and a tax break, so a reforming Chancellor could well look at it. Business, after all her evasion and talk, needs action, not more powers for Government ministers, but actual laws repealed.
How about both scrapping REITs and the Aggregates Tax? The latter is a tax on building, a tax on infrastructure – this would show a clear divide from the Blairite anti-growth mantra which led to the current mess in housing.
Well, we can dream, but there are a lot of levers a government could pull, to help business and jobs, at a low cost. I don’t think demand or capacity or finance is the issue, but like new London housebuilding, some things have finally just stopped, due to government action, though it was never designed to do that.
Meanwhile, I sense the year has more surprises, more to give, but both positive and negative.
Powell stamped on Jamie Dimon’s cockroaches, maybe other pests can be exterminated?