Josh Brown said something on CNBC today that I’ve believed for a long time under the Trump Economy: it’s now impossible to walk-back rate cuts.
We all remember the debacle of December 2018, when the Federal Reserve raised rates by a quarter point, from 2.25 percent to 2.5 percent. The result was a devastating market drop of 20 percent.
After the last seven days of Coronavirus fear and loathing, the Fed made an emergency rate CUT to stave off concerns, and the Dow fell by almost 3 percent. I guess it wasn’t enough, but just imagine if they had attempted to RAISE rates.
Much as Religious Investor thinking may help quench queasy market appetites by feeding the “There’s no limit!” mentality of millennial dreamers, fueled by the likes of Tesla and Virgin Galactic, at a certain point the ties which bind may horribly snap.
In that moment, will rates be cut or raised? Will it even begin to matter?
I have a general rule for life in the United States: anything which saves you money is eventually removed.
A few of you may know about the passage and signing of the SECURE Act in December 2019. This drama-free legislation made some interesting reforms to retirement plan rules, allowing Americans to make certain penalty-free (but not tax-exempt) withdrawals for qualifying reasons, and also lengthened the timeline under which required minimum distributions (RMDs) must be taken by retirees.
That all sounds good, but there is something else to the story. A separate shift in distribution laws could leave you seriously screwed down the road where taxes are concerned.
Under previous rules, people who inherited an IRA from their parents had the liberty of “stretching” RMDs over the course of their own lifetimes, thus reducing the taxes paid on that money and building inter-generational wealth. Not anymore.
The SECURE Act upends this tradition by placing a 10-year distribution requirement on such inheritance IRAs. So if your parent dies and hands over an account with $500,000, you would need to withdraw something like $50,000 annually to spread it out over that period, or take the lump sum. In either case, taxes will be high.
Perhaps the rule won’t be so horrible for folks who inherit at the age of eighteen, but for others it is bad news. Imagine pulling in a six-figure salary at age 45 and having to stack $50,000 on top of that. Your taxes will giggle with delight.
A broader issue relates to how America prevents people from building wealth if they are not extremely rich. Under current tax laws you can even be penalized for making too much while also maxing out a Roth IRA, and few lucrative deductions are available for middle class people. The SECURE Act is just a garnish on that system.
You’ve probably heard something along those lines in market-based articles. After all, greed and overconfidence are the virtues of constantly churning stock wheels. It should never stop.
Over the last few years, we have witnessed a rather new phenomenon: the Religious Investor. In this case, it is a person who has no regard for reality or the underlying principles of value. Any outcome, regardless of nature, is an affirmation of their stock’s worth, and skepticism? We simply won’t have it!
The Religious Investor operates much like the Chant Warrior where psychological tropes are concerned. Anything Bad is Good, and anything Good is good. Low polling? That’s because the polls are wrong! Not getting positive attention? Only because of media bias! There is zero possibility of an alternative, because that contradicts the religious narrative.
You probably recognize by now that my target here is Tesla. To be clear, it applies to shareholders in other stocks as well, like Buttondown notes:
One January 29th, 2020, they released a fresh earnings report showcasing the following:
Q4 Non-GAAP EPS of $2.14 beats by $0.38
GAAP EPS of $0.58 misses by $0.26.
Revenue estimate was $7.05 billion, actual was $7.38 billion, beating by $330 million
In reaction, the stock rose from around $570 to $644, roughly 11 percent. This despite relatively poor results in the second half of the year, and a weak track record.
Look at how Tesla bulls respond to skepticism:
Comparatively, Apple released the following results not long ago:
Q1 GAAP EPS of $4.99 beats by $0.45.
Revenue of $91.82B (+8.9% Y/Y) beats by $3.41 billion.
Apple’s uptick? About 2 percent. And even in that case, after a long run of success, calling for a sell gets you shredded by the true believers.
So should we all go to cash, or stop being haters and buy?