August 2018

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August 2018

Heads up! Look for the Wall Street pundits to inundate us with comments about an inverted yield curve and how it is; 1. A predictor of recessions, and 2. Bad for stock markets.

An inverted yield curve, an economist’s way of saying that, unlike a normal interest rate relationship where long term interest rates are higher than short term rates, exists when short term (2 yr.) interest rates are higher than long term (10 yr.) interest rates. That does signal, several months in advance (see chart below), that a recession is on the horizon. It does not predict when, simply that one is coming, which leads the investment gurus to ponder what to do and when, in spite of the historic facts that show that although an inverted yield curve portends recessions, the market, as indicated by the S&P 500 Index, usually behaves well. So take with healthy skepticism media comments about dangers in the markets from an inverted yield curve. And remember: We don’t own markets—we own solid, seasoned, dividend increasing companies.

Inverted Yield Curve table

“Guess those states will see tax revenues go up in smoke”, a friend joked, “or maybe they’ll bite into new tax sources. You know, have a couple of puffs or eat a brownie.”

A silent groan, as I realized he was referring to the legalization of cannabis for recreational use in Canada and a growing number of states in the U. S.

Regardless of one’s personal opinion of the appropriateness of some states (but so far, not the federal government) legalizing the use of cannabis, the loosening trend continues, with a heavy influence in the states taking such action in anticipation of significantly increasing tax revenues from the sale of consumables made from the plant. Taxing revenues from this source could well run counter to the old saw that, ‘Whatever you tax you will get less of: whatever you subsidize you will get more of.’ Time will tell. Meanwhile this is a topic that we expect will begin taking up growing media attention.

Parents/Grandparents: Be of good cheer, the kids will be back in school soon.

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Next column: September 2018