FIG Topics of Interest

 

11/14/17

"My aim today is not to argue for state-contingent price-level targeting," Evans said on Tuesday. "That may be a good way to go, but at this point, I just don't know. My point is that we should be planning for these inevitable future situations today."
Chicago Federal Reserve Bank President Charles Evans on Tuesday became the second Fed policymaker in recent days to call for a new approach to rate-setting that would allow the central bank to respond to shocks when interest-rate cuts alone are not enough.

 

One option is so-called price-level targeting, Evans said in remarks prepared for a European Central Bank conference in Frankfurt.

Under such a strategy, a central bank combats bouts of too-low inflation by allowing inflation to run too high for a time. Evans championed this policy in 2010 to deal with sagging inflation, but ultimately the Fed rejected such an "extreme" idea as too difficult to undertake during an economic crisis, Evans said on Tuesday.

Now that economic times are calmer, Evans said, the Fed can study and analyze this and other approaches, and prepare the public for their possible use in the next severe downturn if the Fed cuts rates to zero and still needs more firepower to get the economy growing again. Bouts of zero interest rates are likely to become more common in the future as potential economic growth slows, Evans and other Fed policymakers believe.

Last week, San Francisco Fed President John Williams embraced the idea of price-level targeting as a way to set rates in the future, though he too said such a shift would require plenty of study and debate.

Both men referenced the recent work of former Fed Chair Ben Bernanke, who last month argued for a framework where the Fed is to adopt price-level targeting on a temporary basis when rates became too low for conventional policy.

Click here to download a pdf of this article, Missile.pdf
 
 

11/13/17

Ways and Means Chairman Kevin Brady took a hard-line approach during a “Fox News Sunday” interview, saying the House won’t accept a tax bill that eliminates the deduction entirely. The House bill retains the deduction for property taxes up to $10,000.

https://www.bloomberg.com/news/articles/2017-11-13/house-senate-set-to-clash-over-state-break-tax-debate-update
The Senate Finance Committee will start debating late Monday afternoon the 247-page tax proposal released last week by Chairman Orrin Hatch. As of now, the “conceptual” mark has some significant differences with the tax bill the House Ways and Means Committee approved last week -- chief among them the Senate’s call for repealing the state and local tax deduction entirely.

“There are going to be things that we absolutely object to” in the bill that comes out of conference, said Scott Perry, a Pennsylvania Republican and member of the conservative Freedom Caucus. “But we’re going to have to look at it in its totality and say, ‘Yeah I don’t like it,’ but you have a binary choice” to vote for or against the tax bill, Perry said.
House Speaker Paul Ryan has promised that the differences will be settled in a conference between the two chambers, but some House lawmakers are concerned they’ll just be forced into a take-it-or-leave-it vote for a bill that looks much closer to the Senate version.
A final bill is more likely to resemble the Senate proposal, in part because the upper chamber has a slim majority and can only afford to lose two Republican senators and pass a bill without any Democratic support. The House has a wider majority and can afford up to 22 defections.

After the Senate Finance Committee markup, the panel will release legislative text and vote on the measure by the end of the week, according to Hatch. Majority Whip John Cornyn said the Senate plans to vote on their bill the week of Nov. 27. -- Anna Edgerton

What to Watch on Monday:

  • The Senate Finance Committee will begin debating the tax bill at 3 p.m. Monday, in a markup that is expected to stretch out for several days and could feature votes on numerous amendments.
  • Potential amendment related to the tax treatment of carried interest. The break for investment managers is likely to change in the Senate, even though the chamber’s current tax proposal doesn’t call for it, according to Pat Toomey of Pennsylvania and Chuck Grassley of Iowa.
  • On the House side, Majority Whip Steve Scalise said that GOP leaders would work to win over rank-and-file Republicans Monday evening. More changes to the House bill could still come before the planned floor vote this week. If GOP leaders need to make last-minute changes to guarantee enough Republican “yes” votes, they could stick in a manager’s amendment in the Rules Committee, which is scheduled to consider the bill on Wednesday.
Click here to download a pdf of this article, Missile.pdf
 
 

11/10/17

“It’s a key message that China continues to open up and make its financial markets more international and market-oriented," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. "How important a role foreign financial firms can play remains to be seen.”
The relaxation of ownership rules follow a period in which most overseas lenders lost interest in direct stakes in their Chinese counterparts. After sales by Citigroup Inc., Goldman Sachs Group Inc. and others, HSBC Holdings Plc is the only international bank with a major holding -- a 19 percent stake in Bank of Communications Co. HSBC has been building its business on the mainland as part of a “pivot to Asia” under outgoing Chief Executive Officer Stuart Gulliver.

Regulators are still drafting detailed rules, which will be released soon, China’s Vice Finance Minister Zhu Guangyao said at the briefing in Beijing. Here’s what we know so far:

  • Foreign firms will be allowed to own stakes of up to 51 percent in securities ventures; China will scrap foreign ownership limits for securities companies three years after the new rules are effective
  • The country will lift the foreign ownership cap to 51 percent for life insurance companies after three years and remove the limit after five years
  • Limits on ownership of fund management companies will be raised to 51 percent, then completely removed in three years
  • Banks and so-called asset-management companies will have their ownership limits scrapped
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11/10/17

China relaxes ownership rules to allow foreign firms direct stakes up to 51%.
Did China relax the rules to help recapitalize their banks?
What the GOP Senators tax plan looks like.
Farm sector moving more and more to automation.
Shaking down a Saudi Prince is harder than you think.

Click here to download a pdf of this article, Missile.pdf
 
 

11/09/17

Since 1981, the year of President Ronald Reagan’s big tax cut, Congress has passed and presidents have signed 55 bills that the Urban-Brookings Tax Policy Center counts as “major” tax legislation. During the prior 36 years there had been just 18. In their essential text, Taxing Ourselves: A Citizen’s Guide to the Debate Over Taxes, economists Joel Slemrod and Jon Bakija dub the years since 1981 the “modern tax policy era.” Which leads this exhausted taxpayer to wonder: What will it take to make this era end?

Ominously, most previous U.S. tax eras ended with major wars that required big increases in government revenue. Let’s hope it doesn’t take that to break us out of the cut-reform-increase-repeat loop we’re currently trapped in. But a tour of U.S. tax history does at least offer the hopeful message that things can change.

Click here to download a pdf of this article, Missile.pdf
 
 

11/08/17

"The third quarter (vacancy) numbers are a welcome sign (for owners) after the sharp increase at the end of last year. Overall, it was a strong third quarter, which was a nice surprise," said Michael Cohen, CoStar director of advisory services, during this week's State of the Multifamily Market Q3 2017 Review and Outlook. "We're still in the golden age for multifamily, but we're seeing signs of a gradual slowdown in the apartment market." 
Renter demand for apartments continued to accelerate in the third quarter of 2017, as the market absorbed more than 70,000 units. The overall national vacancy rate for U.S. apartments continued to trend lower after turning sharply up at the end of last year. 
Accounting for the slowing apartment market conditions is the gradual upward trend in the homeownership rate, which subtracts from the renter pool as millennials and other groups purchase single-family homes. The rate rose by 20 bps in the third quarter to 63.9%. A one-percentage point increase in the homeownership rate would subtract about 800,000 rental units from net absorption, Cohen said. 

Click here to download a pdf of this article, Missile.pdf
 
 

11/07/17

(Multi-nationals start to ramp up the fear campaign)
The new 20 percent tax is “the atomic bomb in the draft” legislation, said Ray Beeman, co-leader of Ernst & Young’s Washington Council advisory services group. “We’re trying to get our arms around the implications.”

https://www.bloomberg.com/news/articles/2017-11-07/multinationals-scurry-to-defuse-house-tax-bill-s-atomic-bomb
House tax writers say the proposed excise tax is aimed at preventing U.S. companies from shifting their earnings offshore to subsidiaries in tax shelters -- and it moved into the spotlight this week amid a series of global investigative reports on corporate tax avoidance. But tax practitioners say the provision has far larger implications for consumer prices on a range of goods.

“It’s a very big gorilla in the living room,” said Gary Friedman, a tax partner at Debevoise & Plimpton. Tech companies, pharmaceutical makers, automakers and reinsurers are the companies most likely to be concerned, he said.

The tax would apply to billions of dollars in intellectual-property royalties that technology and pharmaceutical firms make to their overseas affiliates each year -- payments often linked to tax-avoidance strategies. But it would also hit U.S. companies’ imports of generic drugs, cars and other products from their affiliates. Global insurers would incur the levy on the cost of “reinsurance” they buy from foreign affiliates.

The provision, which is estimated to raise $154 billion over a decade, “could trigger a trade war,” Friedman said -- stirring other countries to tax their companies’ imports from U.S. units.

Click here to download a pdf of this article, Missile.pdf
 
 

11/03/17

Retirement savers and financial companies cheered Thursday. The really big change they feared—a slashing of the amount workers can contribute before taxes to their 401(k) plans—didn’t materialize in the U.S. House of Representatives tax bill.

But it does include some proposed tweaks.

Here are five changes legislators want to make to the workplace accounts, and how they could affect employees in retirement savings plans.
https://www.bloomberg.com/news/articles/2017-11-03/there-s-some-good-news-about-401-k-s-in-the-tax-bill
1. Continuing contributions 

Currently, someone taking a hardship withdrawal from a 401(k) plan can’t contribute again until six months have passed. The bill would eliminate that restriction. 
2. Bigger hardship withdrawals

Right now, participants can only take hardship withdrawals of money they contributed, not matching contributions from their employer or amounts that have appreciated through investments. The proposed change would allow savers to take a withdrawal based on the whole balance. 

3. Repaying loans

Currently, if you have an outstanding loan from your 401(k) and lose your job, you generally have to roll that money into an IRA or new employer’s plan within 60 days. If you don’t, the loan becomes taxable and subject to a 10 percent penalty. The bill says a worker who was terminated with a loan outstanding would have until their taxes are due (so April 15 of the following year) to repay it into an IRA or a plan at a new job.
4. Syncing ages

The age when plan participants can take in-service distributions would be synced for 401(k)s and government plans. In-service distributions are withdrawals some employees can make while still working. With 401(k)s, the age to take money out without penalty is 59 1/2, but some state and local governments with 403(b) or 457 plans set the age at 62. The bill would declare the age as 59 ½ for all of these types of defined contribution plans.

5. Nondiscrimination test tweaks

One change would make it easier for defined benefit plans, the predecessor to 401(k)s, that are closed to new participants to pass nondiscrimination tests. Those tests are meant to ensure that the retirement plan doesn’t favor higher-compensated employees over lower-paid workers. 

Click here to download a pdf of this article, Missile.pdf
 
 

11/02/17

Powell on Monetary Policy in his Own Words:
On interest-rate increases 

  • “U.S. monetary policy normalization has been and should continue to be gradual, as long as the U.S. economy evolves roughly as expected,” Powell said in an Oct. 12 speech. “The expectation of gradual policy normalization should reduce the likelihood of outsized movements in interest rates.”

On reducing the balance sheet 

  • “The shrinkage of the Fed’s balance sheet is also expected to proceed quite gradually, with slowly phased-in increases in caps on the monthly reductions in the Federal Reserve’s security holdings,” he said in the October speech.
  • “It’s hard for me to see the balance sheet getting lower than $2.5 trillion, let’s say, $2.5 to $3 trillion,” he told CNBC in June. “That assumes we normalize the balance sheet over the course of the next five years and go back to a fairly small number of reserves.”

On consumer prices 

  • “Inflation is a little bit below target, and it’s kind of a mystery,” he told CNBC in August. “You would have expected, given that we’re getting tighter labor markets, that we’d have a little higher inflation. I think that what that gives us is the ability to be patient.”

On the Phillips Curve and inflation expectations

  • “The relationship between slack and inflation has weakened substantially over the years," Powell said in June 2016. “In addition, inflation depends importantly on the inflation expectations of workers and firms. A widely shared view among economists today is that, unlike during the 1970s, expectations are no longer heavily influenced by fluctuations in inflation, but are fairly constant, or anchored. For both these reasons, inflation has become less responsive to cyclical changes in the economy.” 
  • “While inflation expectations seem to me to remain reasonably well anchored, it is essential that they remain so,” he said. “The only way to assure that anchoring is to achieve actual inflation of 2 percent, and I am strongly committed to that objective.”

On economic growth, unemployment and wages 

  • “My baseline expectation is that the economy will continue on a path of growth of about 2 percent, strong job creation and tightening labor markets, and inflation moving up toward our 2 percent target,” he said in a June 2017 speech. 
  • “I expect that unemployment will decline a bit further and remain at low levels for some time, which could draw more workers into the workforce, put upward pressure on wages, or cause businesses to invest more as labor costs rise, all of which I would view as desirable outcomes,” he said.

On using rules to set monetary policy

  • “There is general agreement that these simple policy rules do provide interesting and useful insights into policy,” he said in a February speech. “To gain the benefit of those insights, it is helpful to look at a range of rules. But there is no consensus that any one rule is best, let alone that it would be desirable to require the FOMC to pick and mechanically follow one rule to the exclusion of others.”
Click here to download a pdf of this article, Missile.pdf
 
 

11/01/17

“There’s a complacency that shale is going to continue to produce at the kind of volumes that we had in the past,” says Jim Brilliant, a portfolio manager for Century Management Investment Advisors in Austin, whose investments include shares in energy-related companies. Output has recently failed to meet expectations. As of June, the U.S. Energy Information Administration expected an average of about 9.3 million barrels a day, more than 220,000 barrels a day higher than companies reported.

Click here to download a pdf of this article, Missile.pdf