Best Ideas

A Developing Reset


Regardless of one’s political views, it is hard to argue with the notion that the world is going through a major reset, one of which is likely to be debated for decades. The resulting implications for investors is likely to be massive and we believe it is worthwhile exploring the major manifestations.

Listed below are items which should be classified as “sea changes” as they fundamentally change the investing climate:

European Union: The Italian Job – the election of an extreme left and extreme right party comes with some extreme proposals including the possible repudiation of EUR200+B debt, the possible exit from the EU and the possible replacement of the euro with the lira. While most of these proposals appear to be implausible now, obviously Italian voters are frustrated and there are likely to be at least some measures to appease them. The below chart indicates concern re. Italian banks.

Brexit – like most divorces, this one is far messier and more protracted than most would have believed. While there is talk of a revote or possibly ignoring the referendum, we expect an eventual separation and a coming to terms. Trade Wars – we expect that German will make adjustments to maintain access to markets.

United States:

Tax Cuts – taxes are omnipotent in the sense that they affect us all and while not the only factor driving decisions they are certainly a major consideration. The major impact of the Tax Law is:

• Corporations’ tax cut – corporations are less likely to redomicile outside the US and are more likely to make capital investments, which now have accelerated depreciation.

• Reduced personal taxes – while these cuts are not permanent (what is?) the net effect is tax payers will have more disposable income.

• Non-deductibility of State and Local Taxes (SALT) – taxes in the Northeast, West Coast and Illinois have effectively been increased by approximately 35% with the result being greater pressure on some states which are already having difficulty balancing budgets. The upshot is likely to be a repeat of Detroit’s problems in Chicago, Connecticut and other governmental issuers.