September 2016
Tax Troubles
US Fed keeps rates on hold
World Trade Organization warns of dramatic global slowdown
FATCA looms large
The month of September saw U.S. markets marking time, with no major moves. International markets advanced, with emerging market equities leading the way (+2.5%). Commodities had an especially strong month with a 4.3% return. (Crude oil is a significant contributor to this asset class, and it was up 7.6% in September alone):
The early part of September was dominated by news from the U.S. presidential campaign. Markets mostly bided their time awaiting the first debate, and for news from the Federal Reserve's latest meeting.
On September 21st, the Federal Reserve announced that they would keep interest rates unchanged. Chairwoman Janet Yellen said one increase would be "appropriate" this year barring any major new risks to the economy. Even though senior Fed officials are "generally pleased with how the economy is doing", the central bank wants to see more progress in the labor market.  At the press conference following the meeting, Yellen said "For the time being we are going to watch incoming evidence."  Yellen disputed the claim by Republican presidential candidate Donald Trump that the Fed is keeping rates low for political reasons.  She emphatically stated that "Partisan politics plays no role in our decisions." Bonds rose throughout the month as more and more participants anticipated this "lower for longer" outcome, and then drifted lower after the news.
On September 27th, the World Trade Organization issued a revised outlook for global trade growth that slashed their April forecast of 2.8% to 1.7%. They also revised their 2017 forecast from 3.6% to a range of 1.8% to 3.1%. Many commentators were surprised at the magnitude of the revision, and no doubt many "strategists" will be revising their global growth outlooks going forward. From a practical perspective, investors will be seeing more of the same "tepid growth" that may tilt decidedly towards the "slowdown" side. It does not portend well for global enterprises engaged in the economically sensitive sectors of industrials and materials.
In light of the current US election campaign and the call by some to impose tariffs ("level the playing field"), it is important to consider the global trade issue. The WTO commented in their press release that "The dramatic slowing of trade growth is serious and should serve as a wake-up call. It is particularly concerning in the context of growing anti-globalization sentiment.  We need to make sure that this does not translate into misguided policies that could make the situation much worse, not only from the perspective of trade but also for job creation and economic growth and development which are so closely linked to an open trading system.
"While the benefits of trade are clear, it is also clear that they need to be shared more widely. We should seek to build a more inclusive trading system that goes further to support poorer countries to take part and benefit, as well as entrepreneurs, small companies, and marginalized groups in all economies. This is a moment to heed the lessons of history and re-commit to openness in trade, which can help to spur economic growth."
Students of history will no doubt chuckle at the WTO's admonition to "heed the lessons of history" since the very first Congressional Act ever passed was the Tariff Act of 1789, which required almost 100% of the federal budget to be funded by the collection of tariffs. The average tariff rate was roughly 20% over the ensuing 100 years, and it fueled the growth of the U.S. through the early 1900's, when the federal income tax was imposed.
Income taxes now account for the vast majority of the federal budget, driven by rising tax rates. In 1913, the average earner paid 1% in income taxes; today it is 15%. The maximum rate in 1913 was 7%, now it is 39.6%. (For a quick primer on the history of income taxes in the U.S., go here:
The growth of income tax reporting, collection, and monitoring efforts has now morphed into a global phenomenon embraced by cash-starved governments worldwide, led by the United States. So, regardless of the "fairness" of trade policies, what is often overlooked is the deleterious economic effects of this global "hunt" for taxes. (Perhaps we'd all be better off by setting things back to 1913 income tax rates, and re-imposing fair tariffs that can fund a slimmed down government!)
Keen global observers know that, beginning January 1, 2017, all governments will begin sharing information on foreigners with their home country under the global agreement known as FATCA (read more here:
Since it is accompanied by punitive penalties, potential criminal charges, and a requirement of affirmative proof that any and all activity is not illegal (instead of the other way around, beginning with the presumption that all activity is legal), many believe that FATCA could be set to seriously retard global trade. (This may be one reason the WTO was forced to issue their downgrade.)
As an example, any "U.S. Person" (individual or corporation) now is persona non grata in any foreign domicile (don't even try to open a checking account overseas unless you have residency- you'll be shown the door before you sit down). How then is it possible for anyone other than a giant multinational corporation to conduct business in Europe, Asia, etc.? This inability of small to medium sized U.S. businesses to grow internationally is a key reason why global trade growth may be impaired going forward. Most analyses we've read barely mention this. We think it is a big deal, and we're watching developments here closely.
As we head into the fall, all eyes are on the U.S. election, where no one seems to have a good feeling about either of the major party candidates. But dissatisfaction with government is at an all-time high around the world, and patience has worn thin. Investors are bracing for more geopolitical turbulence early next spring, as French voters elect a new President, and in Germany next fall, where the same thing happens. None of the incumbents are currently favored to win: in both countries, far right nationalist parties have made sweeping gains in local elections and may win federal elections also.
So, whether its refugees and immigrants siphoning off the state, colossal unfunded pensions, or military and diplomatic blunders that have reignited the Cold War, voters are on edge and tensions are high everywhere. About the only thing that is certain is that big changes are coming. Another important chapter of history is about to be written. The old Chinese saying "may you live in interesting times" has never rung truer - it's going to be an interesting fall!
Thanks for reading our Journal, and we'll be back early next month.
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