What Would Be Far Worse Than An Inverted Yield Curve? Read-My-Lips- By NEIL SISKIND

When the economy slows, tax receipts to the government, necessarily, will fall. At the exact time that we need, and expect, bond yields to move lower, they could do exactly the opposite.

As the economy slows, the government still needs to fund the budget, including paying interest on the national debt, defense expenditures, entitlements, federal employee pensions, etc. If tax receipts are not enough to fund these obligations, then the government will need to take on more debt by selling Treasury bonds to fund the obligations, which could cause yields to skyrocket, as investors demand more and more yield (and, perhaps, the term premium rises where capital is not being attracted), and as other investors discontinue viewing U.S. bonds as safe havens and move to other assets, including other select countries sovereigns that are unlikely to fall further, while offering good yields that justify the risk. The 10-yr. Treasury yield could completely disconnect from the economy (or from the needs of the economy at that time), and the yield curve could aggressively steepen- sending a slow economy into recession, or one that is already in recession- even deeper. Because of the government’s excessive and growing funding needs, even the floating 10-yr. yield would be out of the control of market dynamics and market demands[1]. The President recently, strangely, is beginning to publicly excuse and accept “deficits”.

Why are yields suddenly rising?

The 10-yr. yield is rising as economic data points in the U.S. are declining. Even as the economy slows- as we’ve recently seen lower than expected PPI and CPI prints, lower consumer spending, a rising target Fed funds rate and 2-yr. yield, higher consumer and federal debts and deficits, consensus expectations of lower GDP prints ahead, EPS buttressed by tax cuts and stock buybacks with less of these impetuses ahead, an increasingly challenged housing market; corporate debt is growing; much Dow and S&P growth due to rising interest rates and bank stocks and rising energy prices and energy stocks (these are taxes on businesses and consumers); and reports on capex (how much and what on) are mixed and unclear- there still may be a floor on the 10-yr. yield due to the need to fund deficits- and the yield curve (or yield curves) may never invert- even as recession looms or arrives. The safe-haven nature of the U.S. 10-yr. Treasury bond may be compromised by the deficit.

Are we experiencing economic growth- or, rather, a rise in inflation expectations? Stocks have been rising while yields have been rising. Many analysts, portfolio managers and market participants and observers are pointing to bullishness on the U.S. and beliefs in bottoming in select EM markets as the reasons. As oil and gas prices and interest rates have been rising, taxes (tariffs) on consumer goods from China have been announced, labor markets are tightening[2]- the U.S. dollar is weakening. This certainly sounds like inflation, or, at the least, inflation expectations. On the day President Trump announced his final decision on the most recent round of tariffs on China’s goods, yields spiked and the U.S. dollar sank.

The question is whether there is inflation- and growth. Growing economies with rising interest rates do not see their currencies weaken. Semiconductors can be leading indicators for the economy.

We will see what the next GDP print and upcoming earnings present. Remember that EPS growth is not net income or revenue growth- earnings can rise by decreasing stock floats. Even where there is revenue growth to exhibit true organic growth, consumer, corporate, and government debt-spending is what is helping create those revenues- and the cost of debt is rising. GDP and earnings show us levels of spending and revenue growth, but don’t explain the countervailing debt that was incurred to achieve these growth outcomes.

Regardless of why the 10-yr. is suddenly rising – anticipated earnings growth, China’s selling of U.S. Treasury bonds, inflation fears, quantitative tightening, expectation of growing U.S. Treasury bond offerings, re-allocations to EM assets, the tapering off of pension fund bond purchases, tariffs and product price inflation, or any mix thereof, the issue of the deficit (unless we grow out of it) remains, and will worsen as and when the economy slows. So any rises in yields will be in addition to the above reasons and will only be compounded if deficit concerns persist, and Treasury sales grow.

In any event, budgets and deficits can’t be funded by endless debt and bond offerings. The budget, by and large, has to be funded by income and tax revenues.

At the 1988 Republican National Convention, when accepting the Republican Party’s nomination as their candidate for U.S. President, George H.W. Bush famously made the statement, “Read my lips: No new taxes” to assure voters that his administration would not raise taxes on Americans. By 1990, rising budget deficits fueled by slowing growth and mandatory spending, greatly increased the federal deficits. As the result, on November 5, 1990, President Bush, grudgingly, signed The Omnibus Budget Reconciliation Act of 1990 that raised multiple taxes.

This decision was the equivalent of Present Bush signing his own political death certificate as Bill Clinton used this broken promise on taxes against Bush in the 1992 presidential campaign (yes- Bill Clinton actually used the issue of “truthfulness” against someone- and it worked; irony- and gall- in politics- and in life- never cease to amaze)[3].

President Trump may face a George H.W. Bush “Read my lips: No new taxes.” moment where, despite prior promises and actions, he, nevertheless, has to agree to raise taxes to fund on-going budget deficits- regardless of which party controls Congress- or else allow longer term Treasury yields to soar, especially where rate cuts by the Fed would be difficult if the Fed funds rate and related shorter term Treasuries are still low- one of the reasons (one of the main reasons) that the Fed points to any scintilla of inflation to use as an excuse to keep raising rates- as insurance for the future. The Fed would not be able to rescue the economy with rates cuts designed to stimulate growth- at least not without cutting to zero.

Hopefully, in such case, U.S. bonds would become more appealing to investors as tax hikes (hopefully) bring deficits under control, allowing rates to decline, and a new economic cycle to begin[4]. With higher taxes ad little room for the Fed to lower rates, it would be a challenge.

So, to the initial query:

What would be far worse than an inverted yield curve in a slowing economy?

Answer:

A steep yield curve in a slow economy where lower tax receipts to the government mean bigger deficits, causing higher costs of capital to businesses and consumers, accompanied by a weak dollar from sluggish or negative growth, and with higher taxes to follow … all at the worst possible time.

Everyone assumes that if we see a weak economy we will get low interest rates and low yields. But, just look around the world; if fiscal discipline is absent, it may not go that way.  Everyone assumes that higher interest rates and high yields mean a strong currency- but, just look at what is happening in the United States today.

_________________________________________

fn

  1. The U.S. dollar would be weak, even as yields climb, due to deficits and due to the expectation of low internal rates of return due to an economic slowdown.
  2. At this stage of the cycle, wage inflation may be more of an expense (rather than a demand side stimulus), and, anyway, is offset by the rising commodities costs (namely, energy) and higher interest rates (both of which, along with tight labor markets, appear late in business cycles). It’s unknown, and unknowable, how wage inflation earlier on in the cycle would have helped or hindered growth.
  3. It was, actually, the overall sluggish economy, probably combined with many American’s “Republican-fatigue” after twelve years of a Republican White House (all of which included Bush) that contributed to President Bush’s defeat- plus the possibility that many Ross Perot votes would, otherwise, have gone to Bush.
  4. Certain dynamics could offset rising yields, such as, at a certain point, high yields attracting yield-seeking capital that helps push yields lower.

 

 

endnotes

  1. A few things to note about people on “Wall Street” (analysts, CEOs, portfolio managers) to keep in mind as you evaluate markets and the economy:
  • They either didn’t see or didn’t warn about the 2007 housing crisis (as some investment banks were selling housing securities short).
  • They touted a “global coordinated” growth story for months in 2017 and 2018, that never panned out- quite the opposite.
  • They spent the latter parts of 2017 and early 2018 recommending emerging market stocks and bonds to everyone – Great call!
  • You never see calls from investment banks about shadow banking risks (even China had enough sense … and transparency… to try to step-in on and reel-in theirs. It’s only when asked – such as on Bloomberg TV- that Wall Street concedes to a possible problem. This whole shadow banking issue is addressed when brought up, but glossed over … and percolates below the surface, along with other non-regulated high return debt investments.

In light of the above, when “Wall Street” over and over, stresses a 2020 slowdown in the economy and stocks – you can be sure that they will not be waiting until 2020 to do something about it. In 2019- not in 2020- they will be getting their clients out of the market long before “you” are out. So, don’t wait until “they” call the slowdown and alert you. It will be too late. Look at CPI, PPI, expected GDP, consumer spending, interest rate trajectories, housing permit applications … the slowdown is here.

 

 

Neil S. Siskind, Esq., President
The Siskind Law Firm
Tel: 646.530.0006

Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
Neil-Siskind-photo
Learn more at:  http://www.neil-siskind-the-fatherhood-assignment.org/

Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
Neil-Siskind-Picture

The Neil S. Siskind Nature Preserve is over 7 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.

Neil Siskind, Founder, “National Fatherhood Day” – March 29th

Neil-Siskind-pics
To encourage recognition of the needs of boys and girls who are living without fathers or father-figures in their lives.

Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com
Caring is Free®

You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.

Neil Siskind’s Volunteer Work:

– Memorial Sloan Kettering Cancer Center, Volunteer

– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskindhelp children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal

– Make-A Wish Foundation- Help Neil Siskind make sick children’s wishes come true by creating your own fundraiser: Neil-Siskind/Help-Make-A-Child-Smile.htm

– DonorsChoose.org- Donate to one of my needy public classrooms: http://www.donorschoose.org/NeilSiskindGiving

– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/


Neil Siskind’s Pro Bono
 Work:

– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com

– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– Veteran FreeStart Business– Pro Bono: We seek to help put Iraq and Afghanistan war veterans in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.

Neil Siskind’s Government Work:

– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern

Neil Siskind’s Community Assistance:

Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.

Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/

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Media Mischaracterization of The Donald J. Trump Foundation

Mainstream (and not so mainstream) media outlets continue to mischaracterize certain aspects of The Donald J. Trump Foundation (and, by implication, all private foundations) by implicitly and expressly characterizing Trump’s use of donations to The Foundation for charitable purposes, instead of Trump using his own money-exclusively– as improper. This article is solely limited to this topic and the author is in no way intending to discuss, defend or explain any other actions by The Donald J. Trump Foundation or by Donald Trump related to The Donald J. Trump Foundation.

 

Donations made by The Donald J. Trump Foundation in the name of The Donald J. Trump Foundation, using funds donated to The Donald J. Trump Foundation by people other than Donald Trump, are not, per se, improper for the sole reason that funds of such other people besides Trump himself were used for such Donald J. Trump Foundation donations. There is no legal or generally accepted practice requiring Trump to name and credit others whose funds may have been incorporated into any specific grant or donation by his foundation.

While, often, foundations may be funded entirely by a benefactor and his or her family (and by subsequent capital earned on the initial funds granted to create a respective foundation) – it is not always the case. A private foundation is a charity, just like any other charity. While there are differences in some of the rules for private foundations vs. public charities, there is no special requirement that all funds for grants and donations from a private foundation come from only a single source.

If you go to The Clinton Foundation website, the landing page asks for donations. Are we to think that with each grant made by The Clinton Foundation, each of us who donated $25.00 will be named and credited in such grant? It is common knowledge that The Clinton Foundation has donors from all over the word. Are such donors all personally named in each grant made by the foundation? Certainly not.

Likewise, Warren Buffet has pledged enormous amounts of money to the Bill & Melinda Gates Foundation. Is Warren Buffet to be specifically credited on each grant by the Gates Foundation where such Buffet donated funds are used in whole or in part? To my knowledge, the answer is “no”.

Many professional athletes and musicians from Jon Bon Jovi to Boomer Esiason to Derek Jeter….and on and on…. have foundations (many of which are named after them) that accept donations. Certainly, they don’t name and give credit to each and every donor when fundraiser grants are made using donor funds. The grants are made in the name of their respective foundations….and the creators of the foundations get the credit, and, as with The Donald J. Trump Foundation, there is nothing legally improper about that. Even if these nonprofits are filed as public charities, and not as private foundations, the net effect is the same…monies are disbursed by the organization (which is named after the organization’s founder), providing such founder with lots of public recognition and esteem, and the organization never mentions all of the sources of the underlying funds. This is, simply, the nature of charities which are founded by, and named after, known personalities. Celebrities form nonprofits named after themselves in order to maximize exposure and fundraising, the public donates in order to be a part of it, the money goes to good things, and the celebrity gets the praise. It’s not a “Trump-specific” structure of things- at all.

Did you know that most 501(c)(3) nonprofit corporations don’t want to be treated as private foundations because of the extra burdens and rules? They have to meet requirements under the Internal Revenue Code so that they do not have to pay taxes or be regulated like private foundations because private foundations are subject to greater regulations and excise taxes. In other words, Trump would benefit if he could meet the Code’s requirements to be a public charity that can raise and use funds of others- as opposed to being a private foundation where he can’t do that to the same degree. He would have less regulations and less tax liabilities with which to deal. Moreover, the public charity model, a business model used by many philanthropists, nonprofit operators, and celebrities, can use other people’s money to a far greater degree than can a private foundation. Trump could have elected to be a public charity instead of a private foundation- he elected to not.

The differing treatment of private foundations compared to public charities is as follows:

(a) a foundation must pay out 5% of its assets each year, while a public charity does not;
(b) donors to a public charity receive greater tax benefits than donors to a foundation;
(c) a public charity must collect at least 10% of its annual expenses from the public in order to remain tax-exempt while a foundation does not- meaning that a foundation expects to pay all of its own expenses.

Further, in exchange for exemption from paying most taxes and for limited tax benefits being offered to donors, a private foundation must (a) not own or operate significant for-profit businesses; (b) file detailed public annual reports and conduct annual audits in the same manner as a for-profit corporation; (c) meet a suite of additional accounting requirements unique to nonprofits.

Moreover, a private foundation has to pay a two (2%) percent tax on income earned by the private foundation – – – this is called an excise tax.
When a 501(c)(3) filing is made, a filing corporation is automatically considered to be a private foundation which has to elect to be considered a public charity, instead of a private foundation, in order to avoid excise taxes on their net investment income. So, when Trump, or any other foundation owner, fails to elect to be a public charity, it is actually accepting a tax liability to which others are not subject.

By raising funds (when properly registered to do so), a foundation is not acting improperly; it simply may be acting a bit more as a public charity, rather than a private foundation. In other words, raising outside funds is not a bad thing. It’s just another method of operating a nonprofit.

The main points to understand are:

  1. Trump could have filed to be a public charity and accept many public donations and government funds, but chose not to; and
  2. By using the monies of others for charitable causes, a private foundation is not acting improperly, so much as it is acting more like a public charity than an actual private foundation and should be regulated and taxed as such (it would mean less regulations and less taxes).

While Trump may have acted improperly in some foundation activities [1], the act of putting donated funds to use, in and of itself, is not one of them. Yet, the media regularly implies and states that Trump’s foundation “improperly” makes grants and donations in its own name using the funds of other donors. But, this practice is both common and legal, as well as a more conservative approach to collecting the money of others than the approach allowed for by public charities- an approach used by many celebrities.

__________________________________________________

Footnote:
1. The Donald J. Trump Foundation has been accused of improper activities related to fundraising and political contributions, among other things.

Endnote:

My aim in this article is not to defend Donald Trump. My aim is to clarify persistent incorrect legal analyses by the media with regard to the use by a foundation of raised funds, and to point out the media’s attempt to pass off “dicta” as fact, and to mislead a misinformed public through the use of artful suggestion to taint legitimate activity.

 

-Neil S. Siskind, Esq., President
The Siskind Law Firm

Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
Neil-Siskind-photo
Learn more at:  http://www.neil-siskind-the-fatherhood-assignment.org/

Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
Neil-Siskind-Picture

The Neil S. Siskind Nature Preserve is over 7 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.

Neil Siskind, Founder, “National Fatherhood Day” – March 29th

Neil-Siskind-pics
To encourage recognition of the needs of boys and girls who are living without fathers or father-figures in their lives.

Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com

Caring is Free™

You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.

Neil Siskind’s Volunteer Work:

– Memorial Sloan Kettering Cancer Center, Volunteer

– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskind help children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal

– Make-A Wish Foundation- Help Neil Siskind make sick children’s wishes come true by creating your own fundraiser: Neil-Siskind/Help-Make-A-Child-Smile.htm

– DonorsChoose.org- Donate to one of my needy public classrooms: http://www.donorschoose.org/NeilSiskindGiving

– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/


Neil Siskind’s Pro Bono
Work:

– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com

– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– Veteran FreeStart Business– Pro Bono: We seek to help put Iraq and Afghanistan war veterans in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.

Neil Siskind’s Government Work:

– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern

Neil Siskind’s Community Assistance:

Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.

Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/