Thursday, March 2, 2017

Ed Yardeni: "Buffett’s Rules & Ratios"

From Dr. Ed's blog, March 1:
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In a CNBC interview on Monday, Warren Buffett, the Oracle of Omaha, declared that stocks are “on the cheap side.” He has played the Trump rally by putting another $20 billion into the stock market since Election Day. Stocks are cheap, he said, because interest rates remain very low. This suggests that Buffett is betting both on and against Trump. He obviously made a very good decision not to let his personal politics get in the way of joining the animal spirits rally since Election Day. Warren Buffett is a long-time Democrat who supported Hillary Clinton, but he says he agrees with President Donald Trump on some issues—including homeland security as a top priority, boosting economic growth, and increasing the incomes of more Americans who have been hurt by globalization.

Yet, Buffett seems to be betting that interest rates won’t go up much anytime soon. In other words, he isn’t convinced that Trump will succeed in stimulating the economy very much with fiscal policy. He said that Republican leaders will probably have to scale back their tax reform ambitions because their current plan is too complicated to pass Congress, especially if they intend to do something on this by August: “I think complexity will give way to speed.” He expressed skepticism that the Republican tax plan will be revenue-neutral “without the craziest dynamic scoring in the world.” He also said that he doubts that the border adjustment tax (BAT) will see the light of day.

I agree with Buffett on the revenue-neutrality issue. The plan that the administration is outlining suggests a guns-and-butter fiscal approach with more defense spending, no cuts in entitlements, and lower tax rates. It’s hard to see how this won’t lead to higher bond yields, especially if the Fed starts increasing the federal funds rate at a pace closer to normal. (I am still forecasting that the US Treasury 10-year bond yield will range between 2.00%-2.50% during the first half of this year and 2.50%-3.00% during the second half of this year.)

In his interview, Buffett told CNBC on Monday that mixing politics and investment strategies would be a “big mistake.”...
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