Nine Question and Answers
Below are a few questions and answers. Periodically I like to provide answers to questions I am asked; perhaps these are questions you have wondered about as well!
1. Are taxes going up?
Yes, though it depends on your income and tax brackets. Nothing has been finalized yet, but it is clear there are tax increases headed towards high income and high-net-worth individuals as well as corporations. This tax increase is part of the reason why we think interest rates will not ramp up as much as many people expect. Tax increases tend to reduce economic activity and we believe higher taxes will have an impact on GDP growth.
2. Is the deficit going up?
Yep. It’ll probably go above $25 trillion and even higher if stimulus packages designed to focus on infrastructure are passed. The social safety net system has been broadly expanded during this pandemic with some changes designed to be more permanent. It’s not an understatement to say that this is likely the most widely impactful social net implemented since the 1960s.
3. Tech has been under pressure; is the tech sector not attractive anymore?
Tech is taking a breather after a meteoric rise. Technology is going to impact more and more of our world as we go forward. Just look at how car manufacturing plants are shutting down because of a lack of silicon chips. The right type of technology names will continue to be drivers of the economy and we believe this will not change for the foreseeable future.
4. Do you think alternative energy is just a fad? Are people just in love with their electric car because it’s a cool new toy?
Well, some of my friends are in love with their new electric car because it’s a cool new toy that’s for sure. Hehe. But this is not a passing fad. Alternative energy will continue to be a focus as the world moves away from fossil fuel. Just watch the next five years and how many auto companies will have shifted their sales towards electric vehicles; we believe it’s going to be seismic in terms of scope. Alternative energy is here to stay and will get bigger as time goes on.
5. What’s going on with this whole GameStop, Viacom situation?
These companies are heavily traded stocks and volatility is exacerbated when short positions clash with small inventory trying to momentum trade these positions. Margin calls are occurring for organizations or individuals that have negatively bet on the price of stocks. (See the definition of the week below to find out what a margin call is.) Stocks that move up or down 20% or 40% a day are generally NOT trading on fundamentals.
6. What do you expect the relationship to be between China and the United States in terms of trade?
I expect the current administration to keep many of the tariffs in place as a bargaining tool to compel China to be more trade friendly with the United States. The problem the United States faces is China still has lower manufacturing costs. Trade tariffs were designed to reduce trade imbalances. In fact, recently the trade deficit with China hit an all-time high. It’s hard to really compete against low prices and that’s why exports continue to pour into the United States from China.
7. Is there any expectation volatility will decrease this year?
No. We believe volatility is here to stay and will create opportunities as well as special risks. We do our best to try to mitigate volatility as much as we can when we invest in portfolio strategies. That perspective guides our investment decision whenever we buy or sell an asset. Technology, rapid distribution of news, an increased number of global investors, and increases in hedge find activity will continue to drive fluctuation in the markets.
8. I noticed the 10-year treasury seems to be inching up. Does this mean interest rates are likely to go much higher this year?
Maybe, but based on current data, we doubt it. Based on increased tax headwinds and hangovers resulting from the pandemic, we think inflation pressure is likely not going to be as severe as some fear. Still, there is a risk of higher rates and that’s why we have positioned fixed income strategies to be focused on reducing interest-rate volatility.
9. What are your thoughts about how DWM will invest going forward in 2021?
Good question! I’ll have details on our investment strategy and how we’re positioning portfolios in the near future. We will be conducting a video presentation next month that will outline how we intend on positioning portfolios going forward in a challenging environment. You will be invited!