December 2017 Commentary

  • Tax Reform Follow Up: On December 22, 2017, the President signed the “Tax Cuts and Jobs Act” into law after the bill pushed its way through the House and Senate in an expedited procedure known as the “budget reconciliation” process. By implementing this process, the GOP was able to avoid filibusters from Congressional Democrats and only needed to secure a simple majority vote in the Senate rather than the standard 60 votes. Given that the Republicans currently control 241 seats in the House and 52 seats in the Senate, the GOP was able to secure a clear path to a major legislative victory for the Trump administration. At an extremely brief glance of the new law, the individual income tax brackets for individuals are lowered (39.6% to 37%, the 35% bracket is unchanged, 33% to 32%, 28% to 24%, 25% to 22%, 15% to 12% and the 10% bracket is unchanged), the standard deduction is raised ($12K for single filers, $24K for joint filers, and $18K for heads of households), and the corporate tax rate is lowered permanently (from 35% to 21%).

    • Our Takeaways: Theoretically, the lower tax rates will incite more economic growth which will then generate more tax dollars that will end up covering the cost of the tax cuts. According to estimates from the Joint Committee on Taxation (a nonpartisan congressional committee), this new plan is expected to increase the national debt by roughly $1.47 trillion over the next 10 years while it is expected to increase revenue by only about $500 billion during that same period. Overall, the main concern going forward is that this new law will not “pay for itself” as promised by the GOP and further exacerbate the national debt. Moreover, the key winners of this new plan are Americans who opt for the standard deduction, small business owners & owners of pass-through entities, corporations, those with inheritances, and wealthy taxpayers. The main losers are families with dependents, those with student loans, electric vehicle companies, anyone rehabilitating historic buildings, and those located in high-tax states.

  • Net Neutrality: The best way to describe net neutrality is that it is a set of rules designed to ensure internet service providers treat all web traffic the same, regardless of the source, and allow information to flow freely. However, on December 14, 2017, the Federal Communications Commission (FCC) voted to repeal the net neutrality protections set forth under the Obama administration. The result that has left many up in arms is that internet service providers are now able to engage in more lucrative and competitive control over the accessibility and speed of online content. Furthermore, the growing fear is that large corporations could gain a significant advantage over small businesses and that the costs of a pay-to-play internet could be passed onto the average consumer despite having the same quality of service.

    • Our Takeaways: Although the repeal of Net Neutrality will still need to enter the federal register (an index of government agency rules) before taking effect, there is a significant chance that the Attorney General from New York and from Washington will attempt to block the FCC’s repeal. As it stands, the main arguments against Net Neutrality claim that the regulations are unnecessary since it stifles competition among service providers and discriminates against the service providers who may not interfere with internet traffic. Overall, our stance is that the move to repeal Net Neutrality, if finalized and instituted, will likely stunt innovation due to the fact that service providers have a financial incentive to interfere/control web traffic and due to the fact that startups/small businesses would have more significant barriers of entry into the market.

  • Bitcoin Follow Up: As a refresher, bitcoin is a cryptocurrency meant to be used as a worldwide payment system and it is the first decentralized digital currency that has drawn mass appeal across the globe. Despite no one knowing who created bitcoin and the fact that they can only be mined by solving complex mathematical equations via computer, bitcoin has gained even more attention since the Commodity Futures Trading Commission (CFTC) has now allowed two different U.S. exchanges to launch bitcoin futures contracts. The catch here, however, is that leverage (the use of borrowed money) has become a growing part of the equation. The real threat to the exchange and its participants is created when the participants use this large amounts of leverage to trade derivatives (contracts between the buyers and sellers that derive their value from the underlying asset). In other words, you end up with a binary scenario where one side will win and one side will lose with money that they don’t necessarily have. This of course does not sound all that intimidating initially, but when that investment involves being leveraged two or more times more than what the participants have invested, the loser of the transaction can be completely decimated. If there are enough losers with too much unsustainable leverage in the exchange, the exchanges and all the direct (and indirect) participants can experience a chain reaction with a liquidity crisis.

    • Our Takeaways: As stated in our September investor letter, we would like to reiterate that we are neither trading nor planning to trade cryptocurrencies at this time. This is because cryptocurrencies are not an area related to our current fund’s specific strategies or our trading expertise, and cryptocurrency exchanges are still finding their place within the greater global economic machine and political environment. We thoroughly believe participation in such markets with investor capital at this point would be tantamount to trading experimentation rather than trading strategy.


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