“Changes in Latitude, Changes in Attitude, Nothing Remains Quite the Same”

Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA


June 24, 2019 – DJIA = 26,719 – S&P 500 = 2,950 – Nasdaq = 8,031



“Changes in Latitude, Changes in Attitude, Nothing Remains Quite the Same”[i]


Change is all around us and it’s all happening fast.  While some changes are fleeting and only around for a short time, others have broader impacts which results in longevity.  For example, fax machines are now as scarce as pay phones.  On the other hand\, smartphones keep getting “smarter” and will probably be a part of our lives for many years.

Likewise, the financial markets undergo continual change.  There was a time when stock trades were executed on the floor of the New York Stock Exchange. Over the years floor brokers have been replaced by computers.  Further, investors used to call their brokers for quotes and market updates.  Today we open an app.  It used to take days or weeks to build a portfolio to simulate the S&P 500 – now it happens with the push of a button.

Aside from technological improvements, there are other notable changes in the markets.  The role of central banks is among the largest and most important as they have expanded their involvement beyond the traditional tools involving monetary policy.

In times past, the Fed focused on the overnight interest rate (the fed funds rate) and money supply as their main tools to reach their goals of full employment and price stability.  Depending on the chairman’s approach, interest rates were lowered or money supply increased if the economy needed assistance.  It’s only in the past decade that far reaching and radical (and unproven) strategies such as quantitative easing, bank bailouts, massive money creation took place.

Within the new strategies, the foremost course of action for the world’s monetary authorities has been to buy bonds.  They print money and buy the fixed income securities in the market with the goal of lowering long term interest rates and stimulating the economy.  This was an ambitious effort but our monetary bureaucrats have been up to the challenge.

The big three central banks (Federal Reserve, European Central Bank, and Bank of Japan) have increased their balance sheets by approximately 355% since the beginning of the financial crisis. That’s a lot of bond buying.  The graph illustrates the steady climb of central bank assets to the peak in 2018.[ii]


This graph breaks down the big three’s individual growth in holdings.[iii]   The Fed stopped expanding their asset holdings in 2014 and started to reduce their balance sheet.  Some believe that this played a key role in 2018’s stock market turbulence.


Central bankers claim that this policy was the most effective way to deal with the fallout from the global financial meltdown.  This is a much debated point in the financial markets.   Unlike the NFL, the markets don’t have replay and the ability to reverse the call.  But we can question the effectiveness of the decision.

Currently, there is approximately $13 trillion of global debt that trades with a negative interest rate.  Within the government bond market, the 10-year German Bund trades at a -0.326%, while the Japanese 10-year bond is at -0.158%.  To be clear, those are NEGATIVE yields.  In other words, investors who buy those bonds today and hold to maturity will lose money.  As a point of comparison, Australian, Canadian, and English 10-year bonds trade with positive yield but all below 1.5%.

The main reason for this head shaking, illogical situation is central bank policy.  The ECB and BOJ have taken over these markets.  They have bought so many bonds for so long (and continue to do so) that yields are below zero.  Traditionally, borrowers pay lenders an interest rate.  In the modern financial system, that is not always the case.

Another debatable central bank decision is their practice of buying stocks.  The Swiss National Bank’s stock portfolio is around $140 billion.  They own $3 billion of Apple common stock.  Further they own over $1 billion in 6 other companies – Google, Microsoft, Facebook, Amazon, Johnson & Johnson, and Exxon.

The Bank of Japan began buying stocks and ETFs (exchange traded funds) in 2010.  It has accumulated around 4% of the value of the Tokyo Stock Exchange at the same time as becoming a major holder of approximately 40% of Japanese listed companies.  The total of their holdings is around $225 billion.

Everyone is aware of negative interest rates, but the central bank stock portfolios are less publicized.  Beyond the philosophical consideration of whether public funds should be invested in risky assets, it distorts the stock market’s price discovery function.  A common response is, as long as prices go up, it has little impact.  That is ok in a bull market, but any material drop could be accelerated by nervous central bankers.

Returning to the U.S. central bank, the short term interest rate was left unchanged last week but the Fed indicated that a rate cut could come as early as the July meeting.  This news helped drive the S&P 500 to a new all-time high and stocks have now fully recovered May’s declines. This strong month was unexpected as past “Junes” have been a troublesome month.  Here are the major averages’ performance for 2019.


As mentioned this latest rally has surprised many.  Sentiment surveys showed that investors had turned pessimistic recently.  In fact a recent Bank of America Merrill Lynch survey revealed that stock allocations by professional money managers had the second biggest drop in history.  Also, cash holdings rose to the highest amount since 2011 when everyone was expecting further market turmoil from the crisis.[iv]

This is partially in response to worries over slowing economic growth, trade wars, and geopolitical tensions.  Of course, last week’s Fed signal that interest rates will be going lower and not higher changes the perception.  It would be unlikely that stocks sell off dramatically when everyone is expecting a drop.

As a reminder, the stock market went on a 6 year winning streak after 2011.  Of course there are many different factors currently vs. 2011.  But this extreme level of cautiousness would suggest that a lot of bad news is priced in.  Further, given the punishing amount of pressure on performance, if stocks begin to rally, this money on the sidelines could chase prices higher and it could last for a while.

A few months ago the markets were struggling to determine whether the Fed would raise interest rates 2 or 3 times in 2019.  Instead, faster than Apple can replace that new phone, we learned last week, Chairman Powell has softened his stance and the markets are now expecting a cut in July.  There is an example of sudden change.  The key to the markets isn’t about being bullish or bearish, it is now about adapting to change.

[i] Jimmy Buffett, 1977
[ii] Yardeni Research, June 2019
[iii] Ibid.
[iv] Bloomberg.com, June 18, 2019

Death and Taxes are certain…well maybe not so certain!


Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA



“The only difference between death and taxes is that death doesn’t get worse every time Congress meets.”
Will Rogers


Much has been written about the inescapability of death and taxes.  Healthier living combined with medial progress offers some of us a mortality rescheduling.  Nevertheless, there is a terminal aspect of our existence.

Concerning the second item, on July 1, 1862 President Abraham Lincoln signed the law that appointed the first Commissioner of Internal Revenue.  The law also implemented a 3% tax on income between $600 and $10,000 and a 5% tax on incomes over $10,000.

Public opposition resulted in the income tax being repealed in 1872.  After some back and forth in the late 19th and early 20th centuries, the 16th Amendment to the Constitution was ratified in 1913.  This allowed Congress to “lay and collect taxes on incomes…”  The first Form 1040 was introduced and strategies for tax reduction and tax avoidance soon followed.

From the beginning, taxes have been a controversial topic.  Taxpayers constantly seek ways to reduce the amount they owe and Wall Street is always willing to assist in the effort.  To this end, there is a new program that actually helps.

Within the Tax Cuts and Job Act of December 2017, there is a section “Invest in Opportunities Act” which sets up Qualified Opportunity Zones (QOZ).  State governors have already chosen the areas that were designated as QOZs.  If an individual or company has a realized capital gain, that amount is eligible for investment into a QOZ and will receive preferential tax treatment.  QOZ assets must be used to develop and revitalize these areas.

This is how the tax deferral and reduction work.  Investing your realized capital gain in a Qualified Opportunity Zone Fund will defer the tax owed.  There is a 10% tax reduction if the funds are invested for 5 years and an additional 5% tax reduction if held for 2 more years (7 years total).  Lastly, and perhaps most importantly, if the original Qualified Opportunity Zone Fund investment is held for 10 years, any appreciation in the value of the investment is completely tax free.

The eligible capital gains can be from the sale of any asset – property, building, business, stocks, bonds, artwork, collectables, etc.  But to capture the full 15% tax reduction, the investment must done in 2019.

Below is a time line illustration from Griffin Capital.  It provides a 10-year projection of key tax related events.

The formation of Qualified Opportunity Zone Funds has started.  And as this is being done, there are distinct differences on the how the investment vehicles are being structured.  The investment funds are generally being setup as either Real Estate Investment Trusts (REIT) or limited partnerships.   Further there are differences in the type of real estate development being done.  The appropriate choice is dependent on the investor’s goals, needs, and risk tolerance.

Death and taxes are certain.  However, taxes driven from capital gains have a new and unique chance to be deferred and reduced.  To get more information or learn more about this exciting opportunity, please contact us.


“Everyone wants to be part of the scene – See themselves pretty in a magazine”


Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA



April 29, 2019 – DJIA = 26,543 – S&P 500 = 2,939 – Nasdaq = 8,146


“Everyone wants to be part of the scene – See themselves pretty in a magazine”[i]


In a former time, magazines were an important part of our lives.  Those of a certain age can easily remember their mailboxes being stuffed with their favorite subscriptions.  In the age of smartphones and social media, millennials will never understand the excitement around the delivery of an anticipated issue by the U.S. Postal Service.

Further, magazine stands were full of periodicals on seemingly every topic and interest.  And we used to casually look through various periodicals while waiting in an office lobby or doctor’s waiting room.  Indeed, they were an important part of our culture.

As with the current electronically delivered versions, magazines cover issues and events in more detail than a newspaper.  Further magazines often reveal and influence prevailing cultural trends.   For example, Time’s “Person of the Year” is often a controversy with much debate.

Within this literary universe, there are countless magazines covering finance and economics.  Naturally, covering the various topics surrounding the capital markets, viewpoints and opinions are offered.  And, as with everyone who prognosticates, some forecasts are good and some miss the mark.

Professional investors and traders use magazine covers for another type of analysis.  They generally believe that when a topic hits the cover of a business magazine it is an inflection point.  In other words, when a trend or development become so popular that it hits the cover of newspapers and magazines, it is often a peak of its popularity, success, or usefulness.

One of the more infamous business magazine’s cover involves a stock market call that turned out to be wrong.  In August 1979, Business Week ran a cover story entitled “The Death of Equities”.  It was a valid viewpoint considering that in the early 1970’s stocks topped out and fell 40% before trading sideways for most of the decade.  Further there was a general cultural gloom after Watergate, the Vietnam War, U.S. hostages in Iran, an oil embargo, and rapidly rising inflation.  The Dow Jones Industrial Average was below 1,000 and there was very little optimism toward the stock market.

While the Business Week cover was logical, it became a sign that things were about to dramatically change.  In 1982 stocks bottomed and began one of the greatest bull markets ever.  Of course, there was a lot of change in those 3 years as Fed Chairman Paul Volker increased short term interest rates to double digits levels to reduce inflation.  Mr. Volker began reducing interest rates in 1982 which combined with Ronald Reagan’s tax cuts and widespread economic deregulation led to a strong economy.


Another example was a March 1980 Newsweek issue with the cover asking the question “Is Inflation out of Control?”  Once again, the 1970’s were marked by higher prices.  This time the magazine cover timing was almost perfect with the peak of inflation.  As the chart below shows, inflation topped out in 1980 and has moved lower since.

This periodical reminiscence is due to another recent magazine cover that could prove to be another historical reversal of trends.  This one involves Bloomberg Businessweek which asks the question, “Is Inflation Dead?”

It is a reasonable question given the low levels of the Consumer Price Index (CPI).  Also this is despite the Federal Reserve being very vocal that their goal is higher inflation.  After years of printing money and buying bonds in an effort to stimulate the economy and levitate the inflation rate, the financial press is throwing in the towel.  Is this a signal that conventional wisdom now believes inflation is terminally low?  Also, how much of this is discounted by the markets?  And finally, is it time to bet on a return of inflation?

Traditionally, real assets do well during inflation.  Stocks and bonds underperform as margins get pressured and profits stagnate.  In the 21st century’s global system, maybe inflation hedges take different form.   Perhaps crypto currencies or other new age assets replace gold and real estate as inflation hedges.  But first, let’s see if the magazine indicator does actually point to an inflation change.

If the risks of inflation are increasing, it’s being ignored by the bond market.  Treasury bond yields have been plunging which means that investors are not demanding higher inflation premiums.  Bondholders receive the majority of their return in coupon or interest payments.  This is normally a fixed rate.  This income would obviously have less buying power when we have inflation.  Under these conditions, Wall Street normally sells bonds which results in yields moving up.

Last week the 10-year Treasury note closed at 2.32% which is down from 2.60% in mid-April.  The 30-year Treasury bond’s yield finished the week at 2.75%.  Turning to the shorter maturities, the yield on the 6-month Treasury bill was 2.4% and 3-year Treasuries were at 2.08%.  The result is a flat yield curve with some inversion across some maturities.  This is a more a sign of a recession than inflation.  (Please see the last newsletter for information on the yield curve.)

This bond buying might be a shift to safety as the markets deal with a long list of unknowns.  Trade disputes widen, global economic challenges, geo-political tensions, and a deepening political divide in the U.S.

Stocks have reacted too.  The Dow Jones Industrial Average had declined for 5 straight weeks which is the longest weekly string since 2011.  That sounds much worse than the actual pain as the Dow is only down 3.7% during the 5 weeks and remains 9.7% higher for 2019.  Here is the breakdown of the year-to-date numbers for the major averages.

Dow Jones Industrial Average 9.7%
S&P 500 12.7%
Nasdaq Composite 15.1%
Russell 2000 12.3%


The stock and bond markets are the classic glass half full vs. half empty.  Yields have been declining and the curve is flat to inverted.  This is a message of economic weakness.  Meanwhile, stocks have had a great year as the employment and GDP data have been supportive.  The equity market’s recent dip might indicate that stocks are noticing the drop in bond yields.

The news flow can offer insight into the capital markets emotional condition.  Some believe that the headlines drive the markets.  Others think the markets anticipate developments and by the time it’s a headline or magazine cover, it is useless information.  Inflation’s obituary by Bloomberg Businessweek is a bold extrapolation.  It’s probably a good idea to watch for a resurrection in the next couple of years.





[i] Jack Antonoff, “A Magazine”