There is no change to the risk budget this month. For the moderate risk investor, the allocation to bonds is 50%, risk assets 45% and cash 5%. The extreme overbought condition of the US stock market did not correct since the last update and so I will continue to hold a modest amount of cash.

Prediction is very difficult, especially about the future…

Niels Bohr

Every time I see that quote I think to myself, “but that won’t stop Wall Street from trying”. I’ve been asked repeatedly recently whether Congress will pass tax reform and my stock answer is always that I have no idea. On a financial channel this morning I heard a reporter say that the Senate would vote on their version of the tax bill this week. I don’t know who wrote the reporter’s lines but I can’t fathom from where they gained the confidence to say such a thing with any conviction. We don’t know if they will vote on it this week. As best I can tell, they don’t have the votes to pass the bill in its current form and if they can’t twist some arms there is no way they’ll air that dirty laundry on the floor of the Senate. So, not only do I not know whether they will pass tax reform, I don’t even know if they’ll vote on it.

The amount of airtime and ink and pixels dedicated to handicapping the likelihood of tax reform this year is staggering – and largely worthless. No one knows whether Congress will pass any tax changes this year much less something that really earns the label of “tax reform”. All we really know is that the people tasked with reforming the tax code are the same ones who’ve spent their entire careers making it so complicated it needs reforming. Congress is run by lawyers and expecting them to make anything simpler is the triumph of hope over experience. We won’t be needing the Tax Lawyer Re-Employment Act anytime soon. 

Since I can’t tell the future I spend my time trying to figure out the present – which isn’t nearly as easy as it sounds. Most of the economic data we get on a daily basis will be revised extensively from what is initially reported. What we believe about the economy today will likely change as that data is revised until one day we look back on this time with a completely different recollection of what we thought at the time. That’s just human nature but it should be a warning about our ability to see very far in the future when we can’t even reliably trust our analysis of the past. 

Investment analysis is aided by the existence of deep markets that provide us with an instant and ongoing analysis of our economic future. The wisdom of crowds, of markets, is not perfect but the incorporation of new information is relentless and ongoing. If you consider multiple markets across multiple asset classes a view of the future can be sketched. It won’t be clear, it won’t be perfect and it will be more abstract and vague than we’d prefer. Probabilities will change and the approximations of the future that we call markets will change. Markets will conflict at times, different groups, traders, coming to polar opposite conclusions. And at times there will be near unanimous agreement about a future that never comes to pass because of some event that no market could foresee. Markets are composed of humans who are flawed, who make bad decisions, who at times believe impossible things. And yet, when we aggregate all their combined knowledge into a market price we usually get a pretty good approximation of “the truth”. “Usually” being an unusually important word in that sentence.

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