Hello, inflation, my old friend. What you need to know about financial markets today

The latest consumer prices report gave a lift to inflationistas.
The latest consumer prices report gave a lift to inflationistas.
(Valentin Flauraud / Associated Press)

Half a percentage point doesn’t sound like a lot. But that increase for the consumer price index in January was nearly twice the rate experts were expecting Wednesday morning — and it was more than enough to fuel investors’ inflation fears.

Inflation has stayed remarkably tame since the recovery started, hovering around 2% annually. The annual rate for the core CPI (minus energy and food) remained 1.8% last month. The CPI report got stocks off to a rough start, but U.S. markets quickly recovered.

The price uptick caused an immediate leap in the 10-year Treasury yield, which was good news for the speculators who had placed a record number of short bets on Treasury futures ahead of the Consumer Price Index report. They were wagering that the bond bear market, driven by rising interest rates, has only just begun. The Federal Reserve seems all but certain to continue its gradual pace of interest-rate hikes.


What to do? Nothing. Seriously, do nothing.

Times like these call for some perspective. Josh Brown, the chief executive of Ritholtz Wealth Management and Twitter maven, tells The Times’ James Peltz that even though investors have lost a personal connection to the stocks they own — it’s all faceless mutual funds and exchange traded funds to them now, not names of actual companies — they still need to stick to a long-term plan.

“If you have a 10-year time horizon” — meaning you don’t need to cash out before then — “you have an 88% likelihood that the stock market is higher when those 10 years are up. That’s starting in any month of any year going back to 1926,” Brown says. “If you have a 20-year time horizon, it’s 100%. There are zero 20-year periods where the stock market is down from the month and year you started.”

50 Cent the rapper, above, is not 50 Cent the VIX options trader. At least we think he isn't.
(Muhammed Muheisen / Associated Press )

In da club

Wall Street has the best names for its mystery traders. There was the London Whale, the chap who lost $6.2 billion making risky bets for JPMorgan Chase in 2012. Now the latest market froth is contributing its own colorful phraseology.

A trader dubbed 50 Cent was a huge winner when his or her steady purchases of futures contracts on the Cboe Volatility Index, or VIX, paid off, Bloomberg reports. The options — consistently priced at 50 cents apiece — swung $400 million from negative to positive when market volatility, as measured by the VIX, shot through the roof. The result: $200 million total winnings since the start of 2017.

“At one point, ‘50 Cent’ became ‘30 Cent,’ scrimping on his usual VIX option purchases, unwilling to pay up” at the usual price, Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors, recounted in a note to clients. “But in early February, when it seemed like Fiddy’s fortunes could go no lower, it came: redemption.”


Alas, another VIX creature who made huge volatility bets, known as the VIX Elephant, “went the way of the woolly mammoth,” Bloomberg reports, closing out all positions to earn a net $40 million.

Hedge funds are already gaming the tax law

[Update: Treasury Secretary Steven Mnuchin said Wednesday that the Internal Revenue Service plans to issue guidance within two weeks to close the following loophole.]

In one of the least surprising outcomes of the Trump administration’s new tax law, hedge fund managers have discovered a gaping loophole and are driving a Brinks truck through it.

Hedge fund executives have long paid a sharply lower tax rate — 20% rather than the top individual rate of 37% — on their share of investment proceeds, under the argument that this “carried interest” is a capital gain rather than income. Then-candidate Trump made some noise about closing that loophole, but the Republican-controlled Congress, under pressure from financiers and their lobbyists, made only a token effort.

As a result, the new tax law, Bloomberg’s Miles Weiss says, “requires hedge funds and private-equity players to hold investments for at least three years to get the lower capital gains rate, rather than one year under the old law. The rule, however, exempts carried interest from the longer holding period when it’s paid to a corporation rather than an individual. To the surprise of legal and accounting experts, the law didn’t specify that it applied solely to regular corporations, whose income is subject to double taxation.

“Managers are betting that by simply putting their carried interest in a single-member LLC — and then electing to have it treated as an S corporation — the profit will qualify for the exemption from the three-year holding period and be taxed at the lower rate.”


Voila. Since late 2017, managers for outfits like Elliott Management Corp., the hedge-fund giant run by Paul Singer, and Starwood Capital Group Management, the private-equity firm run by Barry Sternlicht, have created thousands of new limited liability corporations in Delaware.

“It’s a total end-run around the statute,” said Anthony Tuths, a tax principal in the alternative investment unit of KPMG’s New York office. He noted that the government could still step in and close the loophole.


9:50 a.m.: This article was updated with the announcement of a plan to close a tax loophole.

This article was originally published at 8:20 a.m.