Wrap

The deflationary trend continues: bonds were up, the 10Y stands at 1.56%. The NDX was up 1.5%, other markets less, but consistent with a deflationary trend. New jobs created were fewer than expected, but unemployment decreased more. Hourly wages increased 0.5% MoM, more than the 0.2% expected. I am not sure whether this adds up to very much, other than that the economy is still in recovery mode.

Crude was up, DXY was down. The Turkish Lira continues a very slow drift down against the euro. Gold recovered some of its recent losses. GSCI was up about 1%.

Carried Interest

Carried interest is one of those many things which exist purely because they are a form of tax arbitrage. By taking the NPV of a stream of performance-related fees and taking the sum as a stake in a the assets of a fund, what would ordinarily be treated as income becomes transformed into capital gains. Because the tax system taxes cash flows differently according to when they are received, classifying them into “income” and “capital gains” this results in a considerable tax saving for the managers. The practice was strongly defended in the letters page of the FT today, responding to a report that Scottish Widows has called for this arrangement to be scrapped. What everyone misses is the dysfunctional design of the tax system that gives rise to this (arguably) artificial arrangement.