Thursday, May 20, 2021

Long March to Socialism

 Long March to Socialism

The Founders were brilliant. They knew if government is inherently corrupt, it must be kept small. Prior to the 20th Century, except for the Civil War period, running the government never exceeded 3% of GDP. Think about that. Today we're at 44%. The long march toward socialism is almost complete.

Why is socialism bad? The premise of socialism is the belief that all rights and property belong to the government, who doles them out to you. That is in stark contrast to the concepts of freewill, liberty, and the Constitution of the United States. America was built on the belief that our inalienable rights are from God; socialism believes that there is no higher power than the State.

For almost 150 years this country was able to survive on excise taxes, or tariffs, on foreign goods coming into this country. America's resources are so vast as to make this country completely and utterly self-sufficient. The American market is such that foreign products fight to gain market share in the United States. Somehow over the last century, mainly due to wars, we have abandoned this approach and instead decided to tax citizens directly, thus slowly eroding their liberty.

Where there is increasing taxation, there is decreasing liberty. Money concentrates power, and there is no greater concentration of power than Washington, D.C. Complexity is also a barrier to liberty, as it requires time and capital to comply with ever-increasing demands from the enforcement arm of the government, the IRS.

Only two Presidents in recent memory fully grasped the fundamental basis of supply side economics, best illustrated by the eponymous Laffer Curve; that a wealth transfer (taxation) ultimately lowers total income because it provides a disincentive to work both at the top (those being taxed) and the bottom (those receiving the transfer.)  Hence, Presidents Kennedy and Reagan implemented taxation according to the principles of the Laffer Curve; both saw economic booms (1961-1968, 1982-1990.)

Sadly, Joe Biden doesn't understand the economic policy of JFK. Kennedy understood, most likely from his father's influence who was a very successful businessman, that a rising tide lifts all boats; both high income earners and low income earners benefit when they keep more of their own money and decide how best to allocate it.

Laundering money through the government for social programs doesn't work because the government is too corrupt; there are too many lobbyists, politicians, and special interest groups wanting their "taste" before policy is created to actually implement a program. Once established, a government agency is as Reagan well put "as close to immortal" as anything on Earth. Government creep continues into every facet of life. Liberty decreases. Personal responsibility is eliminated. Kinda the opposite of the American experience. We can go to Europe for that anytime.

The criticism to low taxation (read high freedom) is that almost inevitably there will be outsize winners. Some individuals or companies or both acting as the same will monopolize industries. This is a natural result of capitalism. It actually shows that capitalism is working. The downside of monopolies obviously is that upon reaching monopoly status they provide stagnant utility to the economy because there is no competition which leads to a collapse in innovation, productivity, and ultimately economic stagflation. This is why the Sherman Anti-Trust Act must be enforced.

Part of the rise in socialism in the United States is directly tied to the rise of monopolies; they constrict liberty by steamrolling competition at the behest of the government. It is long past due that many of the largest tech companies receive immediate scrutiny and enforcement. Or if that is unpalatable to our elected "representatives," then smaller companies are provided with significantly lower rates of taxation, incorporation benefits, and work stimulus. Regulation favors the powerful. Naturally, less red tape helps smaller entities survive and thrive.

As financial farmers loving liberty and freewill, what are we to do? Trump had it right by reforming the tax code and saddling foreign competition with tariffs. Picking winners and losers isn't always popular, but picking America First should be popular...and it is a lot more palatable as the Founders well knew to charge foreigners for the privilege of doing business in the United States rather than extracting taxes from American citizens.

I fear in the current political climate the only option for Americans is to vote with their feet; move to tax-friendly (read freedom-friendly) states that respect industrious work. It may be possible to remain in states with onerous taxation, but as the race towards complete socialism continues states themselves will have to choose on what side of this conflict they stand; for the citizens and freedom, or pure socialism. The winds and tides of civil discourse seems to be pitting state against state once again, and once again it is about the unalienable rights of God-given freedom, liberty, and property.
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Wednesday, May 19, 2021

Crypto Meltdown

 Crypto Meltdown

Feels like 1636 all over again today with crypto crashing anywhere from 25-40%+ depending on the "currency" and, as expected by yours truly but apparently not by Coinbase, surging volumes at a key inflection point has taken down the major trading platform. All is definitely not well in least with the Tulip Bubble you got some nice flowers for the cost of a home.

The problems with crypto are legion. First, it is not cryptocurrency in any traditional sense of the word cryptology...the entirety of the "currency" is easily tracked and this author believes it also can be seized or frozen very, very easily by the state. If the NSA is capable of tracking every conversation and data transmission in and out of the United States, then monitoring cryptocurrency is a piece of cake. But that's not necessarily the biggest problem with this "currency."

Crypto isn't backed by anything, except slave labor in China and fossil fuels (read coal) to mine it and put it into circulation. Once in circulation, crypto is subject to all sorts of tracking and seizure risks. With no physical representation, it lacks true portability. You own crypto at the pleasure of the state.

The best thing that could happen to crypto is happening. It is deflating. Confidence is eroding and its viability is being questioned. Readers of seminal classic "Extraordinary Popular Delusions and the Madness of Crowds" by Charles Mackay will recognize all the symptoms of a bubble in crypto. Shouting from the rooftops "the emperor has no clothes," however, often gets the cryer hung. Mackay said it best when he remarked "Men think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one."

For thousands of years gold has been used by man as money. It requires toil to acquire from nature. It is rare. It cannot be created by man. It is malleable. It is portable. It feels nice. When it is in your hand you have little doubt what it is. "God's money" has been the basis of civilization almost since creation. True "crypto" is buried in the Earth. I would encourage financial farmers to consider its value to your portfolio.

Monday, May 17, 2021

Taxpayer Elegy

 Taxpayer Elegy

Jesus said "Render unto Caesar the things that are Caesar's, and unto God the things that are God's." Today millions of taxpayers across the country will transfer trillions of dollars in hard-earned income and gains to local, state, and federal tax authorities.

This "civic duty" is administered and enforced via the Internal Revenue Service at the behest of elected politicians. The IRS is one of the few unelected organizations capable of revoking your passport, directly reaching into your savings account without authorization, and denying your liberty. It is the ultimate enforcement arm of the political establishment; you don't vote, nothing happens to you. You don't pay taxes you owe, you can go to jail. America wasn't always this way.

The vast majority of taxation comes via personal income tax and associated taxes such as "Social Security, Medicare, unemployment, and other retirement taxes." Prior to 1913 there was no income tax. In 1913, the States ratified the 16th Amendment. This instituted the Federal Income Tax, many states would follow with their own tax systems over the coming decades. In 1913 IRS Form 1040 was FOUR pages long, today it is over 100 pages long. Inflation isn't only a monetary problem. Regulatory creep has resulted in the average American now unable to complete all but the simplest tax return. 

Why aren't more people concerned about taxpayer rights? Politicians certainly aren't...they live and breed (that's not a typo) on the largesse provided by the taxpayer. Politicians only respect those who control the pursestrings. ILAF proposes a solution to the income tax crisis kneecapping millions of Americans AND the concern about voting rights: Implement direct representation of the taxpayer via the annual tax return. Why? The IRS is probably the most inclusive of any organization in the world. It wants payment from everyone, regardless of skin color, orientation, background, handicap, veteran status, gender, or even intelligence.

The annual IRS return would serve both civic duties; voting and taxation. Referendums could be voted on directly from a return. Representatives could also be elected via the annual tax return. Ditto for the President and Vice President every four years. April 15th becomes Super Tuesday. This plan would truly restore power to the people, and maybe, just maybe next year you will get a "Thank You" card from your congressman instead of his lobbyist.
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Thursday, May 13, 2021

Buying Dips

 Buying Dips

Buying dips is one of the great advantages long-term retail investors (aka Financial Farmers) have over their sporting counterparts who are focused on short-term (read high tax) trading gains. Here's how to do it.

When you buy a dip your goal should be to add acreage to your financial a price YOU are willing to pay rather than chasing a stock up. Even before the market sells off 700 points like it did yesterday for example, an investor looking to capitalize should be ready. The first step prior to even making a shopping list of potential targets, though, is making sure you have investible cash not only ready to go, but preferably deposited with your brokerage. Sometimes in the heat of the moment cash can be transferred but remains "unavailable" because it hasn't been cleared. Always have cleared cash ready.

Now with your cleared cash ready, the other thing that should be handy is your shopping list. This is a living document which has been assembled after careful thought, research, and diligence. It is often updated with new information or thoughts. Regardless, this shopping list has as its basis a group of stocks you want to own and the price you're willing to pay for them. Price discipline is essential. During a dip you are a price maker instead of a price taker. That is an important distinction. Bid low.

Buying dips is a confluence of action and inaction; the financial farmer has cleared cash prepositioned and a shopping list ready, now comes the order flow. Selloffs are tricky in that they often come on the heels of unpredictable data, by that very metric investors don't necessarily know the full impact of that data on the moment of release. Sometimes there are global macro events that trigger massive flights to liquidity that unravel over days, weeks, and months. Sometimes it happens in hours. The future is nebulous. But the investor should be prepared for the worst. This means that a selloff can markedly accelerate quickly. Very quickly.  That is why having a comfortable margin of error is vital on the purchase price. Use limit orders.

The other leg of the trade is the timing. Sometimes even if you get the stock you want at the price you want you still overpaid! Selloffs have a nasty habit of lasting longer and diving deeper than we think is possible, or even reasonable. That's why you should buy in tranches.

If your goal is to have a total 1000 shares of XYZ, consider buying the entire position in segments; make a an initial buy of perhaps 100 shares at the first price point (with a margin of err0r build in) that you think is reasonable. Then stagger those limit orders lower and lower and lower. The risk here of course is the opportunity cost of NOT getting your full desired position, but by using staggered limit orders you can ideally pick up some portion of your goal at pricing more favorable in to you. Stagger your order flow.

So to recap: Buying Dips is a great strategy for long-term investors who want to pick up stocks during a period of market weakness. The strategy involves having cleared cash ready to invest at your brokerage, having a shopping list on hand, and placing staggered limit orders. Although not foolproof, history has shown being prepared to buy quality stocks on a dip can result in meaningful gain over time. An old adage in the real estate world is, "You make your money when you buy, not when you sell."


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Wednesday, May 12, 2021

Inflation Kills

 Inflation Kills

Coming soon to a purchase near you...inflated prices! Often called "the silent killer," in economic terms that's exactly what inflation does; it strips away the buying power of the consumer. This morning's Consumer Price Index (CPI) release by the Bureau of Labor Statistics was truly shocking, well at least to people who haven't eaten food, driven a car, or purchased any physical goods for the past several months. For average Americans, there has been no doubt the damage being done to their purchasing power. Everything of value is markedly higher. A lot higher.

Over the past 12 months the all items index rose 4.2%, the largest increase in 13 years. That doesn't sound like much, right? Consider some of the outlying data: the index for used cars and trucks rose 10% in APRIL alone, this was the largest 1-month increase since 1953. The energy index has risen 25.1% over the past 12 months. Food they claim "only" rose 2.4%...assuming you're buying in bulk, and I don't mean Costco, I mean TONS of soybeans. Who are they interviewing for these price points, animals on a farm?

As previously mentioned, inflation is the silent killer. Why does inflation kill? Inflation kills because it marginalizes the backbone of our society: the American Middle Class. The Middle Class is the most sensitive to out-of-pocket purchases; typically they are small business owners or employees subject to the inelastic demand for vital goods-and-services; like gasoline, food, housing, education, medical for example. Inflation ravishes the American Dream because the cost for life necessities consume an ever-increasing share of the Middle Class wallet.

What can be done? As financial farmers you can vote with you money by buying stocks in companies that have the power to pass on increased costs to consumers. Darwinian? Yes. Effective? Yes. Buying inflation pegged consumer staples puts you in lockstep with bad government policy, at least you don't get crushed twice. Second, you can vote members of Congress out of office who do not have a sense of fiscal responsibility. Unfortunately, this takes years. So an alternative approach is to vote with your feet to lower cost areas of the country. If this isn't a viable option, then stick with ideas 1 & 2, and in particular make a God-awful stink to your local, regional, State, and Federal government. Remember they work for you!

Failed fiscal and monetary policy results in rampant inflation. The first flight is usually into dirt (real estate) and paper money continues to lose purchasing power until costs become absurd. In Weimar Germany wheelbarrows full of money were needed to purchase simple goods. Are we there yet? Not by a long shot, but rampant spikes in real estate, food, and vehicles indicate that people aren't dumb to what is for nothing never ends well. You can't expect to burn a candle at both ends and not have the lights go out.


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Friday, May 7, 2021

Big Tech Five

 Big Tech Five

The Big Tech Five, aka Alphabet, Apple, Facebook, Amazon, and Microsoft, are monopolies in their respective businesses, yet have survived with tacit approval from the USA Government literally for decades without the hint of Sherman Antitrust Act enforcement. Why?

The Big Tech Five provide an increasingly disturbing symbiotic relationship with the government; we have reached the point where government really CAN'T break-up, much less shutdown, the Big Tech Five. Much of the existing intelligence structure is based on monitoring the social platforms, smartphones, email, purchase patterns, and contacts in the vast ecosystem the Big Tech Five provides to the government...either willingly or under the guise of plausible deniability. Just ask Edward Snowden.

The financial results of the Big Tech Five over the last decade have been truly staggering. They act as a massive collective vacuum sucking up TRILLIONS in revenue and have built competitive moats that are insurmountable to competition. You can't swing a dead cat in Silicon Valley or Seattle without hitting a billionaire. Consider, the Big Tech Five generated some $1.25T in revenue and pulled in over $250B in profits over the past year alone.

In terms of market capitalization, the Big Tech Five account for nearly 25% of the total value of the S&P 500. Apple or Microsoft (take your pick) are worth more than the ENTIRE Russell 2000 (you're thinking correctly, 1 company is worth more than 2000!)

The Law of Large Numbers would lead us to believe that the Big Tech Five may have peaked in terms of market share, capitalization, or influence...but that would deny the reality of what is happening. The Big Tech Five have branched out of their monopoly niches and spread their tentacles into other areas; finance, healthcare, and logistics for example. But one area where they ALL have spread their influence is politics.

The Big Tech Five have become kingmakers. They have the ability to sway public opinion by defining what is appropriate speech, actions, and results. This is what the colonists in America rebelled against, because by definition tyranny is political action without representation by the people. In large part the United States has become what President Eisenhower warned against on January 17th, 1961 in his Farewell Address to the Nation, a poignant part is below:

The military-industrial complex is real, vibrant, and for many, beautiful. To the average American, however, it should be repugnant. Senator Josh Hawley has recently released a crushing expose of the influence of big tech in America, aptly titled "The Tyranny of Big Tech." I highly encourage readers of this blog to pick up a copy. Consider the points he makes, regardless of political party, and how the freedoms we enjoy will become increasingly in short supply without a government run by the people, for the people. The word Orwellian comes to mind when current leaders propose a "Truth Commission" monitored by the monopolies. 

Surprisingly (or not), for investors in the Big Tech Five I think there is a silver (or perhaps even gold) lining in owning monopolies that end up getting broken up. Consider what happened to AT&T in the early 1980s. Or big tobacco. Or Standard Oil. In almost every case where the Sherman Antitrust Act was applied, regardless of industry, the net benefits to the American consumer were vast...and the respective shareholders also did really, really well too.

So as financial farmers I think it makes sense to own monopolies with the theory that: 1) As a shareholder you will reap the benefits (profits, market share, dividends, etc.) of the unfair competition they currently wield, 2) You can actively VOTE your shares supporting a break-up, 3) Ultimately profit from a break-up in the coming years if political will changes as a result of the people demanding accountability.

Owning the monopolies is one of those trades where you can be paid and profit from morally offensive business models, yet vote your conscience via share ownership, and ultimately if the monopolies DO break-up then there is the potential to reap both financial and moral victories from that scenario. Win-Win-Win works for everyone, even the billionaires should realize competition ultimately benefits them in the long run. There is an old Machiavellian adage that is very apropos: "Keep your friends close, and your enemies closer." 
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