Taxflation

 Taxflation

Increasing taxes and rising inflation are a deadly combination. "Taxflation" is what we find ourselves in now globally as freewheeling politicians ratchet up the pain and are beholden to nothing but their own egos. Be afraid on this solemn day dear readers of the unencumbered politicrat whose loyalty lies only with increasing power. Beware what constitutes your "fair share," as soon it will be your full share! 

Every year Americans dutifully write out a myriad of checks to local, state, and federal governments to help fund our collective defense, social programs, and politicians' salaries under the banner of "civic duty" which is enforced by the threat of imprisonment. What other "civic duty" is compelled by the potential loss of liberty? What would be the collection rate if taxes were voluntary? Imagine if freewill dictated the scope of the government we received.

While the Biden Administration is planning to increase the budget of the IRS to something akin to a nation-state, increase tax rates, and (obviously) increase spending, the barn door is wide open out back. Billions in fraud, pork, and ill-executed government spending leaves the taxpayer without a doubt as the most maligned and least-loved animals in the barn. If America was "Animal Farm" the taxpayer would be the horse. And I think I have a pretty good idea who the pig(s) are feeding at the trough.

What to do dear financial farmers? "Fight, fight, fight against that dying light" of freedom! Readers of this blog well know I support voting, and especially voting with your feet out of states entrenched in burgeoning socialism. For those with strong backbones, however, there is yet another option: Run. And by "run," I mean run for office at the most promising level where victory may be assured. Change the potential outcomes of a country increasingly on the course of taxflation. It's your money, and the politicians work for YOU...isn't it about time we see some real return on our investment? 

Pipes & Rails

 Pipes & Rails

Velocity of Money is "a measure of the number of times that the average unit of currency is used to purchase goods and services within a given time period." The chart above illustrates the historical rate of money usage, with gray-highlighted areas indicating recessions. Up until the mid-1990s the velocity of money was pretty stable. Something happened in the late 1990s however that permanently slowed the usage of traditional forms of money...the internet sparked a tsunami of credit card usage.

Although in circulation for decades prior to the internet surge, credit cards had typically been a "wallet utility" in place of cash or check, not the primary form of payment. With the rise of the internet using a credit card to pay for goods became the de facto solution (readers of this blog old enough to remember eBay prior to credit cards at the dawn of e-commerce will remember sending physical checks to sellers for auction wins!)

Credit cards, however, are not included in the velocity of money because they are considered a debt instrument, hence in the late 1990s we see a precipitous falloff in the velocity of money which usually would be consistent will a massive recession (we have had those as well, most notably the internet bubble, 9/11, 2005 commodities crunch, 2007-2009 global financial crisis, and of course more recently the global pandemic 2020-2021.) One trend has remained in an upslope though; credit card issuances and credit card transactions.

Consider the fact that there are well over 2.8 BILLION credit cards in circulation globally. Although that leaves several billion people uncredit-carded, the credit card companies are working hard to close that gap.  One of the most stunning statistics, and there are many which would make an actuary gleeful, are the daily number of transactions. A Nilson Report indicated in 2018 that there were approximately 1 billion transactions PER DAY. This report is simply fascinating and worth a read. 

OK, so what does all this credit card talk have to do with being a financial farmer? A lot. My theory is that we  should be looking to own velocity; put another way own the roads and tollbooths, not the cars. Or maybe more relevant to today's fascination with "cryptocurrency," own the pipes and rails that it travels over so you can make REAL money on transaction volume. Consider the potential of non-cash transactions projected in the coming years:

Until citizens have the opportunity to own a tax collection and enforcement agency like the IRS, the next best thing in the financial world is to own velocity. It is a bet on population. It is a bet on commerce. It is a bet on technology. The underlying currency itself isn't necessarily as important as the monopolistic positioning of the "pipes & rails" on which it travels; ie we should NOT really be concerned whether dollars or bitcoin or Swiss Francs are being swapped, but rather that we're getting a piece of every single transaction at scale.

D-Day Remembrance

 D-Day Remembrance 

Few events have defined a generation more than D-Day. To a large part, an entire generation risked it all to save it all; democracy, freedom, and human rights. In the short term they succeeded. Along with saving the world as they knew it, the Greatest Generation also raised the Baby Boomers. In many ways the two generations couldn't be more different.

When the good times came after World War II there was an economic and social boom unprecedented in the annuals of history. The fruits of their sacrifices were harvested as America rose to global prominence in many fields; engineering, medicine, and business to name a few. But as President Eisenhower well warned us, there also rose a new enemy, the "military-industrial complex."

The MIC has metastasized over the ensuing decades to capture a wider and wider swarth of society, to the very point now that we once again see authoritarianism and socialism rising in the United States. It is extremely troubling to see the unprecedented growth of regulation, taxation, and group think in government which is dismissive or outright hostile to very American citizens elected officials allegedly represent. Canceling, muzzling, and jailing dissent has become commonplace. In many ways, the American government itself has become a criminal enterprise. On this solemn day, I ask what have we wrought from our nation's sacrifice?

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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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 cryptoland...at 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.

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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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 farm...at 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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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 gold...fiat 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 occurring...money 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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