The following is a two-part series. The views expressed may or may not coincide with those of Bonner & Partners. They may not even coincide with those of their author.
Sometimes right, sometimes wrong, always in doubt – we try on ideas like a grown man trying on a pair of shorts. We want to see how they look before we buy them. We leave it to you to decide for yourself which of the following ideas look most ridiculous.
We are a man without a country… a voluntary exile from Main Street… a refugee… a wanderer.
Not because we want to be. But because we are a victim of our own good fortune.
First, checking in with the markets, we find little activity yesterday. Which leaves us with little to say, except what we’ve already said: Get out while the gittin’s good.
We’re not alone. Goldman Sachs’ chief equity strategist, David Kostin, reckons US stock market valuations are as “stretched as they’re going to get.” According to Bloomberg, Kostin reckons:
…the S&P 500’s price-to-earnings ratio should contract as the Fed begins to raise interest rates in September and the index will end the year at about 2,100, right around where it is now.
And here’s Mac Slavo at SHTFplan.com with a warning from former Fed chairman Alan Greenspan:
If there’s any single person out there who understands US monetary policy and its long-term effects on domestic and global affairs it’s former Federal Reserve chairman Alan Greenspan. As the head of the world’s most powerful central bank for nearly two decades he’s privy to the insider conversations and government machinations that have brought us to where we are today.
In private conversation I asked him about the outstanding debts… and that the debt load in the US had gotten so great that there has to be some monetary depreciation. Specifically he said that the era of quantitative easing and zero-interest-rate policies by the Fed… we really cannot exit this without some significant market event.
By that I interpret it being either a stock market crash or a prolonged recession, which would then engender another round of monetary reflation by the Fed.
Our own Braden Copeland is worried too. He reckons the US stock market is reaching a peak similar to the ones we saw in 1987, 2001 and 2007. (More on that below from Chris.)
Second, checking in with the weather reports, we found it was recently 1°F in Maryland.
How we would like to be back on the farm in front of a roaring fire… with snow on the ground outside… a stack of two-year-old firewood ricked up in the barn… and a generous supply of 10-year-old malbec in the cellar.
But it is not to be. Now, thanks to our success, we have places to go and people to see. And they are all far from our beloved Baltimore.
We’ve been rich. And we’ve been poor. Being rich is overrated. So is being poor. Neither is something to be proud of.
But in today’s Diary, we rag on the inconveniences of wealth. Like everything else, it seems to obey the rule of declining marginal utility. A little is definitely helpful. A lot? Well, that’s where the trouble begins.
The proximate cause of this rant is that three of our friends recently announced they were moving to Puerto Rico.
“It’s really not very nice,” said one. “Rich people live in gated compounds, where they are protected from the locals. We don’t like it very much. It’s almost like a kind of luxury prison, with other rich people.
“Besides, these are people you don’t want to be stuck with. The guys are always on the phone or email. The girls are getting their hair done. Seriously, we’d rather be with the yahoos we know in California.”
“Well, why are you moving there?”
“We have to. Puerto Rico has a tax system that cuts our taxes by about 90%. We can’t afford to stay in California.”
A poor man can live where he wants. A rich man lives where he must. Often, he is forced to become a refugee… a nomad, driven from house and hearth by the tax collector.
“Why not just pay the taxes?” we ask. “What’s the point of having money if it doesn’t allow you to live where you want?”
“We’d like to. But we’d lose all respect for ourselves… and all credibility with our tax adviser. We paid him a lot of money to figure this out. Besides, there’s a price for everything. We like California. But not that much.”
Ah… there’s the problem. You may readily and happily pay $10,000 for the pleasure of living in the Golden State. But what about $50,000? Or $500,000?
As a percentage of income, it may be the same for a rich person as a poor one. But real things have values independent of how much you earn.
A poor man may buy himself a $1,200 Brioni suit – spending 5% of his disposable income. Suppose a millionaire had to pay the same percentage – or $50,000 – for the same clothes?
“Nice threads,” he would say, “but not worth $50,000.”
Likewise, he may like hamburgers. But if the government forced him to pay $100 for a burger, he might become a vegetarian.
Puerto Rico is the alternative to a $100 hamburger. It’s not the only one.
Even the middle-class expatriate from the high-tax states to low-tax ones. Every year, thousands more tax refugees flee from New York and Connecticut to Florida or Nevada.
There they live in exile from friends, families, businesses and bars.
They have chipped away about 10% of their tax burden!
We want to live in Baltimore. But we wonder how much longer we can afford to.
A year of property taxes on our house in the Mount Vernon area is more than the price we paid for our first house in Baltimore (albeit in a different neighborhood) – and the houses are about the same!
Add in state and local taxes… Maryland’s unique “millionaire’s tax”…. and we’re eating $100 burgers every day.
It’s not even about the money. We just don’t like being taken for a chump.
To be continued…
|by Chris Hunter, Editor-in-Chief, Bonner & Partners|
The Fed is scared to raise interest rates…
According to the minutes of the recent Fed meeting, many Fed officials on its policy-setting committee are afraid to drop the word “patient” in reference to raising interest rates.
Because they worry it will spook the market and cause stock prices to fall.
The Fed has moved the goalposts on raising interest rates before. Two years ago, Ben Bernanke claimed the Fed would raise interest rates when the official unemployment rate fell below 7%. When that happened, the Fed simply dropped its target.
There’s plenty of solid historical analysis that shows that interest rate hikes by the Fed did not end previous bull markets in stocks. But as former Merrill Lynch economist David Rosenberg wrote in a recent research note to clients of investment firm Gluskin Sheff:
It could be different this time given the magnitude and duration of this cyclical surge – the Fed has never (at least back to the 1950s) waited as long as five years into a bull market to raise rates.
Colleague Braden Copeland believes the Fed is right to be worried about a coming crash.
Writes Braden in an urgent new report:
Insider sales of stock (that is corporate executives selling shares in the companies they work for) outnumbered insider buys 33 to 1.
If the market is going to keep on rising… wouldn’t they be buying shares to take advantage of such a sweet deal? Or wouldn’t the ratio be at least a little less lopsided? These are corporate execs we’re talking about here… They’re not selling stock to put food on the table.