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With President Biden and the Democrats on the warpath to separate the richest Americans from their income, hedge funds managers are starting to expand into Puerto Rico – leaving open the possibility of relocating to the island to obtain huge tax breaks, according to Bloomberg.

Both ExodusPoint Capital Management and Millennium Management have opened local subsidiaries on the island, according to local records. ExodusPoint, headed by Michael Gelband, created a money-management in Puerto Rico on behalf of co-founder Hyung Soon Yee, who moved there last year.

Millennium, run by Izzy Englander, set up shop on the island just weeks after Biden won the 2020 US election.

And with Biden’s proposed tax increases on the wealthy and corporations looming, those who venture to Puerto Rico may be able to avoid both state and federal taxes according to the report.

The lure for would-be tax-savers is a pair of laws Puerto Rico enacted in 2012 to attract wealthy mainlanders: the Export Services Act and the Individual Investors Act. The latter is of particular interest to hedge fund managers because it exempts capital-gains taxes, including those levied on the performance fees that comprise the bulk of their compensation. In New York, such income currently would be subject to aggregate federal, state and local taxes approaching 50%.

Puerto Rico received almost 3,500 applications for the tax incentives during fiscal 2019 and 2020, exceeding the combined total for the previous seven years, according to the commonwealth’s Department of Economic Development and Commerce. -Bloomberg

In the first six months leading up to March, over 1,000 applications for tax incentives were filed according to an agency spokeswoman. Applications for the tax breaks, which are generally available to new residents and services businesses which generate revenue outside Puerto Rico, are typically kept confidential until approval. The government office which vets them reports a seven-month backlog, which has been exacerbated by the pandemic and surging demand thanks to Biden’s tax plans.

“You have a lot of people looking to relocate because they no longer have to be in close proximity to where they work,” said Euro Pacific Capital head Peter Schiff, who moved his firm’s asset management arm to San Juan in 2013. “The higher taxes are, the greater the appeal of coming here,” he added.

Menlo Park-based Pantera Advisors, headed by Dan Morehead, established a money-management unit last month in the Puerto Rican town of Guaynabo, according to a filing.

According to SEC records, ExodusPoint and Millennium were the only large money managers with Puerto Rico affiliates as of the end of March. At present, neither firms’ subsidiaries have been granted incentives under the Export Services Act, according to the government spokeswoman.

Real estate prices going ham

Around 20 miles west of the capital of San Juan lies Dorado, an area considered family-friendly which boasts high-end housing and the infrastructure required by finance professionals to access necessary computer networks on the mainland.

“There has been exceptional interest, in part because Dorado has access to fiber broadband,” said Jared Dubin – who recently set up Troluce Capital Advisers to manage money for ExodusPoint. “The Dorado real estate market has been pretty wild,” he added.

And of course, the flood of new money managers snapping up high-end real estate is squeezing prices even higher in the region.

Millennium incorporated a San Juan-based company, MPG PRManagement, on Nov. 23, according to records maintained by Puerto Rico’s Department of State. The subsidiary had four money managers working there at year-end, SEC records show. In June, ExodusPoint incorporated its subsidiary in Dorado, where Lee, 52, now lives. He owns 50% of that entity, ExodusPoint Capital Management Puerto Rico, and shares ownership of the rest with Gelband through another affiliate, according to a regulatory filing.

Lee, whose Facebook page shows him seated at the controls of a private plane, has a commercial pilot rating and is certified to fly small jets, Federal Aviation Administration records show. In September, ExodusPoint revised its SEC filings to say that Lee’s business trips on a plane he had recently purchased would be partially covered by the firm’s expense policy. It allows Lee and Gelband to seek reimbursement from ExodusPoint hedge funds for private flights, with repayment limited to the equivalent cost of first-class commercial airfare.

“If people are interested in drastic life changes in order to pay less tax, then I have one item on my list,” according to Stewart Patton – a Belize-based attorney who helps US expats optimize their tax situations. 

“Move to Puerto Rico…”

Authored by Nick Schmitz via Verdad Capital

The three largest economies by GDP are the US, China, and Japan. These are also the largest country stock markets by aggregate market cap. By our count, US-headquartered stocks add up to $44T in equity value, Chinese (and Hong Kong) stocks add up to $17.3T, and Japanese stocks add up to $6.5T. Meanwhile, Vanguard’s Total World Stock ETF allocates 57% to US stocks, 5% to Chinese stocks, and 7% to Japanese stocks.

Figure 1: GDP, Aggregate Market Size, and Vanguard (VT) Fund Weighing

Source: IMF for 2021 nominal GDP estimates. Capital IQ for aggregate market cap of all country-headquartered public listings on country exchanges, excluding REITS and capital markets; China includes Hong Kong. Vanguard (VT) for country exposure weights.

Relative to GDP or total market capitalization, global equity indices, and by proxy most investors, are massively underweight Chinese stocks. The case for upping exposure to China looks even stronger when we look at the selection opportunity, liquidity and growth, especially relative to China’s Asian competitor, Japan. China has 2x the number of listed stocks as Japan, and those stocks have 3x the median market cap of Japan.

Figure 2: Stocks, Stock Size, and Growth for the Big Three Countries

Perhaps most notably, China’s median firm growth rates are >5x Japan’s. And China’s exceptional growth rates aren’t just figments of equity analysts’ imaginations: Chinese corporate profits have been growing faster than Japan’s for decades.

Figure 3: Chinese vs Japanese GDP Growth Rates

It’s puzzling, therefore, to note that China’s equity market hasn’t dramatically outperformed the Japanese market for 10 years now.

Despite a massive difference in historic growth rates, the MSCI Japan index returned the exact same amount as the MSCI China index over the past decade, and with way less heartburn along the way.

Figure 4: MSCI Japan vs MSCI China Index (2011–2021)

This is in large part because investors paid a hefty premium to own Chinese stocks throughout the decade. The growth differential, it appears, was more than priced in. The picture today is little changed from a decade ago: the price differential between the two is still one of the biggest for countries outside of US markets, a concerning data point for China bulls.

Figure 5: Chinese vs Japanese Median Stock Trading Multiples Today

Chinese stocks are around 25% to 200% more expensive than Japanese stocks, depending on how you measure them.

But this simple analysis assumes a Chinese public equity is the same thing in kind as other developed-market public equities like a Japanese stock. There is a relevant quote, often misattributed to Stalin: “I consider it completely unimportant who in the party will vote, or how; but what is extraordinarily important is this—who will count the votes, and how.” For minority voting shareholders of Chinese “public equities,” we think both may be extremely important. This is because Chinese public equities are neither “public” nor “equitable” to the extent we can measure.

As shown below, Chinese equities have a public float of 45% on average, making them technically not public. Despite China’s maintenance, until recently, of the democratic-sounding “one share, one vote” law, in practice, this means that state-owned or quasi-state-owned institutions will often maintain full control according to academics and Pulitzer Prize winning journalism. This is a system of collective equity that might be thought of as having less of the nuance of James Madison and more of the nuance of Mao’s 1949 concept of The People’s Democratic Dictatorship. This “democracy for the people and dictatorship over the reactionaries,” is most likely why the reactionary practice of shareholder activism is “quite uncommon” in China, according to legal experts.

But why rely on the opinions of experts and academics in their ivory towers? As shown below, when you ask Chinese people themselves, they routinely rank themselves alongside Bhutan, the Kyrgyz Republic, and Colombia on most every metric related to the equitable treatment of shareholders, again making them not technically “equities” to the extent we can measure this.

Figure 6: Public Float and Indicators of Equitable Treatment for “Public Equities”

Source: Capital IQ for float. All publicly listed stocks, excluding REITs and capital markets. Survey rankings from the latest World Bank’s and World Economic Forum’s Global Competitiveness Ranks.

Finally, in comparing Chinese to Japanese equities, it may be useful to consider not just the valuation and transparency risks but also the debt markets these equities are subordinated to.

Below is the aggregate amount of corporate ex-financial debt in China and Japan over the last 20 years. The financial statement growth that makes Chinese equities so attractive compared to Japanese equities has come at the cost of skyrocketing debt.

Figure 7: Total Corporate Ex-Financial Debt ($M)

And while the Chinese ratings agencies have ranked most all issued domestic bonds in the AAA to AA investment grade range, when the imperialist swine at S&P Credit Ratings applied their independent analysis on the publicly available Chinese accounting data, this resulted in a downgrade of the same sample of Chinese issuers from exclusively investment grade to largely speculative and junk grade.

Figure 8: Chinese Domestic Credit Ratings vs S&P Indicative Ratings

China is a unique market. We can think of only one historical analogue to a country like China today. A country whose capital markets rose at breakneck speed from the ashes of war and economic catastrophe. A country with a market that emerged as nearly dominant globally after prolonged sustained growth, at massive scale, with high valuations and extremely accommodative corporate lending. A country that adopted many capitalist standards to get there while allowing the government and complex webs of corporate crossholdings to play a heavy-handed role in directing national industrial and technological efforts before hitting peak population and a non-performing loan crisis. That country is Japan in the 1980s, before the asset bubble burst.

But China is quite different from the historical example of Japan for many reasons, including that China is one of the very few officially Marxist-Leninist countries surviving today. North Korea, Laos, and Cuba don’t really have markets, let alone stock markets. As such, this extreme survivorship bias makes it difficult to estimate your long-term probability of realizing a return on (or return of) your capital in Marxist-Leninist states. We are left with only rough comparable examples like the Ho Chi Minh City Stock Exchange in Vietnam and Venezuela’s Caracas Stock Exchange. We can’t say much empirically on such a limited sample, but for what it’s worth, all three markets joined the UN’s Sustainable Stock Exchanges Initiative, giving your capital what some would argue is two layers of communist oversite.

It may be tempting to assume that when you put your money in a foreign country, no matter which one, you will get it back a decade later, as has occurred quite regularly since the ’70s. Capital controls were really something that only our grandparents had to worry about. But foreign investors thinking about Chinese exposure over the next decade have neither the assurance of constrained law nor credible deterrence. Meanwhile, in Japan, investors enjoy the backdrop of a close ally with a pluralistic liberal democratic constitution and the geopolitical insurance policy that only a division of US Marines in Okinawa can provide.    

For these reasons, we think of allocation decisions to the largest countries outside of the US as more complicated than a weighting of fully interchangeable financial instruments.

Our conclusion is that, compared to Japanese public equities today, Chinese public equities are not technically public or equitable to the extent we can measure. They are massively more expensive and are probably subordinated to much more dubious lending practices than the government-approved ratings agencies would let on, according to S&P’s mathematical standards. But we must admit that the trailing and one year forward growth is red-hot in the market that’s marked-to-Marxist.

Dave Floyd, founder of Aspen Trading, joins Real Vision senior editor Ash Bennington to provide an update on the markets as U.S. equities continued their decline this morning as inflation pressure looms large on the horizon. As the U.S. 5-year breakeven inflation rates reaches a 15-year high, Floyd will be sharing his perspective on the inflation narrative that has been roiling markets this year, what currency pairs he has his eye on, and what’s going on in S&P futures.

While Elon Musk (Tesla), Jack Dorsey (Square), and Michael Saylor (MicroStrategy) have made headlines with their adoptions of cryptocurrencies as part of their company’s reserves, many other American companies have begun to embrace the decentralized payments system.

This is The Way. pic.twitter.com/vDzHzdzqnP

— Michael Saylor (@michael_saylor) May 4, 2021

But now, with Bitcoin hovering around $58,000, companies in Asia and Latin America are beginning to move into the space.

Nikkei Asia reports that South Korean gaming giant Nexon said that it has shifted part of its cash into the cryptocurrency, purchasing 1,717 bitcoins at an average price of about $58,226 per bitcoin, including fees and expenses, for around $100 million.

“Our purchase of bitcoin reflects a disciplined strategy for protecting shareholder value, and for maintaining the purchasing power of our cash assets,” President and CEO Owen Mahoney said in a statement.

“In the current economic environment, we believe bitcoin offers long-term stability and liquidity, while maintaining the value of our cash for future investments.”

Nexon said the bitcoin purchase represents less than 2% of the company’s total cash and cash equivalents on hand.

image courtesy of CoinTelegraph

Earlier in April, Meitu, the developer of China’s wildly popular beauty-enhancing photo app, Meitu Xiuxiu, revealed that it had accumulated a total of about $100 million worth of bitcoin and Ethereum. The Hong Kong-listed company had previously announced plans to buy up to $100 million worth of cryptocurrency with cash reserves.

In a statement, the company said:

“The board believes cryptocurrencies have ample room for appreciation in value, and by allocating part of its treasury in cryptocurrencies [they] can also serve as a diversification to holding cash in treasury management.”

The statement went on to say “the board considers this a demonstration to investors and stakeholders that the group has the vision and determination to embrace technological evolution, and hence [is] preparing its foray into the blockchain industry.”

And just this week, Mercado Libre, the largest e-commerce platform in Latin America, has announced to the U.S. Securities and Exchange Commission (SEC) that it acquired $7.8 million in Bitcoin in the first quarter of 2021. It stated in the report:

“As part of our treasury strategy this quarter we purchased $7.8 million in Bitcoin, a digital asset that we are disclosing within our indefinite-lived intangible assets”.

As CoinTelegraph reports, the purchase makes the Argentinean company the first large Latin American company to acquire Bitcoin for its treasury.

We are sure Charlie Munger would be “disgusted” at these actions.

Authored by Isabel van Brugen via The Epoch Times,

Arizona Gov. Doug Ducey (R) has signed into law legislation that designates gun stores as essential businesses allowed to remain open during an emergency—a move that will further protect gun stores, manufacturers, and trade associations from lawsuits.

The new law, Senate Bill 1382, introduced by Republican Sen. Wendy Rogers, applies to any store selling guns or ammunition, or their components, and mirrors federal law that was passed on a bipartisan basis.

Ducey’s office said in a release that the measure will protect the Second Amendment rights of Arizonans by “safeguarding against frivolous lawsuits that have no connection to unlawful use of firearms.”

“With efforts currently underway in Washington to erode Second Amendment rights, Arizona is taking action to protect those rights,” Ducey said in a statement. “In Arizona, we’re safeguarding manufacturers, sellers, and trade associations.”

“Bad actors need to be held accountable, and we will work to make sure they are,” the Republican governor added.

“But we’re not going to allow lawsuit after lawsuit to slowly tear down the Constitutional rights of law-abiding citizens in our state.”

The bill bans the state and its entities from suing a member of the firearms industry for lawful design, marketing, distribution, and sale of firearms and ammunition to the public. It also prohibits a manufacturer or seller of a firearm or ammunition or related trade association from being sued for damages resulting from the criminal misuse of the firearm or ammunition.

Rep. Rogers previously said of the measure that the right to keep and bear arms must be protected, especially during emergencies.

Democratic Sen. Martin Quezada argued the Legislature has much bigger priorities during the pandemic, such as ensuring people get access to unemployment insurance and don’t lose their homes.

“Arizona is—and will remain—a strong 2nd Amendment state,” said Judi White of Tucson, a gun rights champion who has long been active in the National Rifle Association.

“We can’t let flippant lawsuits hinder operations of firearm or ammunition manufacturers, sellers, and trade associations that are following the law. Senate Bill 1382 makes sure of that.”

White added, “Thank you, Governor Ducey, for signing legislation that protects citizens’ Constitutional rights.”

The new law comes as President Joe Biden and Democrats in Congress in recent weeks have issued a series of gun-control proposals, while the House of Representatives passed two gun background check laws.

In his first address to a joint session of Congress on the eve of his 100th day in office, Biden also called for background checks and a ban on assault weapons and high-capacity magazines.

The phenomenon of “cancel culture” is a toxic one metastasizing into a woke revolution war empowered by Big Tech and Big Business. Those unfamiliar with being canceled involve publicly shaming others and boycotting celebrities and companies. However, the art of canceling has progressed well beyond canceling public figures and is now used to garget average folks. The result can be devastating for ordinary people who may face the consequences of losing their jobs, losing friends and family, or having their social media accounts terminated. 

Comedian Dave Chappelle partook in a video interview with Joe Rogan on “The Joe Rogan Experience” podcast about cancel culture. He told Rogan that he recognizes the change people are attempting to bring through activism and accountability for prominent folks but denounced cancel culture: 

“I’m very lucky to be able to see people who are great at things up close,” Chappelle said. “Even on this podcast … it’s one of the joys of my life getting to know these people and knowing and seeing them be human.” 

Chappelle said, “I hope we all survive it,” while referring to the cancel culture storm gripping society. “That’s why that cancel culture shit bothers me. I’m not even opposed to the ideas behind some of these cancelations. I get it.” 

Rogan said, “the inclination, all of it, is to make the world a better place.” He said social media and public shaming have “gotten abused and misused by the wrong people and bad actors, but at the end of the day, the thing they think they’re trying to do is eliminate bad aspects of our culture.”

Last year, Chappelle criticized cancel culture, saying audiences have become “too brittle,” adding that “everything you say upsets somebody.” 

Chappelle hasn’t been the only well-known person to speak out against cancel culture, Curtis Jackson, known as “50 Cent,” recently said cancel culture is “unfair” and “targeting straight men” who “don’t have any organizations to back them up.”

Jackson said he wouldn’t get canceled because “hip-hop culture loves things that are damaged. It loves people who are already broken from experience.” 

A study by a top education think tank, Civitas, found that free speech at the world’s leading universities is being eroded at a rapid rate due to “cancel culture.” 

Cancel culture may have had good intentions to hold people accountable for things they did or say. Instead, it has backfired and produced a toxic environment that limits freedom of speech and alienates anyone with opposing views. Society can’t move forward if liberals cancel anyone they don’t like – there needs to be an open forum where all voices are heard.

Authored by Joakim Book via The American Institute for Economic Research,

Being contrarian is hard work. You need to withstand ridicule, the loss of friends, employment, and acquaintances, face the imminent possibility that most of the time you’ll be wrong, and abandon the warm fuzzy feeling of having your otherwise friendly peers confirming your bias. 

Yet, authentic critics are crucially important, even if (and when) they are wrong. When at least some of us speak out against what is the prevailing wisdom on any given topic, we break the numbing spell that majorities have over groups. We temper extremities, flush out the overlooked assumptions in the majoritarian take, and encourage better decision-making. 

Consensus, contrary to the “science is settled” mantra of climate change activists and affectatious Covid pushers alike, is not desirable.

At least according to U.C. Berkeley psychologist Charlan Nemeth, who, in her 2018 book In Defense of Troublemakers: The Power of Dissent in Life and Business, summarizes research into majorities and minorities, consensus and dissent. 

It’s not a pretty view for those who think bashing wrong-thinkers into silence and reeducating those with the wrong disposition are the treasured fights of our times. In very accessible chapters, Nemeth takes us through detailed analysis of how the lone dissenter in 12 Angry Men could persuade a powerful majority opting for a guilty verdict (majorities persuade quickly and in numbers; minorities quietly and through persistence); we get a comparison between the JFK administration’s internal information-processing in the Bay of Pigs disaster in 1961 and the more balanced and nuanced approach to the Cuban Missile Crisis the following year; we have a brief look at Edward Snowden and the gradual shift of him from a careless criminal to a courageous whistleblower. 

“Repeatedly we find that dissent has value, even when it is wrong, even when we don’t like the dissenter, and even when we are not convinced of his position. Dissent breaks the hold of consensus and majority opinion and enables us to think more independently. Dissent also stimulates thought that is open, divergent, flexible, and original.”

But that’s about it. Nemeth falls for the classic writer’s mistake of telling her readers something rather than showing them. She repeats her talking points about the group value of dissent and she explains the results from various experimental studies, but she never really delves into precisely how those studies convincingly prove the psychological results they aim for: that majorities can pressure us into disbelieving our own senses; that dissenters even in error can improve group decision-making; that consensus can quell creativity and the search for truth. 

The creation myths of the field that is social psychology are that humans are fickle creatures, easily manipulated, and routinely fall prey to group pressures. The “wisdom of crowds” cannot be trusted as they don’t form their opinions independently and so all sorts of incredible behavior are possible, ranging from manias to genocides. There are quirks of our mental processes, believe psychology’s practitioners, that manifest themselves as very odd behavior – that government officials can manipulate for our benefit, or self-help guides can use to improve our lives. 

In the real world outside the experimenter’s carefully assembled settings, this was always much less obvious. Psychology shares the problems of its bastard child with economics (the branch called “behavioral economics”), in that most of its experiments are convoluted and weird. These are not conditions that people usually find themselves in, and most of the time they have no skin in the game, the stakes involved are low, and nobody has a meaningful reason to exert themselves. As Bryan Caplan points out in The Myth of the Rational Voter, people look much less irrational in their natural economic habitat. 

I get the same impression from reading Nemeth. She carefully explains one experiment after another of what seems to be dubious quality: finding anagrams, spotting star constellations, arbitrarily assessing which word associations are creative and original and which are mundane and conventional. She walks us through studies where students were told about a majority of other students’ position on recent campus proposals, which then led them to read a more balanced amount of articles for and against: “They wanted to understand the perspective of that majority,” Nemeth concludes. She manages to show that groups with majority pressure tend to shape both the answers given and the attention awarded various tasks – but how realistic are all these settings? Would they translate to real-world situations we’d be likely to find ourselves in? 

Studies using ultimatum game and dictator game, staples in behavioral economics and social psychology, are often used to point to inherent altruism or that we have an innate aversion against unequal outcomes. When those studies were modified only slightly to resemble real-life conditions (for instance money pots to split were given evenly and not only to the dictator/proposer or research subjects had to work for the money before the game began), the stark results vanished. When observed in real life markets, too, the very same research subjects who had just behaved altruistically in the experimental setting, where they were being observed by the researcher, did not, thinking that they were no longer monitored. 

Even Solomon Asch’s classic conformity experiment (where respondents judge a line to be shorter than it is after hearing their fellow participants take that position) that dominates Nemeth’s first chapter has been gravely criticized, and replications following it show much less of a tendency to conform, if at all. While the conclusions that point to the horrors of peer pressure might have been a quirk of the 1950s, the sample population Asch used, or mere statistical fluke, the result has been firmly entrenched into the wider public: we are fickle creatures that easily conform to what those around us do, even if we know it to be wrong. 

While I want to believe that, and her research would greatly validate my own excessive tendency to – as Steve Carell’s character wonderfully puts it in The Big Short – call B-S on “every f—ing thing,” I don’t think I can. Because of psychology’s replication crisis, where many long-standing research results either turn out to have been faked and manipulated or just don’t hold, it’s hard for non-experts to trust anything coming out of this dismal science. Yet, like Stuart Ritchie or John Ioannidis – and others who’ve done a great service separating out the chaff – often emphasize: the fact that some, or even most, psychology is rubbish doesn’t mean that we can safely discard any new psychology finding without proper cause. All these baskets of bad apples don’t mean that the tree is poisonous. 

Still, many of the experiments that Nemeth walks us through in Troublemakers have the character of many dubious psychology results: incredible outcomes, ambiguous interpretations, settings with little-to-no real-world equivalents. She mentions that her professional work was grounded in studying jury deliberations and verdicts – conditions that are both real and have high stakes – but unfortunately spends almost no time on that work in the book. 

On Joe Rogan’s podcast a few days ago, the comedian Dave Smith spoke passionately against silencing people:

“We have to stop trying to shut people up. We have to stop censoring people and banishing people and all of this. We gotta be able to have conversations; we gotta be able to let someone, even if they’re wrong, think out loud.”

This seems like useful advice, regardless of whether Nemeth is right about the powerful impact of dissenters. But I hope she is.