Category: zerohedge

The recent surge in hedge fund selling (as discussed last week in “Goldman Prime: Hedge Funds Sell Stocks 7 Of The Last 8 Days; Short Squeeze Coming“) appears to be accelerating, reinvigorated by last week’s dismal Netflix earnings and guidance, and as Bloomberg first pointed out has spilled over to the broader tech sector resulting in a broad liquidation before the sector’s heavyweights report this week.

The $161 billion QQQ ETF – a Nasdaq proxy darling of retail and institutional investors alike – has bled nearly $6 billion over the past five days in its worst stretch since the bursting of the dot-com bubble in 2000, according to data compiled by Bloomberg. It helped drag QQQ to its first weekly drop in over a month.

To be fair, with the exception of the ugly NFLX results, earnings season has hardly been disappointing for tech, with the few tech companies that have already reported surprising on earnings by 18% on average. And yet, as we warned, their stock prices have barely moved higher in the following 24 hours, as they were already priced to absolute perfection following the recent surge. It’s also why the pressure is on the rest of the FAAMG megacaps to deliver, including Amazon.com, Apple and Microsoft, which are all scheduled to report earnings next week.

“With earning season starting to heat up, especially for the tech sector next week, it is likely that the expectations for technology companies may be too high,” said James Pillow, managing director at Moors & Cabot, echoing precisely what we said two weeks ago. “It’s early still, but just look where the earnings surprises are coming from: materials, energy, and financials, all about 80% or higher. Money will follow performance — and the performance is coming from those sectors.”

ETF flows have already been reflect the shift, with financials-tracking ETFs attracting $15.7 billion in inflows so far in 2021, while energy and materials funds have absorbed $14.4 billion and $4.9 billion, respectively according to Bloomberg. Meanwhile, tech ETFs have posted inflows of just $3.9 billion year-to-date, after QQQ alone took in $16.7 billion in 2020 – the most since 2000. Much of that inflow is now reversing as investors are looking for the next catalyst to push tech stocks higher… or failing that, the next greater fool.

Authored by Chris Hamilton via Econimica blog,

Total US births are collapsing and likely to continue falling significantly further over the coming decade(s). However, this isn’t our first rodeo…as total births collapsed during the 1960’s ’til early ’80’s…almost inexplicably against a fast growing childbearing population. And now, since 2007 (and not just a C-virus one off), total births have again collapsed against a growing childbearing population. I will make the case that much of this comes back to the Federal Reserve’s policies to foment stagflation/inflation which have created the birth dearth(s). Young adults (potential parents), like the canary in the coalmine, are among the most economically vulnerable to the Fed fueled asset inflation (with lagging pay increases and little to no assets to offset the rising costs of living). Their determination to delay marriage and children is the ultimate barometer of the US economic wellbeing.

The chart below (1950 through 2040) shows annual US births (blue columns…regardless parents legal/illegal status plus Census ’00/’08 birth projections through 2040), actual births (blue dashed line…including my projection from 2020 through 2040), 20 to 35 year old female childbearing population (pink line…representing roughly 80% of births among 15 to 45 year old total female childbearing population), and soaring 45+ year old post-childbearing female population (yellow line).

Looking at the US childbearing female population, there is no growth anticipated through 2040, while fertility rates continue tanking due to a slew of economic / pandemic / environmental / overpopulation concerns. The Census continued projections for rising fertility rates and total births is poorly founded.

Viewing the year-over-year change in 20 to 35 year-old childbearing females (pink columns), annual births (dashed blue line), and Federal Reserve set Fed Funds rate % (black line). We are looking at two periods of collapsed births in the US since 1950…both in conjunction with significantly increasing female childbearing populations (which of and by itself, should have resulted in flat to rising births). Instead, upon the initiation and continuation of major stagflationary/inflationary interest rate policy changes, fertility rates and total births fell precipitously.

Below, take a gander at US fertility rate (children per females) vs. Federal Funds Rate %. While other segments of the population fared far better thanks to offsetting asset inflation, young adults were not so lucky and chose to delay/refrain from marriage, family formation, and having children.

The age of first marriage for both males and females has soared by almost a decade (chart below), while the 30 year’ish window of fertility has not really changed. Females of most species can give birth during 80%+/- of their lifespans. Our species is capable of childbearing during only about 40% of the lifespan (females typically reach menopause by age 50). At age 30, 75% will be pregnant within one year of attempting to do so. By age 40, the odds drop to 40%. Also, risks of adverse outcomes for the child/mother rise dramatically as the mothers age increases. At age 20, 1 in 1,441 births will result in Down Syndrome…by age 45, 1 in 32. Simply put, women are more fertile and births are less challenging on mother and child while women are in their prime childbearing years from 20 to 30…but the current economic system simply doesn’t support this option.

Due to economic / financial pressure, dual-income households have become the norm. The percentage of childbearing age females in the labor force now is nearly double the post WWII situation. Since 2000, females have fluctuated between 65% to 70% labor force participation…well above the 40% seen in 1960 (white line below is raw female 15 to 54 year old employed / population ratio).

In order to achieve financial strength / independence, the number of women getting secondary educations has soared. As of 2019, a greater percentage of females (36.6%) have four-year or greater college degrees than males (35.4%)…compare that to the pre-war situation of 1940, with 3.8% & 5.5%, respectively. Obviously, the 4+ years of education plus the associated soaring student loan debt has pushed marriage, homeownership, and children to the latest on record.

The average age that a female first marries has soared from 20 in the 1950’s to somewhere beyond 28 years old in 2021. Consider…

• The average age of a mother at first childbirth is now over 26 years old

• The average age of a married mother at first childbirth is now over 29 years old…versus unmarried mothers closer to 24.

• Women with a college education (heavily impacting financial capability of supporting a family) are now approaching 31 years of age before first childbirth versus 24 w/out a college degree.

It’s also important to note that the decline in births is not due to abortion. Total abortions and abortions to live-birth ratio continue to decline from the 1980’s, early 90’s peak. Total abortions are down 50% since peak, and abortion to live-birth ratio is at record low levels since Roe v. Wade in 1973. Still, as of 2018, abortion to live-birth ratio was 189 abortions per 1000 live births…still significant (& massively contentious), but my point is it is a decelerating impact on total births.

Below are the Census projections for births, going back to ’00, ’08, ’12, ’14, and 2017. As can be seen, births continue to massively undershoot the Census projections. Much of the miss can be attributed to bad assumptions regarding Latino immigration rates and fertility rates…which have both been far lower than projected by the Census. The Latino population has normalized to the much lower fertility rates and economic situation than the Census could conceive.

From 2009 through 2020, there were 6.6 million fewer births (-12.5%) in the US (regardless legal/illegal status of the parents) than the Census projected there would be, in both it’s 2000 and 2008 projections. Given the flat childbearing female population, soaring average age at first marriage, and collapsing fertility rates, I’m projecting nearly 15 million fewer births (-30%) over the next decade than the ’00/’08 Census projections.

So What? Ultimately, the most inflationary thing in an economy is population growth and family formation. But the Fed’s policies, although advocating inflation via substituting currency dilution, interest rate mismanagement, quantitative easing, etc., is actually the basis of long term deflation. The merits of a financial system requiring infinite growth against an economic system meant to supply the finite needs of a population (with little to no population growth) should have been debated long ago. Now the economic system is being poked and prodded with stimulus, ZIRP, QE, untold leverage, etc. to synthetically produce growth for a financial system that can be called nothing more than a Ponzi scheme. The faster the substitution of these synthetic proxies (and their asset inflation impacts), the faster the decline in births will be. All of the trends in place to push births lower are accelerating. Whether this is intentional or de facto, I can’t say…but the outcome of collapsing US (and worldwide) births is clear.

“A bunch of people will probably die in the beginning,” is how Elon Musk characterized his plans of colonizing Mars last week.

Musk made the comments while speaking with Dr. Peter Diamandis on Thursday in Cape Canaveral, Florida for an event to announce a $100 million carbon removal project “aimed at helping to keep the Earth habitable while humanity seeks to become an interplanetary species,” RT reported. 

The conversation on the live stream quickly turned to Musk’s “plans” to colonize the red planet.

Musk, apparently already dubbing himself reining emperor of the red planet, said that Mars wouldn’t just be an “escape hatch for rich people.”

“It’s going to be uncomfortable and you probably won’t have good food, and all these things, you know,” he said. He noted that colonizing Mars would be “dangerous… uncomfortable…  a long journey, you might not come back alive, but it’s a glorious adventure and it’ll be an amazing experience.”

He added: “If an arduous and dangerous journey where you might not come back alive, but it’s a glorious adventure, sounds appealing, Mars is the place. That’s the ad for Mars.”

If we make life multiplanetary, there may come a day when some plants & animals die out on Earth, but are still alive on Mars

— Elon Musk (@elonmusk) April 17, 2021

Despite this, Musk didn’t think he would have any trouble finding volunteers. “Honestly, a bunch of people probably will die in the beginning. It’s tough sledging over there, you know. We don’t make anyone go,” he added about a colonization project that doesn’t really even exist. “It’s volunteers only.”

“If we make life multiplanetary, there may come a day when some plants and animals die out on Earth, but are still alive on Mars,” Musk wrote on Twitter last week. 

We wonder if it’s more “arduous and dangerous” than being a Tesla owner…

By Andrew Sheets, chief cross-asset strategist at Morgan Stanley

The weather in London has been unseasonably good and, together with the easing of some local restrictions, this opens the door to that most elusive of feelings: normality. Our economists forecast a strong rebound in UK GDP for 2Q, and when navigating the crowds that have now appeared, this feels about right.

The catch, however, is that more normality also portends a more difficult summer for the markets. Some of the problem is fundamental, some psychological, and some a function of what’s now in the price.

Let’s start with the three fundamental challenges.

• First, our global economics team has consistently argued that this will be a strong, ‘V-shaped’ recovery, a view that underpinned our strategy preference for early-cycle winners. But following the arrival of better data, not to mention the US$1.9 trillion American Rescue Plan, better growth is now more widely expected. Meanwhile, the rate of change for that growth will soon peak, given that we’re passing the one-year anniversary of the largest global economic drawdown on record.
• The second fundamental challenge lies in inflation. Our economists forecast US core PCE to hit ~2.5%Y next month, and stay at 2.0%Y or higher for the rest of the year. If that’s correct, inflation will switch from being a far-off concept to something appearing regularly in the monthly data. While we don’t think we’re on the verge of runaway prices, markets are forward-looking, and cyclical, early-cycle winners historically underperform when inflation moves back above trend. My colleague Mike Wilson has been vocal about starting this shift out of early-cycle cyclicality, and increasing quality in the portfolio.
• Then there is the virus. My colleague Matthew Harrison thinks that vaccinations will allow the US to achieve herd immunity by summer, maybe as early as June. While this is clearly a public health milestone to be celebrated, the implications for markets could be more complicated.

Low inflation and a terrible pandemic gave the Federal Reserve two powerful arguments to keep accommodation flowing even as financial conditions improved. Can the Fed sustain this accommodation if the US hits herd immunity and realized inflation is above 2.0%Y this summer? Certainly, and this remains our expectation. But is that a trickier message for the Fed to manage? It sure seems that way.

There are also some softer, market psychology risks that may be relevant.

Seasonality is good in April but gets worse in May through September, offering a convenient excuse to reduce exposure. Then there’s the unprecedented build-up of unused time off and desire to take advantage of it. This is not a cry for sympathy; our industry is well compensated and has been able to work remotely more easily than many others. But with only slight exaggeration, one of the bigger risk-management challenges this summer might be keeping desks properly staffed.

The real crux of the issue, however, is what’s in the price. The year-to-date rally has increasingly eliminated upside to our targets.

Across four major global equity markets (the US, Europe, Japan and emerging markets), only Japan is currently below our end-2021 strategy forecast. In bond markets, US 10-year rates are near the year-end expectations of my colleague Guneet Dhingra, who also thinks that US inflation breakevens now price in the rise of inflation our economists forecast. Oil and credit spreads are also near our year-end targets, and mortgage valuations have compressed so much that, as my colleague Jay Bacow notes, shorting MBS against US 5-year Treasuries is a positive carry, positively convex trade.

We’ll be sitting down soon for our semi-annual outlook process, so it’s possible that these longer-term forecasts will change. But based on our current expectations, there just isn’t much milk left in the carton.

There are a few exceptions. EM local bonds have been big underperformers this year, and James Lord and our emerging market strategy team are out with a recommendation to buy them (FX-hedged). Their underperformance relative to other assets, our expectation for more stability in US yields and a historically low cost of removing currency risk all make a compelling case.

Like EM local bonds, CLOs are a less liquid corner of the market that has lagged the rally, and thus still offer value. With confidence in the global recovery, my colleagues Charlie Wu and Vasundhara Goel like taking default risk in US CLOs at current prices, and see good returns in junior parts of the capital structure in EU CLOs, respectively.

Growth is still improving and liquidity is still abundant. The bull market remains intact, and I struggle to see the type of calamity that defined the summers of 2010, 2011, 2012 and 2015. But a harder, choppier, more range-bound summer does seem likely. Increase quality within equity portfolios, trim CCCs and long-dated corporates, sell MBS against Treasuries, and buy a few EM local bonds.

As if the official government data on soaring home prices wasn’t crazy enough, the latest monthly data from RedFin shows that in April, homes sold at their fastest pace on record with nearly half off-market within one week.

“There has been an ongoing debate at Redfin about whether fear of coronavirus infection was keeping homeowners from selling. With a third of American adults now fully vaccinated and still hardly any homes being listed for sale, we’re close to settling that debate,” said Redfin Chief Economist Daryl Fairweather.

(A quick note on the base effect in the housing market: at this time last year, pandemic stay-at-home orders halted homebuying and selling, which makes year-over-year comparisons unreliable for select housing metrics. As such, this report has been broken into two sections: metrics that are OK to compare to the same period in 2020, and metrics for which it makes more sense to compare to the same period in 2019.)

Metrics to compare to 2020:

• The median home-sale price increased 18% year over year to $344,625, an all-time high. Asking prices reached an all-time high of $356,175.

• Homes that sold during the period were on the market for a median of 21 days, the shortest time on market since 2012. This was 16 days fewer than the same period in 2020.
• 45% of homes sold for more than their list price, an all-time high. This was 18 percentage points higher than the same period a year earlier.

• The average sale-to-list price ratio, which measures how close homes are selling to their asking prices, increased 2.3 percentage points year over year to an all-time high of 101.0%, meaning the average home sold for 1% more than its asking price.

• 58% of homes that went under contract had an accepted offer within the first two weeks on the market. This was a new all-time high (Redfin’s data for this measure goes back to 2012).

• 46% of homes that went under contract had an accepted offer within one week of hitting the market, an all-time high.

• Meanwhile, with supply at record lows, demand remains near record highs thanks to fiscal stimulus, an exodus from rental units and near-record low mortgage rates.

Metrics to compare to 2019:

• Pending home sales were up 23% from the same period in 2019.

• New listings of homes for sale were down 10% from the same period in 2019.

• Active listings (the number of homes listed for sale at any point during the period) fell 47% from the same period in 2019 to a new all-time low.

Fairweather’s conclusion: “Homeowners are staying put because if they move and buy another home they will face a very competitive housing market as buyers, and they don’t need to sell to take advantage of record low mortgage rates. They can just refinance their current home. On top of that, builders are struggling to construct new homes given an ongoing lumber shortage. Without more homeowners listing, buyers are scrambling to compete for the limited number of homes on the market, which continues to drive prices up to new heights.”

Authored by Tom Pappert via NationalFile.com,

A new study conducted by MIT scientists and released this week reveals that the six foot social distancing and limited occupancy guidelines made law in most of the civilized world have done little to slow the spread of COVID-19, and suggests the only way to reduce the spread of COVID-19 is to limit exposure to highly populated areas and areas where people are physically exerting themselves, such as gyms, or areas where people are singing or speaking, such as churches.

The study reveals that the social distancing guidelines employed throughout much of the world for over a year have done nothing to limit the spread of COVID-19, suggesting that the adaption of the guidelines did not stop the spread of the of the China-originated virus, and it can only be slowed with the employment of severe lockdowns. Paradoxically, states and cities that have engaged in severe lockdowns have seen the largest spikes of COVID-19.

“We argue there really isn’t much of a benefit to the 6-foot rule, especially when people are wearing masks,” MIT professor Martin Z. Bazant said, as reported by NBC.

“It really has no physical basis because the air a person is breathing while wearing a mask tends to rise and comes down elsewhere in the room so you’re more exposed to the average background than you are to a person at a distance.”

In other words, widespread mask wearing may simply change the physical vectors of transmission within a given room rather than stop it, effectively making six foot distancing rules pointless.

In their study, Bazant and the other researchers declare, “Adherence to the Six-Foot Rule would limit large-drop transmission, and adherence to our guideline, [of limiting time spent in densely populated areas], would limit long-range airborne transmission.”

In the guideline, the researchers write, “To minimize risk of infection, one should avoid spending extended periods in highly populated areas. One is safer in rooms with large volume and high ventilation rates. One is at greater risk in rooms where people are exerting themselves in such a way as to increase their respiration rate and pathogen output, for example, by exercising, singing, or shouting.”

Bazant also told the media, “What our analysis continues to show is that many spaces that have been shut down in fact don’t need to be. Often times the space is large enough, the ventilation is good enough, the amount of time people spend together is such that those spaces can be safely operated even at full capacity and the scientific support for reduced capacity in those spaces is really not very good.” He added, “I think if you run the numbers, even right now for many types of spaces you’d find that there is not a need for occupancy restrictions.”

This comes on the heels of a study that suggests the Pfizer vaccine could cause severe neurodegenerative diseases caused by brain prions created by the mRNA-style vaccine. National File reported, “‘The current RNA based SARSCoV-2 vaccines were approved in the US using an emergency order without extensive long term safety testing,’ the report declares. ‘In this paper the Pfizer COVID-19 vaccine was evaluated for the potential to induce prion-based disease in vaccine recipients.’ Prion-based diseases are, according to the CDC, a form of neurodegenerative diseases, meaning that the Pfizer vaccine is potentially likely to cause long term damage and negative health effects with regards to the brain.”

Stop us if you’ve head this one before: a hedge fund manager was arrested and charged with fraud for spending client funds to keep up with his own personal habits and live a lavish lifestyle.

Are you stunned? Haven’t heard anything like this in…months? Days? Need the dirty details of yet another story about fraud on Wall Street? Well, here they are.

44 year old Andrew Franzone was charged last week with defrauding investors of almost $40 million, some of which he diverted to buy an aircraft hangar for his private race car collection. He was arrested in Fort Lauderdale on Thursday, according to a U.S. Department of Justice release. 

The release says he touted his fund as a “multi-strategy investment program … focus[ed] on three unique asset classes: the preferred stock market, the option market, and the private investment portfolio” and that he “assured investors that FF Fund was focused on trading in the preferred securities and options markets, which afforded its investors access to quarterly liquidity, and that FF Fund had a track record of consistent positive trading returns since its inception in August 2010.”

The DOJ alleges his representations about the fund’s liquidity and strategy were “largely fabricated”:

Instead of engaging primarily in preferred securities and options trading that ensured the FF Fund’s liquidity, FRANZONE instead diverted more than 80% of FF Fund’s capital to high-risk, illiquid private investments, many of which were either worthless or significantly impaired. FRANZONE also misappropriated FF Fund’s assets to fund his own personal business interests, including the purchase of an airplane hangar, and lied to investors about FF Fund’s performance and assets under management.

Through these and other fraudulent misrepresentations and omissions, FRANZONE induced over 100 investors to invest more than $40 million in FF Fund.  Despite showing investors positive trading returns as late as 2019, FF Fund was unable to fulfill redemption requests in early 2019 and is currently in the process of being liquidated.

Manhattan U.S. Attorney Audrey Strauss said:  “Andrew Franzone allegedly promised his clients access to his successful liquid trading strategy and consistent, positive trading returns.  As alleged, those promises were lies.  Franzone lied about his fund’s investments and performance, and he lied in promising clients that they had could readily access their invested capital.  While his investors lost money, Franzone enriched himself.  We will continue to work with our law enforcement partners to protect investors from these types of deceptive practices.”

USPIS Inspector-in-Charge Philip R. Bartlett said:  “Mr. Franzone allegedly misled investors to believe his fund was liquid and he could cover their redemption requests, in a scheme to lure them in to investing in his hedge fund. This should be a reminder that greed has no boundaries and does not care about a favorable portfolio. Postal Inspectors remind all investors to thoroughly check offers, and if they sound too good to be true, keep your money in the bank.”

Franzone’s affinity for racing was even featured in the Wall Street Journal back in 2016. 

He has been charged with “one count of securities fraud, which carries a maximum potential sentence of 20 years in prison, and one count of wire fraud, which carries a maximum potential sentence of 20 years in prison.”

Authored by Mike Shedlock via MishTalk.com,

Unhappy with Biden’s tax proposals? So are many others. Let’s discuss moving offshore.

Puerto Rico Too Good to Be True?

That’s the question of the day. And the answer is “it depends”. 

If you are willing to live in Puerto Rico and can do business there, then the short answer is yes, go for it.

If you think you can escape capital gains taxes just by moving, the answer is a lot more complex.

Slash Your Taxes To Zero? Not Exactly

Robert Wood a tax contributor to Forbes addresses the above questions in Move To Puerto Rico, Slash Your Taxes To Zero? Not Exactly

Puerto Rico hopes to lure American mainlanders with an income tax of only 4%. Legally avoiding the 37% federal rate and the 13.3% California (or other state) rate sounds pretty good. What’s more, there is no tax on dividends, and no capital gain tax in Puerto Rico.

However, some big cautions are in order. First, forget about easily avoiding U.S. tax on the appreciation in your assets before you move. If you move with appreciated stock, bitcoin or other property, and then sell, all that pre-move appreciation is still subject to U.S. tax. Only your post-move appreciation will be subject to the special tax rules in Puerto Rico. In fact, to escape U.S. tax on all of the pre-move appreciation, you generally must wait a full ten years after you move. That is hardly a quick fix. What about selling your U.S. real estate? That will always be U.S. source income. That means it is fully taxed in the U.S., even if you move to Puerto Rico and wait ten years before selling.

There are other fundamentals about the rules too. First, as with any move, you have to actually move! Your tax home—your real home—must be in Puerto Rico. Remember, just like any move from one state to another, it has to be real. Try to avoid messy facts that don’t look like a permanent move. If possible, sell your home, move your family, sever connections to your old local clubs, and so on. After all, if you are later ruled not to be a Puerto Rico resident, the IRS is back in the picture asking for back taxes, penalties and interest.

Puerto Rico Is Perfect For Whom?

If you are willing to move to Puerto Rico, and live there at least 183 days a year, then it is a very good solution for financial professionals, stock traders and anyone else who can conduct business online or over the phone.

One would not have to renounce citizenship or do anything else drastic.

I know prominent people, one whose name nearly all my readers would instantly recognize who did exactly that.

I believe he has been there for 10 years now which means all accumulated capital gains are now at a 5% long-term rate. 

Not a Quick Capital Gains Fix

For those seeking to avoid capital gains, current long-term capital gains are 0% but only after the move.

Also consider even more detailed information by DC Tax attorney Peter Palsen in Tax-Weary Americans Find Haven in Puerto Rico.

New qualifying residents have 100% tax exemption from Puerto Rico taxes on all dividend and interest income and long-term capital gains accrued after becoming a qualifying new resident.

As for prior unrealized capital gains, the statute provides that:

The total net long-term capital gain generated by a resident individual investor related to the appreciation of the securities owned by such resident individual investor before becoming a resident of Puerto Rico, which appreciation is recognized ten (10) years after he/she became a resident of Puerto Rico and before January 1st, 2036, shall be subject to a five percent (5%) tax, in lieu of any other tax imposed under the Code.

Palsen provides examples in his article and even a phone number if you wish to contact him. 

Whether or not one can escape taxes by moving to Puerto depends on your purpose, current income, and for capital gains avoidance, how long you are willing to commit to living there.

Puerto Rico a State?

This tax haven dies on the vine as soon as Puerto Rico becomes a state. 

Democrats desperately want to make Puerto Rico a state, not for the benefit of Puerto Rico, rather to pick up two more Senate Seats.

For investment purposes, Puerto Rico is doing what it is doing on purpose. Those are the competing forces.

Net Capital Gains Tax Would Approach a Whopping 60% Under Biden’s Proposal

In case you missed it, please consider the post on which this one is based: Net Capital Gains Tax Would Approach a Whopping 60% Under Biden’s Proposal

I am pleased to help any way I can those who wish to avoid such taxes.

Authored by Brian McGlinchey via Stark Realities,

At first glance, Washington’s ongoing skirmishes over the state and local tax (SALT) deduction feels like something out of DC Comics’ Bizarro World: Democrats are pushing a tax break expansion that would primarily benefit the wealthy—opposing Republicans who capped the deduction a few years ago.

A closer look at the SALT deduction, however, reveals a more relatable partisan dynamic: State and local tax burdens vary greatly, and the highest levies are generally concentrated in states and cities run by Democrats. Before the break was capped by the GOP-led Tax Cuts and Jobs Act of 2017, 91% of the benefit went to people with income over $100,000, with residents of California, New York, New Jersey, Illinois, Texas and Pennsylvania leading the way.

Beneath the Red-vs-Blue maneuvering lies an important question of principle: Should the federal government cushion the blow of high-priced state and local government?

How the SALT Deduction Works

The SALT deduction is a federal tax break taken on personal income tax returns. It lets filers reduce their federal taxable income by the amount of their state and local income and property taxes.

It’s only available to those who itemize deductions, rather than taking the standard deduction—which, in 2021, is a hefty $25,100 for married couples and $12,550 for singles. That threshold alone shifts the SALT deduction benefit toward the wealthiest Americans, who are far more likely to itemize.

If the limit on the SALT deduction were removed, 96% of the benefit would go to the top 20% of income earners, with 25% going to the top 0.1%, who would enjoy an average tax cut of $143,860, according to the Tax Policy Center.

However, the SALT deduction shouldn’t only be thought of as a tax break for individuals. In effect, it’s also a partial federal reimbursement of state and local income taxes. In that way, it serves as a federal subsidy of state and local governments and, absent the current GOP-imposed cap, the higher those state and local taxes, the higher the federal subsidy.

SALT Encourages Bad Behavior by Governments and Individuals

Like all subsidies, the SALT deduction distorts the economic decisions of individuals and entities. To understand why, let’s first visit the economic concept of “price signals.”

Prices aren’t just numbers—they carry embedded information that drive the behavior of market participants. A change in the price of a product or service signals market participants to either increase or decrease the quantity that’s supplied and/or the quantity that’s demanded.

When you disrupt those signals, you drive distortions in the behavior of market participants. For example, federal college loans encourage buyers of higher education to spend more than they would have otherwise. Making it easy for buyers to spend more also encourages the producers of higher education to charge more. Thus, an intervention that seeks to make college more affordable has the opposite effect.

Similarly, the SALT deduction distorts the “market” for state and local government by making residents less sensitive to increases in its price, which comes in the form of taxes. Consider a couple in the 37% federal tax bracket. Without a limit on the SALT deduction, a $10,000 increase in their state income taxes only costs them $6,300 after the federal tax deduction/subsidy.

By cushioning the blow, that federal subsidy makes residents less likely to demand a reduction in the size and scope of their state and local governments—or to move to a lower-priced alternative—and makes it easier for governments to expand their undertakings and raise taxes.

Tax debates often center on varying perceptions about what’s “fair.” Putting aside the higher benefit to the wealthy, there’s very little that’s fair about a tax break that disproportionately benefits high-priced state and local governments and the people who choose to live within their reach.

Put another way, there’s no rational federal government interest in providing a discount on the price of state and local government. Indeed, rather than removing the $10,000 cap, there’s an argument to be made for eliminating the SALT deduction altogether—ideally as part of a broader program to simplify the tax code so it’s no longer used as a federal mechanism for social engineering and rewarding cronies—both in and out of government.

Read more and subscribe at https://starkrealities.substack.com/

You haven’t quite made yourself into the zeitgeist of all things unfunny unless you’ve hosted Saturday Night Live at some point over the last 20 years.

And now that’ll be the latest adventure for Elon Musk, who, instead of spending his Saturday night thinking really deeply about how he plans on turning long-term profits at both SpaceX and Tesla, he’ll instead be joining Miley Cyrus on Saturday Night Live. 

NBC announced the news over the weekend, according to NPR. 

🚀🚀🚀 pic.twitter.com/WyTGhSsSVg

— Saturday Night Live – SNL (@nbcsnl) April 24, 2021

NBC made the announcement “just hours” after the SpaceX Crew Dragon capsule docked with the International Space Station. 

The show isn’t well known for having businesspeople host, but Musk’s crossover into the realm of celebrity appears to have afforded him the opportunity. Musk has also made guest appearances on CBS shows Young Sheldon and The Big Bang Theory, as well as voicing a part on South Park, The Simpsons and Rick and Morty. 

For better or for worse, it’s going to get eyeballs on the show, which is NBC’s endgame. The news triggered the lot of super-liberal SNL viewers, who lashed out at the program on Twitter, which became a group “cancel” effort/therapy session for snowflakes:

Having Elon Musk host SNL seriously feels like the show’s biggest misstep since having Trump host

— Joshua Benton (@jbenton) April 25, 2021

idk how much communication you have with lorne or the higher ups, but someone needs to tell them that absolutely no one wants this. i can not think of a single person who wants this.

and i don’t mean miley

— Your Tall Friend Jord (@TallGuySchmidt) April 24, 2021

This is dumb.
This is really dumb.

— Jo (@JoJoFromJerz) April 24, 2021

I’d rather have a root canal with no anesthesia than watch Elon Musk pretend to be human.

— 🙈🙉🙊 (@toddkimmelman) April 24, 2021

Elon can fuck himself. Miley deserves better. The writing’s been shit this year but this takes the cake. Deleting SNL from my DVR ASAP.

— Ang (@angelamusings) April 24, 2021

Are you SHITTING ME? Elon Musk, seriously? Not funny. Bloated billionaire babyman. (Another one, that is.) Stop this!

— ABL in Madison (@AmyBarlowLib) April 25, 2021

Or which skit will feature Elon telling his wife she’s way too emotional and should stop being sad about their child that died.

— Katie Tuohy 🍲🐀 (@katieroo_25) April 24, 2021