Month: June 2021

By Michael Every of Rabobank

Yesterday’s Daily concluded with the question: “Is this a piece of your brain?” Sadly, I feel the need to start today’s with the same question. What else can one ask when our financial press are filling pages telling us Jeff Bezos is going into space? “Multi-billionaire does something expensive and irrelevant” might as well be the headline; or, I would settle for a Muppets-like “Bezos in Spaaaaaace”, which at least has the appropriate lack of gravity.

Meanwhile, we need to be talking more about uncomfortable “I” words:

“Inflation”, obviously. There is a lot of market discussion about it, and if it is really back or not; and some even address formerly-taboo issues like labor vs. capital. However, those who have been brave enough to take that big leap have only landed on a narrow pillar sticking up from a deep intellectual divide, not the other side. The next, more difficult jump is to admit one cannot address the labor issue without also addressing the free movement of goods, services, and capital (let alone people) – and the global supply chains built on their back. Until then, you are intellectually stuck between the solid ground of neoliberal “because markets” –with low inflation, high inequality, and “Bezos in Spaaaaaace!”– and Bretton Woods / national- conservatism / mercantilism / or international Marxism on the other side – which means higher inflation, lower inequality, less globalization, and very different supply chains. And that pillar in the middle is wobbly and won’t hold for long. (For our own take on an inflation framework, not model, and which tries to encompass these factors and more, please see here.)

“Interest rates”, just as obviously. US Treasury Secretary Yellen says she backs slightly higher rates, which would apparently be healthy for the US economy. How many times has she forgotten this is not her job anymore? Could Mr Powell say he prefers a slightly lower fiscal stimulus, for example? The media seem indulgent of these repeated snafus removing the clear red line between Fed and fiscal. Meanwhile, market chatter is that Jackson Hole in late summer is too soon for the Fed to flag any tapering. Given the extended unemployment checkes won’t have run out at that point, US jobs growth will still be below expectations, so requiring said stimulus: there is some logic if you think about it. And months more of $120bn QE a pop for markets.

“Invermectin”, which is a cheap, safe, effective medicine for treating parasitic infections and inflammation. Repeated on-the-ground medical studies claim the drug is an equally cheap, safe, and effective part of a cocktail Covid-19 treatment that could help ensure a far faster global recovery from this pandemic. The fact that none of you have probably heard of it; that academics at the UK’s leading virus-research universities aren’t looking at it; that Twitter has frozen the accounts of some advocating for it; and that India just dropped it as a recommended treatment, all suggests either the data from the studies are flawed, or how we make decisions about such important matters is. (I am no doctor or scientist: but Bret Weinstein has firm views on which of the two is more likely.)

Of course, a faster *global* recovery from Covid would mean we wouldn’t need as much fiscal and monetary stimulus in the first place. Yet even so, perhaps we aren’t having the well-rounded “have we tried this?” discussions about the realities of the best ways to treat either inflation or inflammation.

“’International’ law”, which reflects China’s first of its kind anti-foreign sanctions draft law being proposed yesterday, with a vote expected soon. According to an expert quoted by the Global Times, the law “will deter foreign governments, notably the US and the EU, from resorting to long-arm jurisdiction,…if Chinese entities are hit with unjustified sanctions, the proposed law is supposed to crystallize actionable countermeasures against the foreign governments and institutions…expecting the legal effort to make up for losses that Chinese entities would suffer.”

The example of the Australian government’s decision to tear up Victoria’s Belt and Road agreements with China is given as a “wake-up call” for China to “broaden the extraterritorial reach of its own legislation.” In other words, the proposed law would have allowed China to impose countermeasures on Australia, or demand compensation, for Canberra following Australian federal law within its own territory – because it harmed Chinese interests. Of course, the US, and now EU and UK –and Hong Kong– extend their legal remits outside their geographical territory. Now China is going to join in – and in the opposite direction to the West’s legal moves.  This potentially leaves Western firms damned-if-they-do and damned-if-they-don’t, which is a wake-up call for those who haven’t heard any of the alarm bells so far. It’s also another factor likely to play into supply-chains and inflation over time, even if mentioning it is as popular as Invermectin.

“Industrial policy”, given the US senate is expected to pass “The US Innovation and Competition Act of 2021” today, which includes $52bn for US-based semiconductor manufacturing; $80bn over five years for the National Science Foundation; a new office to oversee the development of technologies such as AI, semiconductors, quantum computing and biotech; to limit Chinese state funds flowing to US universities; to create a new State Department position to monitor and counter Chinese influence in international organizations; steps to strengthen US military alliances in the Pacific; to create a working group with the legislatures of nations in the Quad – Japan, Australia, and India; a ban on US officials attending the 2022 Beijing Winter Olympics; a declaration that China’s policies in the Xinjiang are genocide; and requiring the US to impose sanctions on anyone in China (not Russia) engaging in intellectual property theft or cyberattacks against the US. There is also more in it – and much still subject to last-minute change. Meanwhile, the US is also pushing ahead with the Blue Dot Network

Critics of the legislation point out that it has huge security holes in its proposals for a new 5G technology platform; and others that this is yet another big government boondoggle. However, it’s the clearest bipartisan signal yet that the US is serious about “extreme competition” with China – and it also looks likely to breach the terms of the proposed new Chinese law to prevent its interests being targeted. Hold on to your hats – and perhaps not your supply chains.

“Inverse?”, given 68 Republican members of the House of Representatives are sending a letter to the White House ahead of the US-Russia summit slamming President Biden for waiving sanctions on Russia’s Nord Stream 2 Pipeline; and Ukrainian President Zelenskiy claims US President Biden that he is opposed to Russia’s Nord-Stream 2 project; and US Secretary of State Blinken states that the recent sanctions waiver over the project “can be rescinded”, language that sounded like the US is OK with the pipeline being completed given it is a fait accompli,…but still perhaps doesn’t want it to actually be turned on(?)     

But let’s forget about all this and return to “Bezos in Spaaaaaace”, where Bezos, his brother, a lucky lottery winner, Captain Link Hogthrob, First Mate Piggy, and Dr. Julius Strangepork are….       

The total market capitalization of Cryptocurrencies has collapsed from over $2.5 trillion in mid-May to below $1.5 trillion this morning as losses re-accelerate overnight…

Source

That is the lowest level since March with Bitcoin’s dominance having fallen back to around 40%, as Ethereum’s share of the space up to just below 20%…

Source

Bitcoin is back to a $31k handle…

Source: Bloomberg

Ethereum is also lower, back below $2400…

Source: Bloomberg

The recent slump also coincides with a marked decline in the number of transactions flowing through the Bitcoin blockchain. On May 30, the number of daily Bitcoin transactions dipped as low as 175,000 — a near three-year low that stretches back to September 2018, according to data from BitInfoCharts.

The catalyst for the latest leg lower are likely manifold as the mainstream media grab hold of government-delivered narratives on the risks/fraud involved, and as Decrypto.co’s Liam Kelly writes, reports that The Department of Justice (DoJ) announced that they had recouped $2.3 million of said funds after “following the money,” has sparked widespread fears the network had been hacked.

Though it was initially reported that attackers’ Bitcoin wallet had been “hacked,” this was likely not the case. 

Instead, an affidavit from the Federal Bureau of Investigation (FBI) suggests that authorities were able to trace the ransomed Bitcoin using a block explorer to a specific address containing 63.7 Bitcoin. 

They then seized control of the private key linked to this address, thus accessing the ransomed Bitcoin. 

Users need both the private and the public keys for a Bitcoin address to access the funds. Both keys are a string of words and numbers. Matching the correct private key with the corresponding public key allows users to take control over that Bitcoin. 

Without these keys, it is near impossible to access funds due to the level of encryption used. 

It is far more likely that authorities could either match the address in question with a specific identity, or the address was linked to a U.S.-based crypto service, such as an exchange or other custodian. 

An assistant special agent who participated in the case, Elvis Chen, said, however, that he didn’t “want to give up our tradecraft in case we want to use this [method] again for future endeavors.”

Still, it would appear that the market is trading as if the Bitcoin network has indeed been hacked, with the top cryptocurrency’s price tumbling.

In case we needed more proof that the US labor market is in a historic supply-demand mismatch crisis sparked by Biden’s generous unemployment benefits, a few hours after the latest NFIB showed that it has never been more difficult for small business to fill job openings, moments ago the BLS confirmed what we expected: that the number of job openings in March (recall JOLTS is one month delayed) soared by a record 998K to 9.286MM in April from an upward revised 8.288MM in march, and the highest in the history of US jobs data!

The record number was also a record beat to the already lofty expectations of a 8.2 million print.

Looking at the details, the increase in job openings was driven by a number of industries with the largest increases in accommodation and food services (+349,000), other services (+115,000), and durable goods manufacturing (+78,000). The number of job openings decreased in educational services (-23,000) and in mining and logging (-8,000). The number of job openings increased in all four regions

Separately, in yet another indication of the record surge in demand for labor since the collapse last April when there were 18.1 million more unemployed workers than there are job openings – the biggest gap on record – the gap has since shrunk dramatically to just 526K in April, down from 1.4 million in March. Yes: despite the covid shock, there are just half a million more unemployed people than there are job openings!

As a result, there has been even more continued improvement in the job availability series, and in April there were jus 1.06 unemployed workers for every job opening, down from 1.19 in March, down from 1.35 in February and from 4.6 at the peak crisis moment last April.

Meanwhile, confirming the accelerating in the hiring picture as covid lockdowns were lifted, in April hiring surged for a 4th consecutive month to 6.075MM, up from 6.009MM in March.

According to the BLS, hires increased in accommodation and food services (+232,000) and in federal government (+10,000). Hires decreased in construction (-107,000), durable goods manufacturing (-37,000), and educational services (-32,000).

Curiously, as hires soared, total separations also increased to 5.8 million (+324,000). The total separations rate was little changed at 4.0 percent. The total separations level increased in retail trade (+116,000) and in transportation, warehousing, and utilities (+60,000).

Finally, confirming the overheating in the labor market sparked by “Biden’s trillions” and the tsunami of unemployment benefits which has prompted a wave of revulsion toward work in general, in April the level of quits – or people leaving their job voluntarily due to better prospects elsewhere – soared by a whopping 384K to a record 3.985 million, after rising by 185K and 77K in the previous two months. The number of quits increased in a number of industries with the largest increases in retail trade (+106,000), professional and business services (+94,000), and transportation, warehousing, and utilities (+49,000).

Once again, market action is dominated by the so-called ‘meme stocks’ with heavily-shorted companies getting massively ripped higher this morning.

AMC is up around 7%…

GME is back in the game – ripping almost 20% higher…

And Chamath’s CLOV is exploding higher…

And as the most recent short-squeeze basket continues to rip…

Source: Bloomberg

So bonds are bid back to their lowest yields in 3 months…

But, but, but, the recovery!!

In a story that has taken the Internet (or, what’s left of it) by storm Tuesday morning, ProPublica, a non-profit investigative newsroom somehow obtained sensitive tax information belonging to some of America’s wealthiest individuals: including Jeff Bezos, Elon Musk, Carl Icahn, Michael Bloomberg, and even Warren Buffet.

The data showed that the wealthiest Americans largely avoid paying income taxes because they don’t earn very much income – at least on paper. Most of their wealth is tied up in the companies they own.

ProPublica used the data (it’s worth noting that leaking personal tax data is seriously illegal) to perform a new calculation: the “true tax” bill of America’s wealthiest individuals. The “vast trove” of tax data obtained by PP, which goes back some 15 years, showed that not just their income and taxes, but their investment returns, stock trades and gambling winnings. Some of the data even showed the results of audits carried out by the IRS.

While PP won’t disclose how it obtained the data, it affirmed that all of the data was vetted by representatives of the individuals involved. Several provided a statement to PP, including Warren Buffett, who didn’t directly address PP’s calculations

To finish off the “true tax” calculation, PP used the data for the 25 wealthiest Americans along with estimates of how their wealth grew each year provided by Forbes (which meticulously tracks this information).

The results were striking: the top 25 saw their wealth increase by $401 billion between 2014 to 2018. But they only paid $13.6 billion in federal income taxes in those five years, the IRS data shows. That’s tantamount to a “true tax” rate of 3.4%.

Michael Bloomberg, the former NYC mayor and Bloomberg LP owner (one of the world’s largest private companies), has used his media empire to promote his opposition to the wealth tax.

So it shouldn’t be a surprise that PP’s calculation of his “true tax” bill found he paid just 1.3% of the total amount by which his wealth increased. bbg3

But the most shocking revelation from PP’s calculations is that Warren Buffett paid just $23.7MM on $24.3 billion in new wealth, a “true” tax rate of just 0.1%, the lowest of the top 25.

At one point, PP compared the tax paid by the wealthiest to the average American, purporting to show that average working people pay much higher tax rates.

Our analysis of tax data for the 25 richest Americans quantifies just how unfair the system has become.

By the end of 2018, the 25 were worth $1.1 trillion.

For comparison, it would take 14.3 million ordinary American wage earners put together to equal that same amount of wealth.

The personal federal tax bill for the top 25 in 2018: $1.9 billion.

The bill for the wage earners: $143 billion.

PP acknowledges that there’s nothing in the Constitution calling for a wealth tax, and that Supreme Court precedent shows that an individual needs to sell an asset before being taxed.

Four years later, the Supreme Court agreed. In Eisner v. Macomber, the high court ruled that income derived only from proceeds. A person needed to sell an asset — stock, bond or building — and reap some money before it could be taxed.

Since then, the concept that income comes only from proceeds — when gains are “realized” — has been the bedrock of the U.S. tax system. Wages are taxed. Cash dividends are taxed. Gains from selling assets are taxed. But if a taxpayer hasn’t sold anything, there is no income and therefore no tax.

But the Eisner v Macomber ruling has many critics. However, the fact remains, while many wealthy people engage in borderline-illegal tax evasion, for the wealthiest Americans, taxes can be avoided easily and legally simply by borrowing against their assets instead of selling their holdings. This is why Elon Musk struck his pay deal with Tesla that he would be paid essentially nothing in salary, and everything in “incentive-based” equity.

In the here and now, the ultrawealthy use an array of techniques that aren’t available to those of lesser means to get around the tax system.

Certainly, there are illegal tax evaders among them, but it turns out billionaires don’t have to evade taxes exotically and illicitly — they can avoid them routinely and legally.

Most Americans have to work to live. When they do, they get paid — and they get taxed. The federal government considers almost every dollar workers earn to be “income,” and employers take taxes directly out of their paychecks.

The Bezoses of the world have no need to be paid a salary. Bezos’ Amazon wages have long been set at the middle-class level of around $80,000 a year.

For years, there’s been something of a competition among elite founder-CEOs to go even lower. Steve Jobs took $1 in salary when he returned to Apple in the 1990s. Facebook’s Zuckerberg, Oracle’s Larry Ellison and Google’s Larry Page have all done the same.

Yet this is not the self-effacing gesture it appears to be: Wages are taxed at a high rate. The top 25 wealthiest Americans reported $158 million in wages in 2018, according to the IRS data. That’s a mere 1.1% of what they listed on their tax forms as their total reported income. The rest mostly came from dividends and the sale of stock, bonds or other investments, which are taxed at lower rates than wages.

This is also why Buffett’s Berkshire Hathaway doesn’t pay a dividend. He has long argued that it’s better for him to take that money and bring in new investments for Berkshire. Those investments raise the stock price, creating wealth without a taxable event. Buffett delivered a detailed response to PP, which the organization shared in full.

As for loans, PP explains why borrowing is so much more cost-effective for the wealthiest Americans, who often have credit lines ranging into the billions of dollars.

The tax math provides a clear incentive for this. If you own a company and take a huge salary, you’ll pay 37% in income tax on the bulk of it. Sell stock and you’ll pay 20% in capital gains tax — and lose some control over your company. But take out a loan, and these days you’ll pay a single-digit interest rate and no tax; since loans must be paid back, the IRS doesn’t consider them income. Banks typically require collateral, but the wealthy have plenty of that.

The vast majority of the ultrawealthy’s loans do not appear in the tax records obtained by ProPublica since they are generally not disclosed to the IRS. But occasionally, the loans are disclosed in securities filings. In 2014, for example, Oracle revealed that its CEO, Ellison, had a credit line secured by about $10 billion of his shares.

Last year Tesla reported that Musk had pledged some 92 million shares, which were worth about $57.7 billion as of May 29, 2021, as collateral for personal loans.

For borrowers like Carl Icahn, who took out a massive $1.2 billion loan with Bank of American that was technically a mortgage (since it was secured by his Manhattan penthouse), borrowing offers two advantages: he doesn’t need to sell his assets, and he can deduct his interest from the final tax bill.

The IRS records provide glimpses of other massive loans. In both 2016 and 2017, investor Carl Icahn, who ranks as the 40th-wealthiest American on the Forbes list, paid no federal income taxes despite reporting a total of $544 million in adjusted gross income (which the IRS defines as earnings minus items like student loan interest payments or alimony). Icahn had an outstanding loan of $1.2 billion with Bank of America among other loans, according to the IRS data. It was technically a mortgage because it was secured, at least in part, by Manhattan penthouse apartments and other properties.

Borrowing offers multiple benefits to Icahn: He gets huge tranches of cash to turbocharge his investment returns. Then he gets to deduct the interest from his taxes. In an interview, Icahn explained that he reports the profits and losses of his business empire on his personal taxes.

Icahn acknowledged that he is a “big borrower. I do borrow a lot of money.” Asked if he takes out loans also to lower his tax bill, Icahn said: “No, not at all. My borrowing is to win. I enjoy the competition. I enjoy winning.”

As for whether the rich should owe taxes without registering income, Icahn insisted that taxing an individual “no matter what” wouldn’t be appropriate. “

“There’s a reason it’s called income tax,” he said. “The reason is if, if you’re a poor person, a rich person, if you are Apple — if you have no income, you don’t pay taxes.” He added: “Do you think a rich person should pay taxes no matter what? I don’t think it’s germane. How can you ask me that question?”

Unfortunately for Icahn, Jamie Dimon and their ilk, Democrats and their voters increasingly support a wealth tax, largely thanks to Sens. Elizabeth Warren and Bernie Sanders, who – thankfully for President Biden – split the left-wing vote during the Democratic Primary.

Opponents of these measures, as ProPublica points out, might argue that billionaires pay far more in taxes when one factors in corporate income taxes paid by the corporations they own, and after death, those with fortunes greater than $11.7MM pay a steep tax rate, the estate tax, which many (like Bill Gates) avoid by pledging their fortunes to “philanthropy”.

So how can this be remedied? PP seems to suggest that a ‘wealth tax’ is the best option, since increasing corporate tax rates wouldn’t directly impact the wealthiest (though it will likely impact the market returns of their assets, prompting their wealth to grow more slowly, or perhaps even shrink). On the corporate tax front, President Biden is trying to crack down on what PP described as a “golden era of corporate tax avoidance” with a new G-7 agreement on a minimum corporate tax rate, however they face resistance from low-tax countries like Ireland, Singapore and others.

Anti-trust authority Matt Stoller suggested one tactic that might help, however: Congress could pass a law forcing the IRS to publicize the taxes paid by the wealthiest Americans, attempting to shame them into compliance. Or, President Biden can pick up where President Trump left off on the anti-trust front and do more to stop giant megacorporations from being created in the first place, which is how these giant fortunes were built in the first place.

Easiest way to fix the IRS is simply make the tax returns of the superrich and big corporations public. https://t.co/zQoQ6HjxlW

— Matt Stoller (@matthewstoller) June 8, 2021