Property for the People

Federal land in Utah (Peery/AP/WSJ)

One of the first moves that a financially distressed company makes is to sell off unproductive assets to pay down its debt. Economist Thomas Sowell says that strategy should apply to the Federal government, which is not realizing revenue from its vast landholdings:

Some of that land—such as military bases—is used to house the government’s own operations. But the great majority of that land is not.

The rest of this government-owned land is so vast that there is little to compare it with—except whole countries. And not small countries like Belgium or Portugal. The amount of land owned by the National Park Service alone is larger than Italy. The land owned by the Fish and Wildlife Service is larger than Germany. The land owned by the Forest Service is larger than Britain and Spain combined. The land owned by the Bureau of Land Management is larger than Japan, North Korea, South Korea and the Philippines combined.

The idea of selling huge amounts of government-owned land is not new. Before the federal income tax was created in the early 20th century, land sales were sometimes a significant source of federal government income in the preceding two centuries. The prospect of large-scale land sales was considered during the Reagan administration, but the political opposition was too strong.

As of 2015, government-owned lands were valued at $1.8 trillion by the Commerce Department.

$1.8 trillion, even if adjusted higher from 2015 to current dollars, will hardly put a dent in the national debt of $36 trillion. However, it would be a mistake to limit the financial analysis of government assets to market values equivalent to undeveloped land.

Once these assets are sold, no longer will they be drains on the Treasury for their maintenance and security but contributing value to the economy as sites for residences and businesses. And with future positive contributions come future taxes.

After all, the entire United States west of the Mississippi was once as useless as Federal land is today. If Federal lands were to be used to their full potential, who knows what marvels may ensue?

About Elon Musk: Another Reason You Should Read Beyond the Headlines

The 2.800 sq. ft. home was the property of Gene Wilder. Elon Musk sold it to Wilder's nephew.

Elon Musk forecloses on homeowner is a headline that seems to confirm the worst suspicions about a billionaire and his greed; that is, until one digs into the story and the homeowner sings his praises (!). [bold added]

In 2020, tech mogul Elon Musk agreed to sell one of his Los Angeles homes to filmmaker Jordan Walker-Pearlman and his wife, Elizabeth Hunter, for $7 million. Walker-Pearlman had grown up in the Bel-Air house—the longtime home of his uncle, the late “Willy Wonka & the Chocolate Factory” actor Gene Wilder—and Musk agreed to loan the couple most of the money they would need to buy it.

“He could have sold it for so much more,” Walker-Pearlman, a film director and writer, told The Wall Street Journal in 2022. “His sensitivity to me can’t be overstated.”

The facts, as noted in the article:

2013 - Elon Musk buys the late Gene Wilder's home for $6.75 million.

2020 - Musk lists the home for $9.5 million but sells it to Jordan Walker-Pearlman for $7 million and provides him with a $6.7 million loan, a much higher advance than any bank would allow.

2024 - The Musk loan managers file a notice of default after Walker-Pearlman fell behind the loan payments. Walker-Pearlman lists the home for $12.95 million ("Musk’s representatives have made it clear that they have no intention of forcing a sale").

Normally a foreclosure is bad news for the homeowner, but look at the overall picture. Jordan Walker-Pearlman and his wife, Elizabeth Hunter put $300,000 down, lived for four years in a house they never could have afforded were it not for a billionaire's generosity, then stand to receive $5.25 million ($12,950,000-6,700,000 mortgage-1,000,000 selling expense plug estimate) on the sale.

That's a $4.950,000 profit, 16.5 times their down payment, a 1,650% return on investment. On a yearly basis, that's 105% per annum over four years [$300,000 x (1+1.05)^4].

Elon Musk has given away multi-million-dollar profits to someone he probably never knew four years ago. Are billionaires greedy? Sometimes, but not always.

Note to Kamala Harris' speechwriters: that's how one does a "return on investment" calculation. It would be nice if you show your work, but I'm not holding my breath.

The Banks Aren't X-ing X

(WSJ photo)

When Elon Musk bought Twitter in October, 2022, for $44 billion, most financial observers opined that he substantially overpaid for the stock.

Twitter had been a giant in social media. It was unrivaled as the nation's water cooler, where everyone went for the latest news and opinions on the events of the day. Although it attracted millions of eyeballs every day, Twitter couldn't figure out how to monetize the traffic. Neither selling ads or subscriptions generated revenue to justify a $44 billion valuation.

Twitter also came under fire during the Trump Presidency as it began censoring "misinformation" that turned out to be accurate, yet allowed through information that was later shown to be untrue. The bias all went in one direction, against conservatives and for liberals.

Elon Musk believed that he could make Twitter profitable, but I doubt that his primary motivation was investment, i.e., that it would be a slam-dunk turnaround winner. IMHO, his motivation was equally to create one of the few free-speech platforms that would be widely read. Elon Musk also has a provocative streak, and the purchase of an entity that the Progressives thought they controlled was guaranteed to infuriate them. As I wrote last year

Elon Musk's current net worth has been estimated at $241 billion. His purchase of Twitter was, IMHO, for both investment and personal enjoyment, and he seems to be deriving immense pleasure from seizing control of the Progressives' playground and reminding them daily that he has it. Losing 11% of his net worth on something that interests him is not the best outcome, but he can afford it.

Nearly two years after Twitter (rechristened "X") was taken private, the Wall Street Journal reported on X's financial status:

The $13 billion that Elon Musk borrowed to buy Twitter has turned into the worst merger-finance deal for banks since the 2008-09 financial crisis...

The banks that agreed to underwrite a deal that even Musk said was overvalued did so largely because the allure of banking the world’s richest person was too attractive to pass up, according to people involved in the deal. Musk and other investors ponied up around $30 billion to buy the company, giving the banks some cushion in case things were to go wrong.

The banks—which also include Barclays, Mitsubishi UFJ Financial Group, BNP Paribas, Mizuho and Société Générale—have been able to collect hefty interest payments from the X loans. They are generally for seven to eight years and carry rates several percentage points above the benchmark for investment-grade companies. And the banks could still ultimately be made whole if X is able to cover its interest obligations and repay the principal when the loans mature...

But nearly two years after Musk’s acquisition, X’s business is still struggling to climb out of the deep hole it fell into under his ownership—the company last year said its value had fallen by more than half, to around $19 billion.

While data indicate that use of the app rose amid the explosion of political news in recent weeks, there isn’t evidence that that is translating to a meaningful recovery in the advertising revenue that long sustained the revenues of the company, which pre-Musk struggled to maintain profits. Musk has gone from telling advertisers who fled the platform to “go f— yourself” to suing them and a trade group this month, claiming they illegally conspired to boycott X. The group has said it plans to rebut the claims in court.

Servicing the loans isn’t helping X’s financial health. Even before rates stopped rising, Musk said its annual interest payments total around $1.5 billion.

Banks typically have a number of legal ways to force X to make good on principal and interest. However, IMHO, they're being patient because they have their eyes on a bigger prize--upcoming financing and/or public offerings involving SpaceX, Tesla, and other Musk-controlled entities.

The deal presents a Catch-22 for the banks. On one hand, they are eager to be well-positioned to work with Musk and his six companies that range from electric-vehicle maker Tesla to Neuralink and xAI. Many view a possible initial public offering of Musk’s rocket company SpaceX or his Starlink satellite business as a fee-generating event that they don’t want to miss out on.

Elon doesn't forget those who stuck by him and who crossed him.

California Gas Prices: the Answer Always is More Regulation

The Phillips 66 refinery in Rodeo (Merc)

We've posted before about why California gasoline prices are higher than the rest of the country (gas taxes, "boutique" gas formula, banning new Internal Combustion Engine cars after 2035, etc.).

As refineries close down, the ones that remain have been accused of price gouging--any person capable of critical thought might ask herself why refiners are abandoning such a profitable business--but critical thinking about Progressive governance has been sorely lacking for decades.

The long-term supply outlook has become so dire that last week the Progressive government floated trial balloons about California seizing control of the refineries. Realizing that running refineries (and bearing responsibility for the inevitable debacles) was a step too far, Governor Newsom proposed a bill that he thinks will stabilize fuel prices. [bold added]

California Gov. Gavin Newsom on Thursday announced a first-in-the-nation plan to require petroleum refiners to maintain minimum fuel reserves to avoid supply shortages he says create higher prices at the gas pump.

The proposal would authorize the California Energy Commission to require state refiners to maintain a minimum supply, which would help prevent gas price spikes and save Californians hundreds of millions of dollars every year. Newsom said profit spikes for oil companies are overwhelmingly caused by refiners not backfilling supplies when they go down for maintenance.

The industry is likely to have to build storage facilities in order to hold the gasoline reserves. Also, the gasoline reserves themselves have a cost. As students learn in Finance 101, all assets on the balance sheet are financed through debt or equity (for analytical purposes debt is assumed). Adding storage and gas-reserve assets will increase interest expense which the companies will try to recover through higher prices.

Higher prices are what Governor Newsom was trying to avoid, but if the regulator doesn't allow the expense to be passed through to the customer, the exodus of refiners will accelerate. In the one-Party state, the answer to unforeseen consequences of regulation is always more regulation that will make the problems worse.

There But for the Grace of God Go I

Everyone I know has had a family member--sometimes it's my acquaintances themselves--who's had cancer. Whether or not the patient survives, it's a grueling experience for everyone. Years of tests, chemotheraphy, surgery, and/or radiation, plus the financial strain of paying for everything, await.

Fortunately--I realize that's not the appropriate word--most of the cancer victims I'm familiar with were retired or close to retirement, which means that they had Medicare or other health insurance to absorb most of the costs, and they probably didn't need to work to make up money shortfalls.

There is a growing cohort of Americans who are diagnosed long before retirement age, and, even if they survive the cancer, experience financial ruin. [bold added]

The economic burden of a cancer diagnosis is getting strikingly worse in the U.S., as drug and medical costs soar and more patients live longer with the disease. About 55% of cancer drugs introduced between 2019 and 2023 cost at least $200,000 a year, according to Iqvia’s Institute for Human Data Science. And an increasing number of patients are working-age, a group more likely to report financial hardship after diagnosis compared with older adults.

Nearly 60% of working-age cancer survivors report facing some financial difficulty. Many patients struggle to afford care and end up taking on debt, with some getting payday loans or running up credit cards. Cancer alone accounts for some 40% of medical campaigns seeking financial help on GoFundMe, research shows...

Among common diseases, cancer creates a uniquely difficult financial strain known as financial toxicity. Treatments with expensive medicines start immediately and come with a string of nonmedical costs. Chemotherapy and other treatments can leave patients too weak to work for weeks or months. This can result in a twofold blow, with patients losing income and their employer-sponsored health insurance. The financial fallout can last for years...

Many patients have to take time off—or actually stop working—after a cancer diagnosis. Patients who get chemotherapy are more likely to stop working within four years than those who don’t.

Could one straightforward way of relieving the financial burden be to buy up medical debts--for cents on the dollar because they've been sent to collections--then forgive them?

Undue Medical Debt (aka RIP Medical Debt) does exactly that--it's rated four stars by Charity Navigator--and is a 501(c)(3) organization that my church has donated to. RIP Medical Debt opened its books to economic researchers to find out whether paying off medical debt made a difference in people's lives. The results were disappointing:

[Stanford Prof. Neale] Mahoney and his collaborators find no evidence that buying and then forgiving medical debts that are in collections improved on average beneficiaries’ finances, access to credit, or their physical or mental health. People were even less likely to pay existing medical bills after their debt was eliminated.

Prof. Mahoney and other researchers, as well as RIP Medical Debt, are studying if earlier interventions might be more helpful.

Meanwhile, we're just lucky that we were able to enjoy good health during our working years. If either of us had been diagnosed with cancer in our 40's and 50's, when we didn't have much savings and had mortgages and tuitions to pay, then our lives would be immeasurably more difficult.

Neither a Lender or Borrower Be (to Relatives)

(Image from Etsy)

In many families the Bank of Mom and Dad (or Grandma and Grandpa) start as the lenders of last resort.

As the borrowers find out that their monied relatives can often be sweet-talked into loan extensions or even loan forgiveness the BOMAD becomes the lender of first resort.

(Disclosure: your humble blogger luckily does not have this problem in his immediate family but has first-hand knowledge of adult children and grandchildren who never fulfilled promises to repay "loans" for purchases of cars and houses.)

Now technology has stepped into the breach by formalizing and tracking these loans, making it less likely that relationships will be permanently strained. [bold added]

relationship-based loans come with inherent risks, and financial advisers generally recommend avoiding them. Roughly a third of Americans have had a falling-out over money, and the most common reason was because a loan was never paid back, according to a November survey from price-comparison platform Finder.

“Lending money puts your relationship as collateral for the loan, which is risky and can lead to resentment,” said Chris Hostetler, a financial adviser at Hilltop Wealth Advisors in Durham, N.C.

It should also be noted that the presence of "responsible" siblings complicates the situation. Resentments, especially if unequal treatment has been perceived since childhood, often come to a head when the failure to repay the loan is discovered and can poison relationships even after the parents die. Here's how software can reduce the risks of estrangement:

Platforms and apps like Namma, Pigeon and Zirtue have facilitated more than $100 million in loans between friends and family since 2020, offering practical tools and assisting with some tax record-keeping. These three services have reported low default rates, a trend financial advisers attribute to the accountability fostered by close relationships.

These loan apps and services can turn verbal agreements between friends and family into official, written contracts. They also keep track of payments and terms, and assist in adhering to other IRS guidelines, such as establishing a fixed repayment schedule.

There's anecdotal evidence that using these apps increases the likelihood of repayment. Borrowers agree to use them because a) they're in no position to argue and b) the terms are customizable and are almost always better than any bank. However, an app is not a panacea:

Even with the growth of these apps, financial advisers say those lending money should probably consider the money as a gift—if you can afford to go without it.

“If it’s a gift, then getting any money back from them is a treat,” said Tommy Lucas, a financial adviser at Moisand Fitzgerald in Orlando, Fla. “If they can’t get it elsewhere, there’s a good amount of risk that it may not be paid back.”

The old advice holds true: never lend money to a relative or friend unless you're willing to have it never paid back.

Double-dipping is Never a Compliment

If you don't understand this diagram, don't do double dips.

Some leveraged companies whose low-rate loans are coming due are resorting to "double-dip" loans:

Here’s how a double-dip loan generally works: A company creates a subsidiary that issues new loans and it lends loan proceeds to its parent on a secured basis, meaning the proceeds are backed by collateral. The parent also guarantees the new loans, creating a second claim on the assets. New lenders often get collateral not pledged to existing lenders. Such a transaction is called double-dip because the loan to the parent company, along with the loan guarantee, creates separate claims on company assets.

A double-dip provides additional claims against existing collateral via an intercompany note and guarantee. Double-dips must be allowed by a company’s credit agreements, and they usually are because contractual provisions have weakened over the last several years, [AllianceBernstein director Scott] Macklin said.

Companies drawn to these transactions generally have a significant amount of leverage and few options for refinancing short-term debt. Potential new lenders often are concerned a heightened bankruptcy risk for many of these companies would prevent recovering the par value of debt they provide, so they require additional protections, Macklin said.

If you're still with me, dear reader, here are my comments.

To vet the transaction a lender needs to diagram the cash flows and understand thoroughly what happens when a deal goes south.

On a macro level when money gets tight, structures get more complex. Securitizations and collateralized debt obligations were all the rage because buyers convinced themselves that the collateral was good in case the cash flows did not materialize. We know how that turned out.

Double-dips are simpler to analyze because they only involve one company and look like a way to borrow against assets that are unpledged. Prospective lenders should ask themselves: why doesn't the parent just issue the debt without all this complexity? Instead, they've got to lend to a subsidiary that's got the collateral and a parent guarantee that's worth little when things go south.

They've got to ring-fence the sub with enough protections so they can sleep at night. Frankly, I'd try to get some upside over and above the nominal spread as compensation for the risk.

From the borrower's point of view, these loans may carry a lower coupon than other alternatives, but legal, investment banking, sales-commissions, and compliance costs make them expensive.

Yes, I used to look at complex financial arrangements and didn't particularly enjoy it. But it was a living.

Re-Compartmentalization

(Image from weworkremotely)

Back in my day (OK boomer) we compartmentalized, that is, we didn't bring our personal problems to work. Compartmentalization was a societal value: employees wanted privacy, and employers were happy to comply. Managers were taught to evaluate workers on their performance only and ignore the personal stuff.

Then we de-compartmentalized. Over time it became acceptable to discuss family, health, financial, and even political issues, and the red lines between work and personal life were all but obliterated during COVID.

We are now seeing the beginnings of a pushback. Boundaries are re-appearing in worker-to-worker relationships.

Headline: Nobody at Work Wants to Hear About Your Student-Loan Payments

College debt is a new third rail in the workplace. The payment restart [after the COVID payment holiday] is proving more contentious than the halt at the onset of the pandemic...

Though some debt-free colleagues feel pity—and think student-loan forgiveness would be good for the economy—others can’t stand to hear griping. They tell me they know there are borrowers who didn’t understand what they were getting into and that student loans can be most cumbersome for people who didn’t finish their degrees. Yes, they’re aware that debt, or the absence of it, is often a function of privilege.

Mostly they view the college-debt crisis as a morality play. They did the right thing, paying back what they owe or making good decisions to avoid debt. Others should do the same or face consequences.

Better think twice before lamenting your loans in office chitchat.

For the record I had student loans from both college and graduate school. $10,000 seems like a pittance today, but that amount was over half of my annual first-year salary. I feel empathy but not sympathy for those who are saddled with student loan debt and poor job prospects.

If I were working today, I'd like more compartmentalization, please.

FICO Score: Shrinking Like a Lot of Other Things

Unofficial FICO score from one of our credit cards. Others show
scores in the 700's. Nice, but we're not applying for loans anyway.

ID crooks not only steal from bank and brokerage accounts, they also take out new credit cards and loans in victims' names.

As a protective measure we froze our accounts at the credit-reporting agencies in 2015; a thief could apply for a loan under our ID but the agency will not give a credit report to the prospective lender--hence, no loan.

Since 2015 we've had to "unfreeze" the Equifax, Experian, and Transunion accounts temporarily when we took out car leases and added a credit card. In general, however, we've been simplifying/consolidating our accounts and reducing debt obligations.

Reducing debt is commonly viewed as a virtuous activity, but it does lower one's credit score. Why do credit scores matter if we, like many retirees, don't intend to take out loans? [bold added]

Even people with pristine records of on-time payments can expect their scores to slip after they stop working. While stopping work doesn’t ding your credit directly, living on a fixed income and paying off old loans can lower a score, said Ethan Dornhelm, vice president of scores and analytics at FICO.

Credit scores matter to millions of retirees even if they are less likely to apply for mortgages, loans or other debt, financial advisers said. Scores are used in a range of insurance and healthcare decisions, from setting your premiums to whether you are accepted to an assisted-living facility.

We do have enough set aside for assisted living, if that indeed is our destiny, so keeping a high credit score is not important for that purpose.

The ego had already been crushed when the IQ score started shrinking and there was nothing I could do about it.

As we go gently into that good night, the high (IQ, credit, energy) shall be made low and the low (weight, A1C, blood pressure) shall be made high.

The Forever Bond

The business news through the weekend has been all about bank failures and their effect on interest rates and the economy. At the heart of the problem is the inability of banks to pay off deposits when customers show up during a bank run.

Bank deposits are "hot money" because they are liabilities that can be redeemed at any time. Silicon Valley Bank and Signature Bank failed because they didn't have enough cash on hand (or could get cash quickly enough from asset sales or borrowings from other institutions).

"When this bond was written on vellum in 1648,...
its wide margins were empty. Over many years,
the margins were covered with the records of the
interest returned to its owner."

At one end of the duration spectrum are bank deposits. At the other is a 375-year-old “perpetual” Dutch bond.

One of Yale’s most intriguing investments is a 375-year-old “perpetual” Dutch bond that still pays interest. It was issued by the Hoogheemraadschap Lekdijk Bovendams, a semi-public organization charged with maintaining the dike along the Lek river in the Netherlands.

The water authority was founded in 1323; its successor still operates today, in the province of Utrecht, as the Stichtse Rijnlanden.

The bond is a "bearer bond," which is a key plot point of many a murder-mystery novel:

The text makes clear that the bond was transferable, and payment was to be made to the bearer of the security, not to someone listed in a registry.

However, what may dissuade someone from acquiring the instrument via foul means is that the bearer must show up in person to receive the interest. Also, the amount at stake is not enough to quit one's day job:

Beinecke curator Timothy Young presented the allonge in 2015 at the Stichtse Rijnlanden offices to collect the subsequent twelve years of payments. The latter amounted to the equivalent of $153.

The water company paid its obligation, even when the Netherlands were annexed by France in 1810. When the debt was issued in 1648, the payment of same was viewed as a moral imperative. It's nice to know that some people and cultures still subscribe to that principle.

Scratching for Yield

This happens every time interest rates rise; it's just that the increases have been so sharp that the effect is noticeable to everyone, not just Wall Street and corporate treasurers.

Interest Rates Are Rising Everywhere—Except Your Savings Account [bold added]

The interest on my $45,900 money market fund rose
from .16% to .25% between August and September.
Sheer laziness was the reason I didn't do better.

Mortgage rates doubled this year to nearly 7%, and it has become more expensive to get a car loan or carry a credit-card balance. Yet the interest on savings accounts barely budged. In March 2020, the average annual yield on a standard savings account was 0.1%, according to Bankrate.com. It fell to a pandemic low of 0.06% after Americans’ personal saving rate peaked, and is now up to a wan 0.14%.

...[banks] still paying out meager interest can count on customer inertia: We fail to take advantage of better deals, because switching banks seems like a headache.

One reason savers haven't shopped around is inertia; another is the "headache" of switching. A third reason, IMHO, is that we've gotten used to making $thousands on the stock market, and scratching around for $hundreds in interest doesn't seem to be worth the trouble.

The great reset isn't just about re-evaluating priorities; it's about recognizing how hard it is to make a buck, working hard for it, and shopping around, both to lower household expenses and to raise the interest on one's savings.

By the way, I have not yet seized the opportunity to invest in the almost too-good-to-be-true yield (9.62%) on I-bonds. There is a $10,000 limit on an I-bond account, so under the old perspective it wasn't worth the trouble. Now that I'm scratching for yield, it is.

Coping with Inflation

(WSJ illustration)

The WSJ publishes 15 Ways Consumers Can Deal With—and Even Benefit From—Rising Inflation. Below are my comments in italics:

What’s your inflation rate?

In the CPI-U [consumer-price index for all urban consumers], motor fuel represents approximately 5% of assumed total household spending and is up 44% from April 2021 to April 2022. Used cars and trucks represent approximately 4% of the total and are up 22.7% over the same period. So if you can hold off on buying a new car, for instance, you can feel less of a sting from those big increases.

My personal inflation rate is lower than the average because the largest expenditures (mortgage and car payments) are fixed. Variable components have a discretionary element, e.g., chicken can be substituted for beef, and we can dine out two days a week instead of three. So we're lucky--we certainly feel the inflation, but the non-inflatable part of our budget is high, and we are willing to substitute lower-priced items in most cases.

Be aware of shrinkflation

Product companies will slowly “shrink” the contents of the packages and goods you buy while charging you the same price. This means a price hike for you. The package of strawberries now has five fewer strawberries. The bag of chips has more air and less chips than usual. The roll of toilet paper went from 264 sheets to 244 sheets...

One way to deal with shrinkflation is to try to stick with generic store brands because those tend to be the last to shrink...It also helps to only buy fruits and vegetables that are in season.

Perhaps there's brainwashing involved, but about half the time I don't find generics to be as good or effective as branded products, so that suggestion doesn't work for me.

Instead, my problem is kind of the opposite but is an opportunity to save money: don't buy more than you're going to use before it spoils. I buy too-large packages of perishable items, for example, two loaves of bread for $7.50 instead of one for $5, then have to throw out the second because of mold. Switching to smaller-size packages raises the per-item cost, of course, but the overall expense is lower.

Delay Social Security

Every year that Social Security benefits are delayed past full retirement age, the amount of the eventual benefit increases by 8%.

Thus, an individual with a full-retirement-age benefit at 67 years of $1,000 a month could increase their benefit to as much as $1,240 by delaying to age 70—an increase of as much as 24%. And the annual CPI increase is based on this higher amount.

My health is good but not great, and there's a good chance I will make it to 90. However, there are many personal friends, relatives, and acquaintances my age for whom stuff happened, so I claimed full benefits at 66 rather than defer until 70. Deferral is a good plan if you're in good health and are financially comfortable.

Buy the car you’re leasing

New-vehicle prices rose 13.6% since March 2021, while prices for used cars/trucks were up a whopping 34.7%. If you have a vehicle lease expiring soon, you possess a valuable way to avoid those higher prices.

That’s because your vehicle’s lease-end price was set when your lease began, prior to the current inflation...

Even if you really want to get rid of it, buy it anyway. It’s now a (lightly) used vehicle whose market value has jumped about 35% in the past year. So sell it yourself, and pocket the profit on the difference before buying something else. If you simply return it to the dealer, they will do the same thing and, of course, share none of the profit with you.

We bought out our leased car three months ago. It was the right thing to do, kind of like going to the dentist.

Seek a higher return on happiness

Take a moment and think about what you’re spending money on and why. And then stop spending money on the unnecessary things that don’t bring you joy. After all, if you stop spending money on something, by definition, you are no longer impacted by inflation in that area...

take just a week (a month is even better) and commit to deliberately reflecting on every single expenditure made during that period—from the auto-payment on that streaming service to filling up your gas tank—transformational things can happen...thinking about that one expenditure allows you to rethink where you are going—literally and figuratively.

COVID-19 caused a lot of people to reflect on their lives before inflation struck. What one needs vs. what one wants is an age-old question, but it's still relevant. I want the latest iPhone but the almost-four-year-old iPhone XS Max satisfies all my needs (except for status and techno-lust), so resist temptation!

Ask for a raise

The salary increases one normally gets are likely to be below the rate of inflation, so it is important to ask for higher raises...Given the state of the labor market—this time in favor of workers—summon up courage and go ask for the raise. You need it.

I only expressed unhappiness to management about my pay a couple of times in my career. Each time I was fully prepared with comps, a list of extra things I did, and even a worst-case scenario if the discussion went south and I had to leave the company. Even if the worst-case scenario is improbable, it's good to go through in your mind (see "happiness" above) and enter negotiations with the confidence that walking away from a job isn't so bad.

Time your expected purchases

Consumers are often advised to have cash and other liquidity available for unexpected expenses, such as house or car repairs or even medical bills. But there is another use for that cash on hand: making expected purchases on sale and ahead of time. While this only works for nonperishables, there is real value to be reaped by buying goods when the price is right and in quantities that make sense.

...households tend to hold inventories of consumer goods worth about $1,100 on average. By shopping strategically and optimally managing their inventories, households can potentially earn returns well above 20% on their “household working capital.” The key is not to stockpile too much at full cost and buy only when the price is right.

Stockpile supplies when prices are low. Clothing, however, carries the risk that tastes change: you may not like the swimsuit you bought on sale last winter.

Don’t add explicit inflation protection

While there’s nothing wrong with maintaining a long-term allocation to Treasury inflation-protected securities (TIPS) for diversification, tactically adding them as a hedge may not have the intended effect. TIPS performance is driven by unexpected changes in inflation expectations. So while inflation is high today, the likelihood of inflation expectations surprising to the upside going forward seems low now that the Federal Reserve is actively tightening monetary policy.

Gold, meanwhile, has been an awful inflation hedge since gold futures began trading in 1975, in part because they tend to rise in anticipation of inflation (rightly or wrongly) rather than with inflation.

Even with the recent period of higher inflation, average inflation is less than 3% over the past five-year and 10-year periods. So rather than adding an explicit inflation hedge, you are better off reviewing the underlying assumptions of your financial plan to focus your attention on items that are within your control.

Plus, most investors already own the best asset to combat inflation: stocks. A big reason stocks beat inflation over time is that corporate earnings and dividends tend to grow faster than inflation.

I followed my own advice from one year ago, and it holds up: If we are going to reprise the 1970's, shift some investments into real estate, gold, art, or more stable foreign currencies that can keep up with dollar inflation. (I would recommend cryptocurrencies, but I don't understand them well enough.) Get out of bonds and low-growth dividend paying stocks. If you have variable-rate loans, convert them to long-term fixed-rate debt.

Control your lifestyle creep

spending inertia is very common and, oftentimes, there are some expenses that can be cut out with minimal impact. A good place to start this budgeting process is to simply pull all of one’s bank account, credit-card and debit-card statements and look for any recurring expenses for subscriptions or services that may no longer be needed.

COVID's silver lining: we bundled our shopping expeditions, doctor's visits, etc. to minimize car trips before gas spiked, cut back on recreational travel, and cooked more often. We're spending less in total than we did before COVID but I draw the line on subscriptions; we're keeping them all.

Account for shadow inflation

Do you remember when your restaurants gave you free bread and butter? When soda refills were free? Or when your hotel room was automatically cleaned, and you could count on fresh turned-down sheets before bedtime? With the cost of goods rising rapidly, along with the current labor shortage, many of the services we have grown accustomed to are no longer included without an extra fee...

Since it is likely right now that the cost of goods and services will continue to rise, build a buffer into your budget for spending on meals and other services that are affected by this cost increase.

The message seems to be that freebies are a vanishing species, hence inflation is worse than we thought, and we should "build a buffer." Very helpful! (sarc)

Buy inflation-indexed stocks

Investors should purchase stocks from established companies—such as supermarkets—whose revenues are indexed to the inflation rate. Inflation is a basket, and the best thing correlated with the change in the price of the basket is exactly the basket. Food is sold in supermarkets and, therefore, the inflation rate of food is highly correlated with the revenues of those companies. Because those companies have small margins, their earnings also are correlated with the inflation rate. Hence, buying a claim on the revenues or the earnings has to be correlated with the inflation rate.

My own preference is for real estate stocks or the hard asset itself. Though risky, real estate returns, especially with leverage, exceed inflation.

Update your résumé

I encourage individuals to update their résumés. Given the tight job market, there’s an opportunity for many employees to find new positions that will pay them more—and a higher salary is obviously a benefit in an inflationary environment. But workers may be able to find a job that is more personally satisfying as well.

The retirement nest egg is big enough so that I don't have to go back to work...yet. If inflation continues for a couple more years, then the résumé will have to be dusted off.

Watch for falling prices

One strategy for dealing with inflation is accelerating certain purchases. This might seem counterintuitive given the impact of inflation on the economy. However, in certain scenarios it is possible to selectively capitalize on the current environment. Many consumers will need to cut spending on discretionary items, so a lack of demand may cause the prices of various nonessential goods to decrease. This can present a unique buying opportunity.

If you planned to pursue new hobbies in retirement, for instance, and are fortunate enough to have ample cash flow, it’s possible to make the most of this inflationary environment by accelerating the purchase of select recreational items as their prices fall. The key is to identify where you have some financial flexibility and make the most of what is otherwise a very challenging situation.

Prices fall with products that no one else wants (duh!). Time to fill your space with hardcover books and CD's.

Invest in alternative energy

Investors may want to consider alternative-energy stocks as an inflation hedge...But the war in Ukraine has further underscored the importance of sourcing alternative energy...While traditional energy may outperform over the near-term, the drive toward clean energy seems unlikely to reverse and may present a better long-term opportunity for socially responsible investors and the planet.

Even if you don't buy alternative energy stocks, get out of fossil fuel companies like Chevron and Exxon-Mobil. Their shares have doubled in the past year, so take the profits. The long-term prognosis is bad.

Better insulate your home

One of the best investments for a return on your dollar is to better insulate your home. This is particularly important given the current higher costs of fuel. Often, you can get a free energy assessment from your power company, with a to-do list for lowering your energy costs.

The upgrade will eventually pay for itself—sometimes in as little as three to five years—and you will have lower heating and cooling bills that will outlast this inflationary period. If it takes five years in saved electrical and fuel bills to recoup the expense, you likely just got a lifetime 20% return on your insulation investment. And as the costs of fuel and electricity go up, so does your percentage saved.

Insulating the house has been recommended for decades, and we haven't done it because we're highly allergic to the dust that project will create. Besides, it's cheaper to wear a sweater during the winter and go to the air-conditioned mall, library, or theater during the summer.

A few final words of advice, applicable to non-inflationary times, too:

1) Temper your lifestyle to be less than your income (easy to say, but pride and pleasure are powerful obstacles);

2) Pay off your credit card balances every month;

3) Do all you can to make your marriage work.

Trump's Taxes: Not Surprising if You Know the Basics

Many pundits are posting their opinion about the NYT's feature on President Trump's income taxes. I will do so only lightly because I haven't seen the tax returns. (Responsible analysts also make this disclaimer.)

Haven't we learned anything from the quick takes on stories like the Covington Catholic School kids, Ferguson's "hand's up, don't shoot" falsehood that was debunked by the WaPO and NYT, Jussie Smollett's faking his racist, anti-gay attack, and many other news reports that were later proved wrong?

Wait for other, non-NYT analysts to weigh in on the President's taxes, a subject more complicated than the above topics.

Understanding the income taxes of a man who controls $billions of real estate requires many hours of study of source documents by accountants and lawyers to present a "fair" picture of his finances (fairness about the tax code is something very different).

Just because you do your own tax return doesn't mean you can have a decent understanding of how the tax returns of "hundreds of companies" (NYT's words) are prepared. It's like me reading a few sci-fi books and discussing time travel and black holes with a theoretical physicist.

Regarding my own background, I worked 24/7 during the busy season in the Tax Department of a Big Eight accounting firm over 40 years ago. It was the first time I was exposed to how very wealthy families build a network of interlocking entities to organize their businesses.

Those who work on Donald Trump's taxes likely refer to a chart depicting the ownership, cash flows, and goods-and-services flows among the entities. Trump accountants, because of the heavy emphasis on real estate, should be familiar with at-risk rules, the difference between recourse vs nonrecourse debt, the tax attributes of C corporations, S corporations, partnerships (limited and general), and single-owner LLCs.

They also should be acquainted with issues such as controlled groups, consolidated returns (where going from 79% to 80% corporate ownership has important ramifications), fiscal year vs calendar year elections, inside basis vs. outside basis of pass-through entities, foreign tax credits, NOL carryforwards and carrybacks (different for individuals vs corporations), and entity formation and liquidations, to name a few.

These complicated arrangements are often created for reasons other than income taxes. 1) Certain structures minimize estate taxes; 2) In businesses with high-value assets, each asset and its related debt are housed in separate entities for their legal protection; 3) These entities are billed for management fees and administrative expenses by other entities. Who owns the management companies? That's worthy of a separate discussion.

After spending hundreds, maybe thousands of hours, looking over the documents, the NY Times doesn't headline a meaningful finding, such as an in-depth assessment of the financial health of Trump Consolidated. Instead it leads off with

Donald J. Trump paid $750 in federal income taxes the year he won the presidency. In his first year in the White House, he paid another $750.

He had paid no income taxes at all in 10 of the previous 15 years — largely because he reported losing much more money than he made.

To the Times it doesn't matter if the "hundreds of companies" Donald Trump controls have paid millions in taxes. It doesn't matter if he paid millions in tax years other than 2016 and 2017.

His accountants, as they were supposed to, used their knowledge of the tax code to minimize the taxes on Form 1040. Undisclosed are how much taxes were paid on Forms 1065, 1120, 1041, and others.

If the President is re-elected, I hope that he appoints a public-relations tax accountant to make sure he pays some individual income taxes each year. For example, one of his companies could declare a special distribution or sell a minor asset for a gain. There are countless ways to be tax-positive if your name is Donald Trump. He just has to remember to do it.

Unprecedented Debt + Encouragement to Borrow More

(Note: the above 75-year debt chart shows debt as a percentage of U.S. GDP and is from the Wall Street Journal)

Even before the coronavirus-induced recession, United States consumers, businesses, and state and local governments had borrowed at unprecedented levels.

The conventional worry is that paying back the debt will be a drag on the recovery: [bold added]

The debt surge is set to shape how governments and the private sector function long after the virus is tamed. Among other things, it could be a weight on the expansion that follows.

Many economists believe low interest rates will help the nation manage the soaring debt load. At the same time, they say high levels of private sector debt could lead to a period of thrift, slowing the recovery if businesses and individuals try to rebuild their savings by holding back on investment and spending.

But these are unconventional times. Paying back the debt is a future concern. The problem is making more loans now to keep businesses alive.

In normal recessions businesses tap their lines of credit. If they reach their limit, banks will be nervous about lending more. The unavailability of credit flushes weaker players out of the system and primes the economy for recovery.

However, all sectors of the economy are struggling. Some of the biggest employer names--who were doing fine a few months ago--will collapse without funds to keep them going, The "normal recession" model of weeding out the weaker companies won't work if entire sectors--for example, the airlines--are gone.

Because prudent lenders won't make loans or purchase debt in this environment the Federal Reserve has become the lender of last resort for the entire economy, not just the banking sector.

On Thursday, the central bank expanded those efforts and further unveiled a new generation of lending facilities to prevent a liquidity crunch from turning into a solvency crisis for American businesses, states and cities.

The Fed said it would offer through banks four-year loans in which payments can be deferred for one year to businesses with up to 10,000 employees or revenues of less than $2.5 billion. Loans through this Main Street Lending Program, which will initially fund up to $600 billion in loans, will be subject to restrictions on stock buybacks, dividends and executive compensation. Firms that have received separate forgivable loans for payroll costs from the Small Business Administration will be eligible to seek Main Street loans as well.

To ease funding strains for cities and states seeing large revenue drops and rising expenses from simultaneous economic and health crises, the Fed said it would purchase up to $500 billion in short-term debt directly from U.S. states, the District of Columbia, U.S. counties with at least two million residents, and U.S. cities with at least one million residents.

Your humble blogger was taught in Paleozoic-Era economics courses that the Federal Reserve only participated in capital markets by buying and selling Treasury Bills. In succeeding crises the Fed bought long-term Treasuries and bank debt.

Now the Fed is buying corporate debt--even some risky pieces that pension funds won't touch--and the debt of state and local governments. It has crossed a line and can't go back. ("Why are you letting [State name] go bankrupt?")

Eventually the tidal wave of government debt and paper money will cause an inflation that will dwarf that of the 1970's. Thankfully, with a life expectancy of perhaps 20 years, I won't have to suffer through much of it.

Steep Price for Corporate Virtue

Virtue Signaling by individuals is questionable, but it only affects the person doing it. When a business virtue-signals, it can divert management's attention from key missions like serving customers and earning a profit for shareholders. Such is the case with Pacific, Gas, and Electric, now bankrupt, which curried favor with the green crowd. [bold added]

(Chronicle photo)

The California utility’s moves over the past 10 years to rely more on renewable energy sources such as wind and solar resulted in high scores on environmental, social and governance [ESG] metrics, which are considered by many investors to be a positive factor in choosing a stock and used by others to manage risk...

Both firms evaluate companies on a broad range of issues. Under the heading of environmental, for example, MSCI and Sustainalytics assess corporations on issues such as carbon emissions, raw-material sourcing and climate-change vulnerability.

ESG is a poor predictor of financial success:

2015 VW share price after cheating 

as of November 2018, Sustainalytics rated PG&E in the top 10% of its peers in the environmental category, and the firm had singled the California utility out in 2017 as one of 10 companies world-wide best positioned to take advantage of emerging ESG trends...

PG&E isn’t the only high-rated company that has faced an ESG-related selloff in the past year. Facebook shares have fallen more than 20% since its peak over the summer, a decline that many analysts attribute to its handling of a data-privacy controversy...

Similarly, Volkswagen was historically viewed as a strong ESG company before the 2015 disclosure that the German auto maker systematically cheated on emissions tests. In that case, MSCI raised governance concerns about the firm ahead of the scandal and later attributed “Dieselgate” to Volkswagen’s mismanagement....An investor who bought Volkswagen shares in April 2015 would show a loss of more than 35% on the investment.

With its very existence at stake, PG&E seeks to shed itself of long-term renewable energy contracts that gave it a high ESG rating.

PG&E has agreements to purchase power from about 350 energy suppliers representing $42 billion, according to Bankruptcy Court papers. The company says it entered into most of the agreements to satisfy California’s renewable energy requirements, and the contracts typically last for 15 to 20 years or more.

Renewable energy prices have fallen significantly since the contracts were put in place, creating an opportunity for PG&E.

When a company touts all the great things it's doing for the environment and "social justice", take a second look. If it's more than PR, do your portfolio a favor and walk away.

Still Going Strong

"YES": the 3 leading currencies (Dreamstime graphic)

In 2011 Standard & Poor's downgraded the U.S. credit rating from AAA to AA+. The rating agency cited government debt (then $11.4 trillion) and mismanagement of fiscal policy. Not following suit, Moody's and Fitch, the other two major rating agencies, maintained their triple-A rating on U.S. Debt

7½ years later, outstanding government debt has nearly doubled. Citing this as his reason, Starbucks chairman Howard Shultz is running for President: "I think the greatest threat domestically to the country is this $21 trillion debt hanging over the cloud of America and future generations."

Meanwhile, S&P, Moody's, and Fitch have not changed their respective ratings on U.S. debt since 2011.

But what does the rest of the world think? WSJ -- Dominant Dollar Bests Challengers:

after a drawn-out crisis in the eurozone, and a more recent slowdown in China, the dollar’s international pre-eminence looks safer than ever. Concerns that a U.S. administration with an America First platform would diminish the dollar’s global role haven’t been borne out, either.

U.S. debt may be risky, but the dollar is still on top because currencies, which are an imperfect proxy for national strength, are graded on a curve.

International use of the euro, once the dollar’s clearest challenger, has diminished since the eurozone sovereign-debt crisis raised the specter of default on debts previously believed safe. The euro’s share of global reserves shrank to 20.5% in the third quarter of 2018 from 28% in 2009...

But to make the yuan an international force, economists and investors have long maintained, Beijing must permit freer movement of money across its borders.

Instead, facing a flood of capital outflows in 2015-16, it clamped down on investment outside of China.

You can't replace something with nothing, and the dollar is more something than its rivals.

Not All of Them

A few years ago I had a short-term need for $90,000 (don't we all?). There were drawbacks to raising the money through stock sales or IRA withdrawals; the $90,000 would be replenished in three months, and these methods would result in income taxes--about $20,000--that did not have to be incurred. So I decided to borrow using margin from Charles Schwab.

Under a margin loan account holders can borrow up to 50% of the value of their stocks. It's risky to borrow the full 50%, because the borrower would be subject to a maintenance call if stocks go down, as they sometimes do 😀. (The broker would sell enough stock to pay down the margin loan so that the ratio was back to 50%). In my case $90,000 was safely under 50% of the stock value, so a margin/maintenance call was not a worry.

These changes to 0.075%-1.825% don't look so bad

The borrowing rate that Schwab charged was about 7%, so when I got back the $90,000 in 2½ months I paid off the margin loan immediately. (Aside: margin loans are a form of secured borrowing--as are home mortgages--where the lender has the right to sell assets to recover its loan. IMHO, a secured loan backed by publicly traded stocks should bear a low interest rate because of the low risk to the lender, but that's just me.)

until you notice the Base Rate is 7.75%

Anyway, I've taken steps to ensure that I won't be using margin debt any time in the future.

A couple of months ago we noted how the interest that Schwab pays on its cash deposits was well under 1%. So you lend them cash at 0.2%; they lend it back to you for more than 7.75%.

I like the services and products we get from Schwab, but not all of them.

Borrowing Is Easy, Repayment Is Hard

Anglican priest and Guardian columnist Giles Fraser says the current Greek-German-euro crisis harks back to different perspectives on the Crucifixion(!) [bold added].

As Mr Fraser recalled, traditional Protestant and Catholic teaching has presented the self-sacrifice of Christ as the payment of a debt to God the Father. In this view, human sinfulness created a debt which simply had to be settled, but could not be repaid by humanity because of its fallen state; so the Son of God stepped in and took care of that vast obligation. For Orthodox theologians, this wrongly portrays God the Father as a sort of heavenly debt-collector who is himself constrained by some iron necessity; they prefer to see the passion story as an act of mercy by a God who is free.

The Greeks, obviously steeped in the Orthodox notion of a merciful God, had over 15 years of fun in the Mediterranean sun at the expense of those dyspeptic German bankers. C'mon, Angela, forgive us our debts and we'll try real hard to pay you back next time.

Clearing One's Debts....or Not

Like many others, I like to do a bit of tidying up before the New Year....no, not the major clutter-clearing project that I've been putting off, but the low-hanging fruit of year-end charitable contributions (both money and used articles), paying off medical bills that required extensive analysis, and dumping magazines that I never got around to reading.

Concerning the second item, paying off one's debts--even small ones--is liberating. They nag at your humble observer's conscience, and reminder notices are a cause of ongoing stress.

(Image from Fox News)

That's why I never understand rich people who don't pay debts that they can easily handle (unless they're questionable or there's some moral principle involved). Carly Fiorina, ex-HP CEO and failed California Republican candidate for the Senate, is gearing up for a Presidential run [bold added]:

In 2010, Fiorina and husband Frank claimed a combined net worth of $30 million to $120 million....her 2010 campaign still owes $486,418 to creditors. Who wants a deadbeat for president?

Like the evil George Wickham in “Pride and Prejudice,” Fiorina skipped California owing buckets of cash to her one-time pals. She owes $60,000 to former campaign manager Marty Wilson, who now works for the California Chamber of Commerce, and another $20,000 to his former communications firm. She shorted her lawyer Ben Ginsberg, formerly of Patton Boggs, to the tune of $44,000. She owes $3,750 to a former press secretary, $5,000 to another communications aide and $7,500 to her erstwhile political director. She stiffed political consultant Joe Shumate, who died in 2010, to the tune of $30,000. (Yes, she stiffed a stiff — even though she lauded Shumate as a “trusted adviser and friend” upon his death.)

Based on this track record, why would any political consultants or lawyers do any paid work for her?

it takes a certain kind of brass to not pay off your political operatives, and then set up shop to run for the highest office in the land. [Former campaign manager Marty] Wilson isn’t sure who will want to work for Fiorina, but he does offer a suggestion for Fiorina 2.0: Ask for the money up front.

"Neither a borrower, nor a lender be; For loan oft loses both itself and friend." In Carly Fiorina's case she'll lose a lot of votes, too.