The Amazon Conundrum

March 5, 2019

While New Yorkers continue to debate the loss of Amazon from a site in Queens, the discussion seems to have lost sight of what Amazon contributes to the long-term well-being of our society.

Amazon is not a friend to America, has contributed very little if anything to our overall economy. The stock is currently grossly overvalued with a P/E ratio in excess of 80x.

Jeff Bezos, the founder of Amazon, has an estimated net worth of $165 Billion, primarily as a result of a business model which has dramatically changed the U.S. retail sector.

Most egregious? Amazon paper earnings for 2018 are $11.2 Billion, and early reports indicate that they will pay $0 in federal income taxes on these earnings.

(Amazon reported $5.6 Billion in U.S. profits in 2017 and paid $0 last year.)

Amazon creates jobs? True. Good jobs? False.

Economic scholars generally agree that a ‘living wage’ in the NY Metro area for an adult with one child is $31/hour, with 2 children $41/hour.

Amazon announced in early October 2018 that it would raise the minimum wage to $15 an hour for its U.S. employees.

Meanwhile, much like Walmart, Amazon has created a business model which effectively eliminates competition and destroys small business.

The hot topic today is the talk of ‘Democratic Socialism’ being portrayed by some pundits as a death threat to American democracy.

The real threat to American democracy is the proliferation and exponential growth of a few family-controlled and vertically-integrated oligarchies which are capable of re-creating the Feudal System which characterized medieval Europe during the Middle Ages.

“Those who fail to learn from the lessons of history are bound to repeat the outrage of history.”

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National Emergency

February 13, 2019

Yes, we are facing a national emergency, and it’s not along our southern border.

Our real national emergency is our National Debt.

Let’s first agree that when the U.S. federal government runs a deficit, or spends more than it receives in tax revenue, the U.S. Treasury Department borrows money to make up the difference.

Next, let’s agree that our national debt is the amount of money the federal government has borrowed through various means, including: (1) by issuing bills, notes and bonds which are bought by investors (domestic and foreign), including the public, the Federal Reserve and foreign governments; (2) through intra-governmental debt, essentially money borrowed from trust funds used to pay for programs like Social Security and Medicare.

The great majority of economists and economic and fiscal analysts tend to agree that the significance of national debt is best measured by comparing the debt with the federal government’s ability to pay it off using the debt-to-GDP ratio, simply by dividing a nation’s debt by its gross domestic product.

Various sources have estimated that a healthy debt-to-GDP ratio is in the 40% to 60% range.  A longitudinal study conducted by World Bank economists published in 2010 estimated that in highly developed countries, 77% was a ‘tipping point’ where productivity and potential economic growth was constrained by adding additional debt without addition of incremental revenue.  (In emerging economies, they estimate that 64% is the tipping point.)  In either case, potential for default begins to increase once the tipping point has been breached, thus putting upward pressure on borrowing costs.

The first instance when U.S. debt-to-GDP ratio exceeded 77% was toward the end of World War II.  In the post-war years, our national debt shrank in comparison to the booming post-war economy, and the debt-to-GDP ratio fell as low as 24 percent in 1974.

Recession and rising interest rates during the Carter administration put upward pressure on the debt-to-GDP ratio, and once the tax cuts enacted during Reagan’s first term combined with increased spending on both defense and social programs, the debt-to-GDP ratio reached 50 % in July 1989.

Economic growth in the ‘90s, combined with tax increases under both Presidents George H.W. Bush and Bill Clinton helped keep the debt load in line, and by the end of December 2000, our national debt was about 55% of GDP.

Following the terrorist attacks on 9/11/2001, U.S. military spending spiked, yet tax cuts enacted in 2001 and 2003 during the George W. Bush administration combined with a mild recession in 2001 and the Great Recession beginning in 2007 caused significant decreases in tax revenues. By the time Barack Obama took office in January 2009, the debt-to- GDP-ratio reached 75%.

Deficit spending is one of the key tools available to stimulate economic recovery, and by the time of Obama’s 2nd inauguration in January 2013, the U.S. debt had grown to $16 Trillion – a debt-to-GDP ratio of 101%. By that time, it was clear that the economic stimulus of deficit spending had worked, evidenced by an expanding U.S. economy; signs of ending the wars in Afghanistan and Iraq; resurgence of the U.S. stock market; continued job growth; and other positive economic indicators.

All of these positive signs at the beginning of 2013 pointed to the need to rein in government spending and to strategically increase revenues (i.e. raise taxes).

Yet, the Congress has stubbornly refused to deal with the reality that our U.S. debt-to-GDP ratio has remained above 100 percent since 2013.

In early 2018, an analysis by the nonpartisan Committee for a Responsible Federal Budget concluded that the Tax Cuts and Jobs Act signed into law in late 2017 will push the U.S. national debt to $33 Trillion — 113 % of GDP — by 2028, a ratio not seen since immediately after World War II.

The Tax Cuts and Jobs Act is a sham (and a scam) which created a situation exactly opposite of what responsible elected officials should have supported.  The sooner it is  amended, repaired or repealed, the sooner the American people will be transitioned into a less dangerous and more stable and sustainable economic environment.

Common Sense Tax Reform

January 30, 2019

Massachusetts Sen. Elizabeth Warren recently announced the launch of an exploratory committee to consider a 2020 White House bid, vowing to be a tenacious advocate for economic fairness and rebuilding the middle class.

Sen. Warren subsequently proposed an “Ultra-Millionaire Tax” through which her campaign committee promises to raise some $3 Trillion in new federal tax revenues over the next 10 years.

Her proposal is not a tax on income; it is a tax on assets.

She identified some 75,000 U.S. families which hold assets in excess of $50 Million.

Her proposal is interesting, and it seems relatively simple.  All families with assets between $50 Million and $1 Billion would owe a 2% annual tax on assets valued in excess of $50 Million; and, the rate would rise to 3% on those assets that exceed $1 Billion.  What could go wrong?

Most appealing in the Warren proposal?

Senator Warren claims that this approach would affect just the wealthiest 0.1% of Americans, and that the incremental revenue generated through this novel approach could help rebuild the American middle class by providing for universal child care; student debt relief; and other critical societal needs.

What could go wrong?  Let us try to explore some possibilities.

The Warren plan anticipates that if your family holds $750 Million in gross assets, you would be facing a potential annual tax of $14 Million on those assets.

What the plan doesn’t mention is that for a fraction of that amount, you could employ lawyers and other experts to help value your assets quite differently.

One recent case study was illuminated by some extensive research conducted by the New York Times on the estate of Fred Trump.  https://www.bloomberg.com/opinion/articles/2018-10-03/trump-taxes-fred-s-scheme-was-quite-impressive

Stay tuned.  There is more to come from The Walrus on “Common Sense Tax Reform”!

Since Donald J. Trump announced his candidacy for president in June 2015, there have been many commentaries on his financial history — particularly because he has refused to release his tax returns.

In 2016, David Barstow, Susanne Craig and Russ Buettner of The New York Times obtained Trump’s 1995 tax returns, and for their article published on the front page of The New York Times on October 3, 2018, they worked together for over a year to investigate the wealth that the president inherited from his father.

The narrative in the NY Times investigative piece is compelling.

Like most rules and regulations, U.S. tax law assumes that people will voluntarily comply in the interest of equity and fairness across the board.  If the laws are not fair, they should be amended, not circumvented.

Having worked in the real estate and financial services industry for many years, I am familiar with many of the strategies exposed in the article, particularly the rather arbitrary and capricious use of independent appraisals to determine market value at a point in time.

Where many — if not most — wealthy families and individuals pay their fair share of taxes (perhaps grudgingly), the Trump family has notoriously and conspicuously fought against taxing authorities, continually challenging assessments and levies as a part of their overall family business plan.

Note a recent kerfuffle in Westchester County, NY where a Trump National Golf Club is located.

With a 65,000 square foot club house, private gourmet restaurant, swimming pool, tennis pavilion and courts, the 18-hole, 7,261 yard Jim Fazio designed course is situated on 140+ acres of prime real estate in the Town of Ossining, NY.

This ultra-exclusive private club demands a hefty 5-figure initiation fee from new members, with minimum annual dues of $19,400.

In his 2017 Executive Branch Personal Financial Disclosure Report (filed 6/14/2017), Donald Trump revealed the value of his ownership interest in Trump National Golf Club – Westchester at ‘over $50,000,000.’ with annual personal income attributable to the Club of $9,771,428.

Yet, in 2015, the Trump Organization sued the town of Ossining to lower its assessment from the 2014 value of $13.5 Million to $1.4 Million in order to reduce property and school taxes.

After the feud with Ossining became public, Trump’s lawyers raised the dollar value of the golf course, but it was still nowhere near the official 2015 assessment of $14.3 million and 2016 assessed value of $15.1 million.

The moves are consistent with repeated efforts by the Trump Organization to challenge property valuations in an effort to win massive local property tax reductions, not to mention the potentially illicit impacts on federal, state and local income tax obligations which in many cases are directly linked to these local assessments (valuations).

Over the past several years, Trump has lauded himself as “one of the most successful businessmen in the world,” who paid “no more tax than legally required.”

“I have brilliantly used [the U.S. tax] laws,” Trump said at a campaign event in October 2016. “I was able to use the tax laws of this country, and my business acumen, to dig out of the real estate mess — you would call it a depression — when few others were able to do what I did.”

It was a reported $916 Million net operating loss in 1995 which gave Trump the ability to avoid paying taxes on more than $50 Million in annual taxable income over the following 18 years.

Make America Great Again? Only if others are willing to cough up the tax revenues needed to pay the freight.

“We Fed an Island”

September 15, 2018

While U.S. President Trump continues to blame the people of Puerto Rico and their elected local leadership for delays, inefficiencies and various failures in the response to the aftermath of Hurricane Maria (2017), Trump is lavish with praise for the wonderful response by his administration.

“I think that Puerto Rico was an incredible, unsung success,” Mr. Trump said.  “I actually think it is one of the best jobs that’s ever been done with respect to what this is all about.”

Meanwhile, other sources do not agree with President Trump’s assessment.

One of the true unsung heroes involved in the Island’s recovery from Hurricane Maria is José Andrés, a chef and restaurateur who helped organize others from the food industry to form a veritable army comprised of both professionals and volunteers to feed residents, medical professionals and other disaster response workers.

A year after the initial response to Maria began, José Andrés has released a book reflecting on his experiences and lessons learned from the disaster response.

This article from the Washington Post describes his passion and introduces the book in a manner I wish I was able:

https://www.washingtonpost.com/lifestyle/food/jose-andress-riveting-we-fed-an-island-calls-for-a-revolution-in-disaster-relief/2018/09/05/b126d766-ad70-11e8-b1da-ff7faa680710_story.html?utm_term=.df529f66adc0

Labor Day Reflections

September 2, 2018

Labor Day, the first Monday in September, is an outcome of the U.S. Labor Movement and is dedicated to the social and economic achievements of American workers. It is an annual national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country.

The first Labor Day holiday was celebrated on Tuesday, September 5, 1882, in New York City, in accordance with the plans of the Central Labor Union.  It didn’t take long for the federal government to recognize it (1885), and it became a national holiday in 1894.

The inspiration of Labor Day is closely tied to both the roots of Capitalism and the emergence of Labor Unions in the U.S.

In 1983, the first year for which union data are available, the union membership rate was 20.1 percent and there were 17.7 million union workers.

By 2017, the union membership rate had declined to 10.7 percent, and – most alarmingly – union representation of public-sector workers (34.4 percent) had become more than five times higher than that of private-sector workers (6.5 percent).

The origin of Capitalism as economic system assumed that private individuals or families who directly invested in (and directly took on the risks of loss) would own the means of production, distribution, and thus ensure a free and fair market for goods and services: They had real skin in the game.

Relying on the theories that: (1) people (consumers) are rational and will seek maximum utility from their economic actions; (2) information is transparently available to all who participate in the economy; and (3) markets are self-correcting; the concepts of Capitalism are compelling to most people when contrasted to cooperatively or state-owned means of wealth.

Worker exploitation was one of the early criticisms of the Capitalism model. The Labor Movement in the U.S. was instrumental in creating a buffer (safeguard) to help ensure a safer workplace, fair wages and reasonable hours and benefits.  The Labor Movement was enabled by Labor Unions.

Today’s version of Capitalism has morphed into ownership of corporations by passive investors (mutual funds, pension funds, venture funds, etc.) which seek maximum current ROI with little or no regard to sustainability or externalities.

The executives who are charged with achieving the expectation of the passive investors are “hired guns” who begin with no skin in the game, yet who often are rewarded with stock options when short-term outcomes are positive.

In 1978, the average CEO earned about 30 times as much as the average worker.  U.S. Census data tells us that the average income for U.S. households was $17,730, pegging average CEO income at $531,900.

In just 40 years, statistics from 2017 indicate that CEOs in the 350 largest companies in the U.S. are earning over 300 times as much as the average worker (actually, 312:1).

A recent survey by Glassdoor found that the median salary for U.S. employees is $51,272, implying median CEO compensation at nearly $16 Million.

There is no rational explanation for the explosion of the CEO to Worker compensation ratio.  It seems to reflect a total lack of oversight by those individuals who have been elected to represent the interests of the American people.

Current economic conditions ought to raise a red flag to our elected officials that our nation has navigated very close to a Feudalistic System which is on track to implode and to destroy the very notion of what is described in the Declaration of Independence.

Labor Day seems like an appropriate time to pause and reflect on what seems to be an egregious obstacle to the healthy future of our American society.

Martha Stewart served prison time for a conviction on insider trading.

There is a cadre of Trump Insiders who are privy to Mr. Trump’s rants which roil the financial markets, some of whom are getting rich off of their advance information of what he will say or do.

Donald Trump’s frequently irrational, generally unpredictable — and often arbitrary and capricious — tweets, pronouncements and actions have proven to significantly move financial markets, often creating a whipsaw effect.

Today – May 31, 2018 – Mr. Trump allowed tariffs to be enacted on steel and aluminum imports from Canada, Mexico and the E.U. on the grounds that such materials are being imported into the United States “in such quantities and under such circumstances as to threaten to impair the national security of the United States.”

There is no credible evidence that steel and/or aluminum imported into the U.S. from Canada, Mexico and/or the E.U. pose any threat to the national security of the U.S.  In fact, there is no credible evidence that such imports pose any threat to the U.S. domestic economy.

Meanwhile, Mr. Trump’s action today to impose tariffs on imports from our closest allies was apparently not expected in the financial markets, leading to a 1% drop in the Dow Jones Industrial Average.

We now have several data points relating to financial market response to irrational actions by President Trump which clearly represent huge arbitrage opportunities for Trump insiders.

The ‘out-of-right-field’ announcement in early March 2018 by Mr. Trump that the U.S. would impose tariffs on steel and aluminum imports precipitated an almost immediate 500 point drop in the DJI.

 

It’s bad enough that Trump’s actions pose a tremendous risk to the entire U.S. society and our economy.

The Securities and Exchange Commission (SEC) needs to reign in this illegal behavior by Mr. Trump, and to charge those insiders who are illegally profiting in the financial markets from advance knowledge of what sort of disruptive, arbitrary and capricious pronouncements President Trump will make in the near term.

America’s Teachers

April 12, 2018

America’s teachers have notoriously been underpaid relative to their peer group. The excuses include, (a) Flexibility; (b) Summers off; (c) a profession dominated by women (and we all know that women earn about 80% of what men earn for comparable experience in similar jobs).

If I were a young person approaching college graduation, I might look at starting salary, and projections for advancement over the course of my career.

If I did that, teaching would not likely be on my list of job choices.

According to a study published by US News and World Report looking at the best jobs for 2018 college graduates, there are dozens of opportunities which absolutely blow away starting salaries for teachers, which seem to be in the $38k range.

One random example is an entry level Financial Analyst in the area of investment banking, private banking and the securities industry. The highest paid in the financial analyst profession work in the metropolitan areas of San Francisco, New York City, and San Luis Obispo, California. The Stamford /Bridgeport, CT area also pays well, as does the city of Salem, Oregon.

San Francisco      $141,840
New York City     $133,130
San Luis Obispo, CA  $120,750
Bridgeport (Stamford), CT   $120,520
Salem, Oregon            $120,150

These are median starting salaries for newly minted graduates.  What’s most egregious about this?

On a really good day, financial analysts provide zero economic value-added to our overall economy and society; on a bad day, they can cause catastrophic damage. Financial analysts produce no tangible outputs; they endeavor to discover and exploit financial opportunities to benefit their firm and its clients at the expense of other individuals.

Teachers bring value every day, yet they are generally under-respected and certainly, under-compensated. Teachers are the mechanism by which we build future intellectual capital to benefit future generations in and across the U.S.

Some may argue that this example attempts to pit Capitalism against Socialism:  Nice try on that one!

Pure capitalism relies on the premise that private capital, invested strategically, adds value to the overall economy and society, while providing a fair and reasonable profit to the capitalist(s).

Pure socialism requires a government controlled population of workers to both plan and operate the system; true socialism requires government control of all economic as well as political and public affairs.

By levying fair and reasonable income taxes on excess or suspicious profits, a nation is able to re-invest those taxes into strategic and forward-focused programs and initiatives, such things as: bridges; tunnels; airports; rail rapid transit; healthcare research and innovations; and public education – including teacher quality and teacher compensation.

Teachers need to re-focus their compensation and resource allocation argument toward pure economics.

It strikes me that the message needs to be:  “High quality, well-compensated teachers who are provided with appropriate and needed classroom resources help to shape and create the next generation of high-performance, highly motivated and productive citizens our nation will need to ensure future economic and political success.
There is no substitute for a ready and reliable supply of intellectual capital waiting in the wings to take charge in the coming decades.”

A half century ago, the Baby Boomer generation entered adulthood with plenty of energy and commitment to help make our world safer and better.  As they set forth to establish families of their own, careers and all of the rest, they faced some unexpected head winds.  The rapidity of technological change combined with growing economic and social divides put extraordinary pressure on these young families, and they became self-absorbed.

The direct socioeconomic impacts of American suburbanization didn’t really begin to take hold until the 1970’s.  The resulting economic and racial segregation shielded the next generation(s) of middle class young people growing up in suburbia, away from their less affluent peers who were left behind in urban neighborhoods. They lost touch with each other, not able to see common ground.

Somehow, things have begun to change for the positive.

Maybe Trump’s legacy will be as the unconscious ‘uniter’ of the people of good will — Americans who reject corruption, self-dealing and bullying — who regardless of hair color, height, weight, economics, gender, race, skin tone, religion, sexual orientation, learning and/or mobility differences, and many more… — refuse to participate in the Trump Swamp.

This emerging generation, evidenced by the Parkland students, are showing signs of unity under a new paradigm of The American Dream, where the principles of life, liberty and the pursuit of happiness are honestly and equitably recognized and applied.

To date, Trump has certainly distinguished himself as the polar opposite of genuine American values.

While it’s still too early to celebrate any victories, I am betting on the young people who have taken an active role in the March For Our Lives movement — and the millions of their supporters (average age 48!) — to continue to energize and inspire the vast majority of U.S. citizens and residents who want to see common sense prevail.

High on the Hogg

April 1, 2018

David Hogg, the Parkland student who has become one of the most vocal leaders in the March For Our Lives movement, has explained their position and their mission,

“I want people to understand, we’re not trying to take your guns, we’re not against the second amendment; we don’t want to repeal the second amendment. We simply want gun legislation in this country that allows law-abiding citizens to still own guns but prevents people with a history of mental illness or a history of a criminal background from owning a firearm. It’s as simple as that.”

I think the last real, sustained and almost universal call to action by America’s youth occurred in the late ’60’s – early ’70’s when large-scale opposition to U.S. military involvement in SE Asia was the focal point.

Sure, there have been many other issues, causes, protests, rallies, etc. in the ensuing years, but I am not aware of anything quite as promising as the current March for our Lives movement.

One of the great outcomes thus far is contained within the Laura Ingraham debacle.

On her broadcast television show, Laura Ingraham personally attacked David Hogg regarding his academics.

Within 2 days after Ingraham attacked him personally, Hogg organized a successful boycott of her advertisers.

Nothing personal, he remarked. We are just following the money. Take away the money, and the show will disappear.

Brilliant!