Wednesday, May 1, 2019

Tax increases may encourage residents to flee High Tax states in USA

US states with High Taxes may be hurting themselves. Gary Shilling talks about a trend where high earners in high tax states leave for lower taxed states via Bloomberg

The U.S. Tax Cuts and Jobs Act enacted at the very end of 2017, which limited the deduction of state and local taxes to $10,000, has focused attention on the vast differences among municipal levies. It also provided an incentive for high earners to leave high-tax states such as New York for lower-tax climes including Florida and New Mexico in a trend that will only intensify.

From 2011 through 2015, New York was among the top three states exited by millennials, and more Americans are moving out than moving into the Empire State. New York faces a $2 billion tax shortfall and will, no doubt, speed the exodus with higher taxes on those remaining. Under Mayor Bill de Blasio, New York City’s spending has risen 20 percent this fiscal year to $61.3 billion. Pension obligations are up $1.2 billion from four years ago to $9.5 billion annually, the Wall Street Journal reported, with more to come due to new municipal union contracts.

This strategy of tax increases that encourage taxpayers to leave is the government equivalent of a private-sector firm raising prices when its products are already overpriced. New Jersey incurred a major tax hole when a high-profile hedge fund manager decamped several years ago, and yet Governor Phil Murphy wants to raise taxes on millionaires.

In government, there is no bottom line watched by shareholders, so there is no incentive to run efficient organizations — as long as voters don’t revolt and the disgruntled taxpayers simply leave for lower-tax venues. Former Indianapolis mayor Stephen Goldsmith said famously that politicians can go to jail for stealing money, but not for wasting it.

To be sure, state government leaders claim they strive for efficiency, but if they did, wealthy states with high incomes per capita would have low tax rates. Those tax rates applied to large incomes, property values and retail sales would generate ample revenue to cover the costs of efficient operations.

Nevertheless, reality is quite the opposite. Connecticut, with the highest income per capita last year, had a state income tax burden of 10.6 percent, according to the Tax Foundation and Bureau of Economic Analysis. New York, third in income per capita, had the highest state income tax rate, 13.5 percent. New Jersey was fourth in per capita income and had a 9.2 percent income tax rate but a 2.4 percent property tax rate, the nation’s highest, edging out Connecticut’s 2.1 percent rate.

In contrast, Alabama ranked 46th in income per capita and had an income tax rate of 7.4 percent and 0.4 percent for property taxes. Kentucky was 47th in income per capita but taxed its citizens’ incomes at a 4.1 percent rate and 0.9 percent on property.

Even if those very blue states where tax and spending is endemic suddenly turned red, taxes will continue to rise because of the tremendous albatross of pension fund obligations. New Jersey has a pension funding gap that equals 42 percent of state gross domestic product and Connecticut’s is 31 percent, according to the Pew Charitable Trust. Many officials, back in the 1990s when the S&P 500 Index rose 20 percent for more for five consecutive years, assumed that rally would persist indefinitely and easily fund the generous pension fund benefits they were exacting.

By 2001, major police and firefighter pension plans nationwide had a median 101 percent of pension fund obligations set aside. Now, those first-responder pensions have median funding of just 71 percent and municipal pension funds in total have a median 78 cents for every dollar needed to cover future liabilities, Pew Charitable Trust figures show.

Furthermore, many state and local officials pushed costs into the future by promising pension benefits in lieu of present wage increases for public employees.

Now the chickens have come home to roost, and new Governmental Accounting Standards Board principles this year urge state and local officials to record all health care liabilities on their balance sheets. The nationwide $696 billion shortfall in retiree health benefits as of 2016, up from $589 billion in 2013, adds to the promised $1.1 trillion in pension benefits. States have just $47 billion in assets to cover $696 billion in health care liabilities.

New Jersey has unfunded pension liabilities of $90 billion, and a bipartisan commission recently recommended scaling back the health coverage and shifting many public employees to a hybrid pension plan in order to keep benefit costs at 15 percent of the annual budget. But that’s very unlikely given the current makeup of the state’s governing bodies. At the current trend, those costs will reach $10.7 billion in 2023, more than a quarter of the state budget.

So, if high state and local taxes are giving you the urge to move, pack your bags and call the movers sooner rather than later.

Monday, April 1, 2019

Gary Shilling sees a recession risk coming up

Gary Shilling sees a recession risk coming up

I give a business downturn starting this year a two-thirds probability.

The recessionary indicators are numerous. Tighter monetary policy by the Federal Reserve that the central bank now worries it may have overdone. The near-inversion in the Treasury yield curve. The swoon in stocks at the end of last year. Weaker housing activity. Soft consumer spending. The tiny 20,000 increase in February payrolls, compared to the 223,000 monthly average gain last year. Then there are the effects of the deteriorating European economies and decelerating growth in China as well as President Donald Trump’s ongoing trade war with that country.

There is, of course, a small chance of a soft landing such as in the mid-1990s. At that time, the Fed ended its interest-rate hiking cycle and cut the federal funds rate with no ensuing recession. By my count, the other 12 times the central bank restricted credit in the post-World War II era, a recession resulted.

It’s also possible that the current economic softening is temporary, but a revival would bring more Fed restraint. Policy makers want higher rates in order to have significant room to cut in the next recession, and the current 2.25 percent to 2.50 percent range doesn’t give them much leeway. The Fed also dislikes investors’ zeal for riskier assets, from hedge funds to private equity and leveraged loans, to say nothing of that rankest of rank speculations, Bitcoin. With a resumption in economic growth, a tight credit-induced recession would be postponed until 2020.

“Recession” conjures up specters of 2007-2009, the most severe business downturn since the 1930s in which the S&P 500 Index plunged 57 percent from its peak to its trough. The Fed raised its target rate from 1 percent in June 2004 to 5.25 percent in June 2006, but the main event was the financial crisis spawned by the collapse in the vastly-inflated subprime mortgage market.

Similarly, the central bank increased its policy rate from 4.75 percent in June 1999 to 6.5 percent in May 2000.  Still, the mild 2001 recession that followed was principally driven by the collapse in the late 1990s dot-com bubble that pushed the tech-laden Nasdaq Composite Index down by a whopping 78 percent.

The 1973-1975 recession, the second deepest since the 1930s, resulted from the collapse in the early 1970s inflation hedge buying of excess inventories. That deflated the S&P 500 by 48.2 percent. The federal funds rate hike from 9 percent in February 1974 to 13 percent in July of that year was a minor contributor.

The remaining eight post-World War II recessions were not the result of major financial or economic excesses, but just the normal late economic cycle business and investor overconfidence. The average drop in the S&P 500 was 21.2 percent.

At present, I don’t see any major economic or financial bubbles that are just begging to be pricked. The only possibilities are excess debt among U.S. nonfinancial corporations and the heavy borrowing in dollars by emerging-market economies in the face of a rising greenback. Housing never fully recovered from the subprime mortgage debacle. The financial sector is still deleveraging in the wake of the financial crisis. Consumer debt remains substantial but well off its 2008 peak in relation to household income.

Consequently, the recession I foresee will probably be accompanied by about an average drop in stock prices. The S&P 500 fell 19.6 percent from Oct. 3 to Dec. 24, but the recovery since has almost eliminated that loss. A normal recession-related decline of 21.2 percent – meeting the definition of a bear market – from that Oct. 3 top would take it to 2,305, down about 18 percent from Friday’s close, but not much below the Christmas Eve low of 2,351.


Monday, March 18, 2019

Fed is doing about what they should be doing

Click here if the above video does not play

Topics discussed include

- This may be a bear market rally

- Wages are not increasing due to Globalization and On Demand economy such as Uber where people are willing to work for less money in exchange for a flexible work schedule.

- Chairman Powell is not a Phd Economist. 

- There is probably more risk of a Deflation than a return to high Inflation for the foreseeable future.

- Fed does not have a good track record in slowing an overheated economy

- Agnostic on Gold

- Brexit

- New York has met its match in Jeff Bezos. He is the wealthiest man in the world. I hope its a wake up call for New York. 

- Net Exodus of resident population in New York,  New York City

Tuesday, February 12, 2019