A word on investing and bubbles
I have to admit that not much has changed in my views in the last couple of years that the stock market is in a major fed-driven bubble and that gold – either physical or through the streamers and perhaps the minors. I don’t really trust the GLD because of how much physical gold has been liquidated from it in recent years.
As for housing – the median sales price of a home in California is $450,000. My parents at their peak made between $100-$150k/yr combined and struggled with their most expensive house that cost $295,000 … nowadays median family incomes are much lower (peaking around $60k/yr nominal in 2000 and around $53k/yr nominal today). Needless to say, it isn’t young families buying these homes but investors – for a while it was hedge funds (http://www.bloomberg.com/news/2014-03-14/blackstone-s-home-buying-binge-ends-as-prices-surge-mortgages.html) but now a lot of the purchases are boomers entering retirement who are looking at low bond returns and overpriced stock market, so they’re turning to buying homes to rent out. When the primary buyers are investors rather than consumers, we’re certainly in bubble conditions.
A quick word about bubbles though – its better to stay out of the way than to bet against them. Many people lost a lot of money betting against the dot-com bubble in 2008-2009 or against the housing bubble in 2006-2007 … being early is equivalent to being wrong. I still think it’s entertaining how the head of MF Global had to serve jail time for his fund collapsing because he improperly bet too much of his clients’ money on peripheral European government debt back in 2011. He figured that the ECB ultimately had to bail them out – and he was right – but he was 4 months too early. He would’ve been a wall street legend if he merely waited 4 months before placing that bet, as no one would dig into the details on the back of huge gains. Needless to say, bubbles can persist and grow for a long time, much longer than people would expect, but they are fragile structures which will inevitably collapse.
As for the economy – the Fed has been a major part of the problem recently. The problem with their versions of QE and low interest rates is that all of the money is funneled straight to the super-rich while the middle classes struggle, in the worst kind of trickle-down stimulus. Big banks get money for practically nothing, buy debt from big corporations which use it for stock buybacks in order to boost share prices and thus upper management bonuses. They don’t use it to expand production because capacity utilization and demand are still low – because the middle class doesn’t have enough to spend. Asset prices rise like crazy squeezing young families with the prices of food, gasoline, energy, health care, and so on while more discretionary sectors such as apparel struggle to get pricing power. Meanwhile, consumer and corporate debt continues to rise under this influence, and the rich see big gains in their asset prices (stocks, bonds, land, housing) but are nervous about the overall economy.
Small Business Troubles: Tax, Credit, Regulation & Corporate Preference
The main driver of economic redistribution/equalization and job growth in this country has traditionally been small business growth. However, the regulatory and tax atmosphere has become increasingly hostile to small business while none of the money from the Fed’s easing gets to that sector. As a result, more businesses have been destroyed or consolidated than created in recent years.
As for tax – I am not talking about the upper income tax rates because real small/early stage businesses don’t reach those. The big tax burdens are the regular ones that don’t depend on income such as the $800 annual partnership tax in California, the heavy payroll taxes, and sales taxes. Payroll taxes are especially regressive and hefty, taking away 20% of all pay up to the first $100k per employee for social security and medicaid – half shown on the employee’s side and half on the employer’s side – and an additional 6% of the first $40k per employee for federal unemployment insurance. That’s 26% of a minimum wage employee’s earnings taken away (though he only see’s 10% of it). Republicans are keen to argue about the reduction in jobs from minimum wage increases, so why don’t they do something about these egregious job-killing payroll taxes! The argument I typically hear is that medicaid, social security and unemployment are for the poor so it evens out – but it really doesn’t and it is very economically damaging. Sales tax is also a major killer because many small businesses have a tough time getting any kind of profit margins, so reducing them by 8% in California is devastating. In addition, the political elites often like to “target tax evaders” simply by sending threatening letters to thousands of small businesses about money they owe based on estimated unpaid sales tax on cash purchases, which is done by a simple formula not by research, and paid mostly by small businesses that are overworked and afraid to dispute IRS claims.
As for credit … at it’s infant stage, a business has only 3 sources of funding – savings, family, and personal debt. In the past, personal debt included a lot of housing equity but that has become unavailable to the younger generations – leaving personal credit cards as the primary source for startup funding. The too-big-to-fail superbanks get money at nearly 0% from the Fed, but they still charge 15-20% APR interest on these cards which are the lifeblood of a small business.
Regulations are also very much gamed to deter small business and give more breathing room for the big corporations to collect their economic rent. An example familiar to everyone is the FDA, which makes it illegal for anyone regardless of business size to create and sell food from their own homes. They are the reason why the police bust up the kid’s lemonade stand, and why most early restaurants – which have enormous unnecessary equipment costs before they even get to test out what sells – simply fail. I ran an LED lighting business, and Title 24 was no exception to this economic favoritism. These regulations require that replacements for lighting must be dimmable (if they replace over 20% of the lighting in an area) specifically to discourage companies from getting their fluorescent T8 fixtures retro-fitted for LED tubes. The fluorescents are a major source of mercury contamination in dump sites because most people don’t know they’re toxic, but they are made by entrenched companies like GE who don’t want to lose their market for these because just because non-toxic and inexpensive LED replacements use less than half the wattage.
My biggest problem in running an LED lighting business has been a bias toward corporate preference. Our business model involved selling to retail chains, auto dealerships, small airports, and so on. We did over 150 energy audits at different places – counting all of the light bulbs in a large facility, offering LED recommendations and pricing along with all of the work in getting energy rebate applications. Many companies love to have this done as a free service, and then hold on to demo lights for months, only to decide that they feel saver paying near double to go with a big corporate name than a small business. It makes sense … if management buys lights from a small company which goes BK then they have no more warranty support. If this becomes a problem they’ll look bad whereas they aren’t penalized for getting a 3-4 year ROI from a big company rather than a 1-2 year ROI from a small one. Family owned businesses and individual consumers don’t have this level of bias, but the big corporates with layers of management always do. Unfortunately smaller jobs require a lot more work for a lot less potential earnings, and expenses such as gasoline and travel time eat up much more of the profits. The government’s sales taxes are not flexible on this issue, which further erodes any potential profit from small projects.
A personal note / behind the writing / the long road to the middle
My focus on writing has certainly shifted from the time I’ve started this blog. You may notice that I’m writing more off-the-cuff here, with less references and investment ideas and more unfiltered cynicism. I still read all the posts on mauldineconomics.com and I particularly enjoy Grant Williams and I still read the Wall St Journal, the Economist, and Foreign affairs. However, I don’t expect to be able to make any serious investment decisions in the coming decade so I’m much more concerned about the deterioration of the American middle class and the growing concentration of wealth in this country.
During my MBA program I was interested in joining the finance industry. I figured my engineering background & mathematical affinity combined with my fascination with history and world events would make me a strong candidate and launch me to an illustrious career. As my graduation approached and passed in December 2010, I saw how wrong I was. Through all the applications I only managed one phone interview for a position in Deleware and didn’t make it past that. I realized that with the consolidation of the finance industry, I was an engineer competing with seasoned financial sector employees for the same entry level jobs, and that my only chance was to get hired into exactly what I was doing before. That was my first big break in writing this blog.
After many hiring conferences, including ones in Texas and Nevada as well as my more local San Diego and Los Angeles, I managed to get a temporary year-long position as a project engineer starting nearly 1.5 years after graduation – on a refinery project in northwest Indiana. I started writing again and stopped as the project was coming to a close. Then I came home and started an LED lighting business with a friend with my savings and all the credit cards I could apply for. I learned a lot from this experience and don’t regret it in the slightest.
During my time running the business, I occasionally thought of doing another blog post, particularly toward the end when I was really worried about finances. However, my interest and focus had shifted and I was afraid of speaking my mind openly. Suppose a potential employer or customer ran across my blog and thought I sounded too cynical or negative, or simply assumed my interests were elsewhere. In April this year I started applying for jobs like crazy and I was especially worried about this – in a world where the most minor jobs require a background check and piss test, how would a potential employer react to my open thoughts – it was simply better to buckle down and shut my mouth.
Anyway, I had to BK on all of those credit cards and give up the business, but I managed to land a job doing payroll services. I doubt I’ll ever earn the kind of money I was making in the 2000’s, but right now financial independence, the self-respect that comes with it, and time with friends are my overall goals. Things seem to be going well at the new job so far – I’m getting along with the coworkers and I have a relatively easy time picking everything up. At least it seems secure enough for me to start writing again, and I’ll have to say it feels good to do so.
I’ve been fascinated with the Economics of small business and the shadow economies shown in such books as the popular Freakonomics by Levitt & Dubner, Shadow Cities and Stealth of Nations by Neuwirth, and the more off-beat Sorcerer’s Apprentice by Tahir Shah. My recent fascination with the business-creation side of economics will give me plenty to write about, but for now I’d best end the post here.