California versus Washington State – Effect of California Income Taxes Upon After-Tax Earnings

I built a spreadsheet to model the effect of California state income tax rates on after-tax income and compared California with Washington State, which lacks an income tax.

I would have to earn about $12,000 more in California in order to earn the same after-tax income that I make in Washington State, and even if I did earn that income premium in California, I would likely not be able to save as much money each year because housing is more expensive in big cities in California. If I were to account for all of the cost of living increase, I’d probably need to earn $20,000 more each year in California to save the same amount each that I can in Washington State.

This spreadsheet really illustrates the power that income taxes wield over all of us…who knows, maybe this spreadsheet will even cause someone to move to a lower-tax state!

Click here to see the spreadsheet in a new window.

Note: Someone tipped me off soon after publishing this spreadsheet that I did not account for the fact that earning a higher pre-tax income in California would also potentially put you into a higher federal income tax bracket, and this scenario is not reflected in my spreadsheet (maybe in version 2.0?).

Dow Above 13,000 – Sign of a vibrant economy?

For the first time since May 2008, the Dow Jones Industrial Average has closed above 13,000, an important psychological and technical level.

What does this event say about the economy, if anything?

Simpletons might be inclined to identify the breaking of 13,000 as a sign that the US economy and the world’s economy are returning to vibrancy. Such an explanation is overly simplistic, ignoring the complexity and the myriad variables that lead markets to behave the way they do.

US stocks are being driven higher for two reasons:

1) Fear of exposure to European sovereign debt

and

2) Fear of exposure to European banks

Both of these drivers have led investors to seek safety in US Treasuries, which has driven down Treasury yields, causing many treasury investors to seek potentially higher returns in stocks due to the low returns offered by Treasuries. As a result, I believe it’s safe to say that the recent breaking of 13,000 is not caused by bullish sentiment on stocks, but rather is simply a consequence of insanely low-yielding debt, which has made stocks look like a bargain in comparison.

Investors are faced with heightened global uncertainty due to fears of low growth in the Eurozone and the United States, slowing growth in China, high energy prices, and the threat of inflation. The obvious play in this environment would be to buy gold, TIPS, and Treasuries and wait out the storm until it’s safe to wade back into the equity markets. However, there is little opportunity to make gains using said strategy because our relatively efficient markets have priced gold at stratospherically-high levels and have done the same to TIPS and Treasuries, some of which are currently sporting negative yields (including the 5, 7, and 10-year TIPS).

So what might an intelligent investor do to best position their portfolio with regard to risk and return?

1) Buy leveraged real estate funds, REITs, apartment home operators, and senior living operators

With the cost of financing going through the floor, healthy demand for apartments and rental housing, and low prices for single-family homes due to the poor health of the US housing market, real estate is cheap. Cheap asset prices and dirt cheap financing? Sign me up.

2) Buy energy services firms

Energy prices are high and will likely remain high, barring a global recession. Oil production in the Bakken shale and other areas in the heartland of North America is increasing quickly due to recent advances in horizontal drilling and fracking. Increased production will drive higher revenue and margins for energy services firms.

3) Go bargain hunting in Europe

European equities are cheap, and by spending some time prospecting through them, you might just discover some hidden gems.

New York Times Errs On Government-Regulated Lending

Oddly enough, my favorite news source (The New York Times) is one that I often find myself at odds with. Usually it’s limited to economist and champion-of-the-left Paul Krugman, what with his defense of big government and socialist policies, but occasionally I find other problems with their reporting.

While reading Binyamin Appelbaum’s piece for NYT’s The Caucus blog, I came upon an egregious error that I must point out:

Subprime Mortgage Lending

Earlier in the [Republican] debate, Michele Bachmann suggested that the federal government caused the boom in subprime mortgage lending by pushing banks to lower “platinum level” lending standards.

[...]

The assertion [...] mischaracterizes the historical relationship between the government and banks. Regulators can sometimes prevent banks from acting, but there is almost no evidence that the government can push banks to make loans they don’t want to make. This point has been underscored over the last two years, as the Obama administration has begged and pleaded with banks to start making loans, and banks have largely declined to do so.

Banks did make subprime loans in large numbers, and the reason they did so, according to their own executives, was that they saw a chance to make lots of money.

Has Mr. Appelbaum ever heard of the Community Reinvestment Act? It’s often been pointed to as one of the partial causes of the subprime mortgage/debt meltdown of 2007-2011. The CRA requires banks to lend money to lower-income and less-creditworthy borrowers, which consequently increases future loan losses and imperils the creditworthiness of banks, potentially risking the health of the entire economy.

Stupid Hippies.

Yay capitalism.

With SethAaron Henderson at SAM Remix

I was lucky enough to meet Mr. SethAaron Henderson, the winner of Season 7 of Project Runway (the most recent season as of this writing) at SAM Remix on Friday. He’s quite friendly, and is a phenomenal designer.

Hopefully, we’ll be seeing him in Seattle again shortly.

My tour immediately followed his.

Pat yourself on the back.

My thoughts on this infographic, posted up by Jenny:

“Interesting graphic; however, the President (or the party he/she is a member of) has little to do with any job gains or losses during his/her term. The economy is a beast much larger and more complex than the federal government, and consequently cannot be lorded over by the chief of the Executive Branch.

A good example is the economy under President Bill Clinton, which soared (but some or much of it was a bubble). There is no way that such a massive rise in wealth could be attributed to one man (such as President Clinton). His influence is relatively small; a drop in the bucket.

Actions that affect the economy are so numerous (the Fed’s interest rate policy, the behavior of private-sector banks, changes in regulatory policy/legislation, consumer behavior, currency fluctuations, behavior of other central banks/treasuries, the business cycle, et cetera) that it would be overly simplistic to isolate a single action (the election of one President, or another) as the root cause of an economic malaise (or an economic boom), as this graphic clearly attempts to do. But considering the source of the infograph (it was created by Obama’s own administration, right?), I’m not surprised that it’s so self-congratulatory…it’s really downright propagandist and sort of (intellectually) disgusting.”

Massachusetts Voters’ Complicated Effects On The Market

After the Democrats effectively lost their filibuster-proof majority (and consequently any hope they might’ve had for passing their healthcare package), the US markets took a dive, with Bespoke Investment Group reporting:

The major indices are approaching the -2% level on the day, which would be the worst day for the market in some time.  While some people thought a Scott Brown win would be good for the market, it appears to be doing the opposite.  The dollar is strong today on the Brown win, which is hitting stocks (especially commodity-related stocks) hard.  As shown below, the Materials sector is down 2.39% on the day.  The Health Care sector is down the least of the ten major sectors at -0.96%.  So while the Health Care sector has benefitted for the time being, the rest of the market is taking it on the chin.

To sum up today’s action, the markets responded in the opposite way that was expected by many market watchers and commentators, due in no small part to the complexity of global markets and the strong influence of currency fluctuations on US stock market indices. The first-order expected outcome of a Republican win in Massachusetts was that Congress would become less partisan and hence more inactive, which would be a positive sign for the market because legislative inaction means predictability for businesses and individuals, who can invest without fear of the unknown and potentially risky effects of legislative change. Instead, the financial markets reacted not to the perceived enhanced predictability of Congress, but rather to the projected effect on the country’s budget offered by the failure of the Democrat-sponsored healthcare reform bill. If the Democrats had been successful in passing their bill before the special Senate election, any such bill would’ve increased government spending, added to the deficit/national debt, and would’ve struck a blow to the government’s fiscal health, which is already in shambles. After this fear was vanquished by Massachusetts voters, the US Dollar rallied against major currencies, which consequently made US stocks more expensive to foreign investors and sent domestic indices sharply lower.

If any four lessons are to be learned from these developments, I think the following are constitute a good list:

1) Markets and their behavior are complex.

2) In order to accurately forecast the direction of the market given a certain event, one must consider more than the first-order expected outcomes, instead integrating the first-order outcomes with second and third-level outcomes in order to come up with a holistic meta/macro-outcome that integrates all necessary and relevant data and accurately predicts the macro outcome that follows from the behavior of the relevant market participants. In addition to integrating first-, second-, and third-order outcomes, one must have a strong understanding of reflexivity (in the sense that George Soros uses the word) to model the reflexive effects of a development upon itself and consequently the ‘integral system’, as I choose to call it.

3) Markets behave like biological systems and are composed of many actors, all with different incentives and behaviors. To accurately forecast the outcome of a given event, one must accurately model the micro-level decisions and behavior of particular groups of market participants, and model the groups’ behavior proportionately to one another when extrapolating the model into a full-size model simulated economy.

and 4) Even if your model is up to snuff with modern economic theory, your model may still spit out predicted outcomes that are completely wrong, so don’t be cocksure about your predictions—be humble.

Excel and the Language of Love

FemaleExcelPowerUser: Oh how you tease me so with your .XLS whispers in my gchat window…
Cameron: ‘Tis a proven way to seduce the ladies, methinks
FemaleExcelPowerUser: Clearly, I’m fantasizing about embedded “IF” statements, and don’t even get me started on defined ranges
I can’t even type anymore
Cameron: Can we do it in Excel ’07, so we aren’t limited to 65,000 rows?
FemaleExcelPowerUser: Baby I love it when you round
But its 65536

I think I’m in love.

The Economic Recovery (End of Recession) has begun!

I’ve called it (wrong*) twice before, but this time, I’m significantly more optimistic for the economy, credit, equities, consumer confidence, et cetera. FINALLY!

*Statistically, you shouldn’t listen to me. I’m 0/2 on this one, so far. The sample size is so limited that it shouldn’t be extrapolated, however.

The Panasonic GH1 Kills The DSLR, TV-Industrial Complex

This is an amazing time to be alive, what with all the things that are changing, evolving, improving.

A major step was just taken that will revolutionize how video is produced and consumed. It’s called the Panasonic GH1.

It dispenses with the traditional SLR mirror and optical viewfinder, allowing a shorter lens-to-sensor distance; in turn enabling smaller, lighter, and quieter cameras. The platform, called ‘Micro Four Thirds’, maintains the same-size image sensor as a traditional DSLR, and uses similar (though smaller) interchangeable lenses that allow for shallow depth of field, which is one of the defining characteristics that DSLRs have long had a monopoly on versus point-and-shoot consumer cameras.

So it’s smaller. Why is this camera so revolutionary, then?

Well, size is not the revolution. HD video functionality is.

Though hardly the first digital camera to shoot HD video (notable examples include the Canon 5D Mark II and the Nikon D90) the GH1 manages to provide jaw-droppingly-good HD video (1080p) in a smaller and less-expensive package* than its predecessors and rivals. This means that any idiot with a thousand bucks, a subject, and a PC can become a movie producer.

Here’s the freshest example of HD video shot off a Panasonic GH1 (if you watch the HD version closely and notice the shallow depth of field and fantastic quality, you’ll understand how revolutionary this is!):

Panasonic Lumix GH1. First footage from Philip Bloom on Vimeo.