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?).
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
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.
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.
Prolific blogger Om Malik posted this provocative, loaded question for his readers to answer:
Does anyone else feel that World Economic Forum in Davos is elitist, all talk, no action, and a perfect representation of crony capitalism? The off the record nature of conversations only bolsters my argument. Talk away folks.
The older I get, the more I realize the value of conversations conducted in secret. One doesn’t have to worry about the oversensitive media creating an overblown polemic over some logical, agreeable, yet also out-of-context and outwardly controversial statement (Ex. Harry Reid’s observant remark that Barack Obama became the country’s first black president because he had “no Negro dialect.”)
Likewise, Obama’s meeting with House Republicans this week in Baltimore should’ve been (and indeed was initially planned to be) conducted in secret in order to foster dialogue, but was opened to the media as a result of secret meetings’ perceived incompatibility with Obama’s pledge to be the most transparent administration ever.
It just goes to show that even seemingly universally-positive values like transparency can become negative as you approach their extremes (liberalism, socialism, libertarianism, and conservatism are also examples of ideologies that become dysfunctional, regressive, and destructive as you approach implementations of their extremes).
Anyways, getting back to Davos, you are exactly right to call them elitists. Davos is where elitists feel comfortable amongst their brethren. And you’re also correct in your characterization of Davos as “all talk … no action.” Davos is basically a week-long press conference for elitists to trumpet their ideas and pat themselves on the back, coupled with receptions and parties, networking, and a little skiing. Little is actually accomplished AT Davos. However, the value of Davos can be seen in two key ways:
1) its benefit of expanded dialogue between business/political/cultural leaders,
and 2) the inception of many relationships between the elitist attendees that flower into real-life business relationships, which “greases the wheels of capitalism,” by the creation of useful partnerships.
I write this on a BlackBerry engineered in Canada and built in China, inside a centi-million dollar condominium building financed by major transnational banks. The existence of these two simple things (a cellphone and a condo building) are shining examples of the benefit to society that comes from cross-border business relationships–some of them made at places like Davos. So complain all you like, but the truth is that you likely benefit greatly from the World Economic Forum in Davos, whether you recognize it or not.
(I should note that I am not advocating corrupt crony capitalism between business and government. Rather, I’ve tried to illustrate my belief that elitists hosting a meeting like this and fostering incestuous business relationships is not in any way negative, nor should pejorative words like crony capitalism be used to describe the WEF.)
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.
There is a very cliche expression that often makes the rounds of economists, which holds that “we live in a knowledge economy,”—having knowledge pays.
A man who died yesterday, Jeffry Picower, has made that abundantly clear.
You probably haven’t heard of Mr. Picower, but that’s just the way he would’ve liked it. A lawyer and an accountant, Picower was known as an expert in tax shelters. He was famous for making things invisible. For example, on January 2, 2003, Picower withdrew $1,378,852 from a curiously named account, “Jln Partnership”, which was managed by none other than Bernard Madoff. When withdrawals across all his accounts were totaled for that day, they amounted to exactly $250 million. Nothing he did was by accident.
Mr. Picower achieved something amazing. He discerned that Bernie Madoff was a fraud years before securities regulators did, and he was able to profit massively from that knowledge. Picower knew that he could go public about Madoff’s ponzi scheme at any time, and therefore held enormous negotiating leverage over Madoff, who would do anything to avoid the disclosure. What Mr. Picower asked for (in exchange for his silence) was substantial: enormous returns from his investment with Madoff, paid for in dollars that belonged to other investors. Picower could demand precise annual percentage gains for his account–much higher than the returns given to other Madoff investors. Picower would pick the number, and Madoff’s people would dutifully backdate trades to update the account balance to Picower’s satisfaction.
Although Madoff ostensibly produced eerily consistent 10-12 percent annual returns for his clients, the returns he provided Picower were other worldly:
In 14 instances between 1996 and 2007, a group of Picower trading accounts experienced annual returns of more than 100 percent. On 25 occasions, the annual return exceeded 50 percent. During this same period, the biggest annual gain in the S&P 500 was 31 percent (1997). The S&P’s annual average for that period was slightly under 9 percent. In 1999, one of Picower’s accounts earned 950 percent.
On April 18, 2006, Picower wired $125 million to Madoff to open a new account. Madoff’s office began “purchasing” securities in the account, but “it backdated the vast majority of these purported transactions to January 2006″ when the stock market was at its lowest for the period. Twelve days later, the net equity value of the account was $164 million, a gain of $39 million – or more than 30 percent – in less than two weeks.
From 1995 to 2008, Picower made 670 withdrawals totaling $6,746,066,548. Initially, he’d invested some $1.6 billion with the fraudster, so this amounted to quite a return on his initial investment.
Was much of his wealth stolen from others? That’s a question that the courts are trying to find out right now, but considering Picower’s prowess for financial sleight-of-hand, we may never know.
Clearly, Picower’s gain from his knowledge of Madoff’s fraud is not an something to look up to, but it surely illustrates the benefits of having more information than others. After all, Picower died a very rich man.
Chace Bank’s Redmond, WA branch is trying to stiff me for $385 due to the manager’s error. His behavior is pitiful. It looks like I’m not the only one who is fed up and closing my account:
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.
My prognostications for 2009/2010:
-After cutting costs in 2008/2009, corporate earnings stabilize and recover (this is already happening, with 60%+ of earnings reports coming out in the last few weeks beating analyst expectations*
-Growth from China, as well as growth from nations currently/formerly in recession, will spur lending and increase economic activity.
-Banks will be slow to recover because their balance sheets have been so damaged by bad loans, BUT the help they’ve received from government WILL enable them to lend earlier and lend more than had they never received any assistance at all.
-Companies will begin hiring more, unemployment will fall to 6 or 7% by January 2011.
*I know, I know–50% would be the expected beat-rate, so relatively, 62% doesn’t sound that bullish; that said, numbers don’t lie.
by Rigoberto Morfin
Meeting successful people has helped me analyze my career, and has motivated me to continue trying especially during these hard times when many of us are unemployed. On Thursday, April 23rd, James Fernandez, the CFO from Tiffany & Co., gave a speech about “The Path to Professional Success” at ALPFA Baruch Chapter’s 2nd Annual Business Banquet. He warned us: “Be careful when you give your opinion, don’t give it freely. Be thoughtful and insightful. Your opinion says a lot about you.” Later that night I was told more about the dangers of opinions by Alberto Flores, an executive at Deloitte and one of my mentors in New York City. “Miss California Carrie Prejean is a perfect example,” he said. “She shocked the audience by saying same-sex marriage should not be legalized. That is probably what cost her the Miss Universe 2009 crown.”
I’m no beauty queen, but I know we’ve all had similar experiences when we’ve expressed an opinion that we regretted. My friends often joke that I always give my opinion regardless of whether it’s politics, religion, or other potentially sensitive matters. This is fine in your personal life, but it’s something I’ve learned to be careful about on the job.
While working at a Forex brokerage firm, I was talking with a rich prospect from South America. I told him that my mother was from Caracas, Venezuela. “That is where I live,” he said excitedly. “What is your opinion of Hugo Chavez?” Without thinking, I told him that President Chavez was too socialist for my taste. Afterwards my rich prospect stopped returning my calls. A few weeks later I heard from the Geneva office that he opened an account with a Russian coworker.
Another time the director of global sales asked the currency brokers to agree to a monthly sales target during a meeting. I quickly spoke up with my sincere opinion. “I don’t think we can reach the monthly target after the firm just cut their marketing budget completely,” I said with frustration. “We are barely getting any leads – from fifty leads per day to less than five.” Later that day, I found out that the director thought I was being confrontational, and his attitude toward me soured.
At the end of the ALPFA event, I ran after Mr. Fernandez to introduce myself and ask him the same question I’ve asked Microsoft CEO Steve Ballmer and former N2h2 CEO Philip Welt. “Do successful people suffer more from mental turbulence and stress when they go to sleep than regular people?” I said curiously.
“That is an unusual question at these types of events.” He considered my question thoughtfully. “Well, it is basically the same. Through life you learn how to leave work behind when you go to home.” We firmly shook hands and I took his business card. After that I walked away, pondering what I’d learned.
Before moving to New York, I had the opportunity to analyze employees’ performance with customers at various Seattle branches of U.S. Bank. At the end, I gave a presentation to all the branch managers. I told them that most cashiers at a specific branch lacked customer service skills. The manager for that branch interrupted me. “Most of our employees have been working in this industry for many years and have been trained from upper staff,“ he countered. I didn’t give a contrary opinion and at the end of the presentation recommended boosting interaction with customers to create brand loyalty and lower employee turnover. Afterwards, the northwest regional manager congratulated me and told me that if I ever wanted to work in a bank to please consider them.
During his speech, Mr. Fernandez described his frustrating first interviews out of college with top firms. He couldn’t get a job offer. “Maybe I was a bad interviewer or I said the wrong things,” he said. If anything the job market has become more difficult since then. Now it pays to be extra careful with your opinion.
Rigoberto “Rigo” Morfin is a seasoned finance professional residing in New York City. He graduated from the University of Washington’s Foster School of Business, and has worked as an account executive at leading foreign-exchange investment firms. He is currently on the lookout for his next big challenge. You can email him at firstname.lastname@example.org
Putting a money-manager into a freezer seems like an odd regulatory response. What are they going to do next? Send Bernard Madoff to the North Pole in assless chaps?
Daraun Prince: my portfolio is up today. Any thoughts about the [banking industry's] stress test [results being released] in two hours?
Really bullish sentiment out there.
Jeff: I’ve got to go and read 130 pages on how to value Agency Federal Home Loan Securities.
Cameron: I envy you.
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