Big Gubmint

Scuttlebutt around here is that the president has manifested some sort of excess meddling in business, markets and government.  I'm not suggesting what we've grown accustomed to witnessing in other more authoritarian regimes such as Russia and Communist Red China; but more meddlesome than what some may consider a classic laissez-faire, free market perspective. 

Consider that the president fired Erika McEntarfer, commissioner of the Bureau of Labor Statistics, earlier this month after big downward revisions to jobs data.  Similarly, he ordered Goldman Sachs to fire an economist, Intel to fire its CEO, demanded a government ownership interest in Nippon Steel's acquisition of US Steel, demanded a 15% cut of AI chip sales to China.  Invested a total of $11.1 billion in chip manufacturer Intel for a 9.9% stake.  And shook down most of our trade partners to pledge billions of dollars of investment in negotiating export taxes.  

Compounding this our tariff policy has become a tool wielded at the sole discretion of the executive branch and varies haphazardly by country, product and fit of pique.  It's manic.

By all outward appearances you'd think that we've become a hybrid of Soviet-style centralized state-run economics. 

I would argue no; not yet anyway.

Government has a long and storied history of embedding itself in business and all things economic; even in a capitalist economy such as ours.  Until Obama rolled-around we legislated restrictions on crude oil exports.  We've instituted wage and price controls and interfered with the regulation of banks and savings and loans at our own peril.  

Farm policy pays farmers to grow and not to grow.  We've subsidized ethanol production and green energy technologies. Congress legislated how many gallons per flush and never consulted a plumber.  They also instituted TARP to bail out banks, automakers and organized labor. 

Furthermore, agencies like Freddie Mac and Fannie Mae artificially impact mortgage rates distorting the housing market.  Similarly, Biden pushed to forgive student loans.  Once upon a time we took an ownership interest in a civilian passenger liner.

I could go on, but I think you get my drift.

On the happen chance you believe I support this; I do not.  I'm disinclined to political busybodies interfering in free markets.  Nevertheless, I expect the president is going to continue to pick winners and losers.  Every day is an opportunity to discover he got up on the wrong side of the bed and you, your business or country may join the ranks of losers.  

All of my previously self-identified libertarian acquaintances have suddenly gone deaf and dumb.  And I continue to have a tough time figuring-out how any of this advances your and my prosperity and general lot in life.  And is the world a safer place? Yet?

You Say Potato, I Say Potatoh

L to R: Yukon Gold, Superior and German Butterball

I've grown a lot of  potatoes in my life, but not likely as many species that you will find at the Midwest Area Vegetable Crops Research Unit where you will find the Potato Germplasm Station; AKA the United States Potato Genebank (USPG).  Yup, the Fort Knox of potatoes is found right here on the peninsula  just north of Sturgeon Bay.  

Before 1950 and the US national plant germplasm system was started, potato breeding was basically  ad hoc by various scientists and breeders.  Consequently they were not available to the whole grower community, and got infected with viruses or otherwise lost. Potato scientists (yes, there is such a thing) organized to lobby for a centralized program to import, classify, preserve, evaluate, and distribute potato germplasm. 

Because we grow a lot of potatoes in our fine state Wisconsin lobbied extensively for a genebank, and we got what we asked-for.  It seemed a good idea to have all of this genetic treasure situated a bit removed from the production area of the state, and the because the UW research farm - Peninsular Agricultural Research Station (PARS) has been located on the peninsula since 1922  Sturgeon Bay was chosen as the USPG home in 1948. 

Unbeknownst to just about everyone it is here that research is performed to facilitate improvements in the potato of the future by promoting the use of valuable exotic genes found in wild potato species.  Wild potato species contain a veritable treasure chest of genetic diversity for potentially useful traits that may be bred into new varieties. These new varieties must be able to overcome the challenges of pests and stresses with less dependence on chemical fertilizers, insecticides and fungicides. The USPG is doing this through a 5-fold approach: acquisition, classification, preservation, evaluation and distribution of potato genetics.  This collection is part of the U.S. National Plant Germplasm System (NPGS) - all 5927 potato specimens in the collection!

Check-out the Champion Spud to the left.

 

Potato scientists have a complete tissue culture lab and growth chamber facility to support a clonal collection of about 1000 tubers. In addition, there are 10 greenhouse compartments in which plants are grown to generate seeds and tubers for distribution to customers, as well as for cooperative and in-house research. Most of this work is performed in the winter.  Additionally, there are four large screenhouses for similar work in the summer. A seed lab is used to extract, dry and package the seeds. Freezers hold the seed collection, and a walk-in refrigerated storage holds research tubers.  

The purpose of USPG, like any genebank is to acquire, classify, preserve, evaluate and distribute germplasm, information and technology pursuant to improving the crop. Right under your nose this is the  only facility in the US with that mission specifically for the potato.  Researchers here also support potato improvement around the world. 

The potato has about 100 species and more wild relatives which are accessible to breeding than
any other crop. At least 70% of new cultivar releases have exotic germplasm from USPG in their family tree.  Indeed, it is here that you will find the grandparent of  the Yukon Gold. 

It all begins here so researchers think about consumers a lot, since potato needs to expand demand to stay profitable.  Here you will find researchers working on evaluating and developing unusual forms like the Colombian orange-fleshed egg-yolk specialty type.  Scientists keep abreast of nutritional news and trends, since any kind of nutritional improvement in potato could make it a more attractive choice to consumers. Since there is no expectation that people will eat more, attention is paid to how the potato could compete better with grains.  And they're on the lookout for totally new outlets for potato.

Finally, substantial attention is given to how Wisconsin germplasm can address the needs of growers in Latin America, since this is a way to say “thank you” to the people who originally donated it to the world.

Fast Fact:  The Honeycrisp Apple (Malus pumila) was developed by the University of Minnesota at their Horticultural Research Center.  Designated as MN1711 in 1974, patented in 1988, and released in 1991, the Honeycrisp, once slated to be discarded, has rapidly become a prized commercial apple.  So, when someone wants to defund government-paid research at major universities it might just have consequences.

The King's Speech

On Tuesday, March 4th President Trump addressed a joint session of Congress.  I do not begrudge our President the opportunity to take a victory lap; particularly on the heels of six busy weeks of cabinet hearings, executive orders, reductions in force, court hearings, spending freezes, tariffs followed by pauses, starts and follow-up pauses of the the latter.

The speech was exceedingly long however; meaning the volume of dubious claims or lies was target-rich.  Nothing new under the sun; nevertheless, worthy of truthful daylight.  Consequently, from time to time one of more of the King's gems will be featured here.

Enjoy. 

“We’re also identifying shocking levels of incompetence and probable fraud in the Social Security program for our seniors, and that our seniors and people that we love rely on. Believe it or not, government databases list 4.7 million Social Security members from people aged 100 to 109 years old. It lists 3.6 million people from ages 110 to 119. I don’t know any of them. I know some people that are rather elderly, but not quite. 3.47 million people from ages 120 to 129, 3.9 million people from ages 130 to 139, 3.5 million people from ages 140 to 149. …”

This is false.  From all outward appearances the President was repeating fabrications posted on social media by Elon Musk.  As has been covered in the media this is a consequence of the Social Security Administration's (SSA) maintenance of their data bases using COBOL - a computer code invented when I was a toddler.  

A report issued by the inspector general for SSA as recently as 2023 documented that virtually every beneficiary who lacked a date of birth was deceased.  Coincidentally, neither the DOGE, White House, member of Congress or the media has been able to positively identify a an individual that falls into any category of the President's fabrications.

Where Does the Money Go?

Frequently the discussion around how the government spends our money gets bogged-down in the jargon of budget nerds with terminology like discretionary and mandatory spending.

Thee good people over at Axios along with the help of centrist think tank Third Way distilled thousands of lines of federal spending and broke it down into a chart using plain language. 

In the Third Way analysis 31 cents of each dollar the government spends consists of checks to Americans - primarily Social Security.  15 cents went to help people purchase health insurance, 12 cents to medical expenses, another 13 cents went to cover interest on the national debt,  3 cents goes to wages for military and federal law enforcement while everything else the federal government does cost 26 cents. 

Once you wrap your mind around the fact that 60 cents of every dollar is spent on health care or direct payments it makes the spending picture clearer.

FOIA

The DOGE has penetrated the IRS, Social Security and Medicare.

 

The DOGE now has access to all of my financial info and personal identifiers. I did not consent-to nor authorize Elon Musk’s access to this privileged and confidential information.

 

The DOGE has not disclosed what they are going to do with this information; or how they will protect me from identity theft or fraud.

 

Nobody has been able to explain how Elon Musk’s possession of this information makes me safer, more prosperous, improves my lot in life or makes my government more efficient. To what purpose is it they have my bank account and routing numbers, brokerage accounts, charities, medical records and more?

 

Come to think of it, if my former employer allowed a data breach on this order of magnitude they would be out of business.

 

 

So, last Friday I figured what the heck; I'll make an inquiry under the Freedom Of Information Act.  Maybe I can ascertain what DOGE has on me.  I figure there are three possible responses:

 

1. We have nothing.

2. We have something and here it is

3. Get lost.

 

An attorney pal tells me that all of the FOIA officers at federal agencies have been terminated; but to let him know if I get a response that is other than claimed exemption from disclosure.  A retired acquaintance informs me that FOIAs are the language of government procurement; that they have been for many many years.  Furthermore, they often go unanswered.  And a non-reply is standard and customary.

  

Stay-tuned.

 

And if anybody can answer paragraph four I'm all ears.  Even the most brilliant of my MAGA friends cannot.

Impoundment

Our Founding Fathers crafted our government to be small.  Not so small and ineffectual as the one under the Articles of Confederation (which the Constitution replaced) even so, limited.  In the century and a half leading up to just before the Great Depression, federal spending consistently hovered-around 3% of GDP; evidence of a constrained government.  With the passage of time things changed.

In an effort to limit patronage and corruption the civil service system was created in 1883.  With the exception of a wartime economy government continued to remain limited in both size and power.  Nevertheless, with the best of intentions, a small bureaucracy was born.

The arrival of Roosevelt's New Deal in 1933 gave rise to a vast collection of regulatory agencies, government-supported recovery programs and creation of various federal safety nets.  Considering the magnitude of a decade-long depression most of this was welcomed by a beleaguered citizenry. And the administrative state grew.

Fast forward to nowadays.  Several generations had come and gone since WWII and all the while government had grown larger.  Allow me to introduce you to the power of impoundment. 

In the simplest of terms an impoundment is any action – or inaction – by an officer or employee of the federal government that precludes federal funds from being obligated or spent, either temporarily or permanently.  Presidents dating back to Jefferson had periodically wielded the impoundment power.  

Naturally, Congress holds the legislative power of the purse.  It is the prerogative of Congress to hand the president a purse full of money; but not the capacity to compel the president to spend the entirety of the contents of the purse.  Presidents retained executive discretion in that regard. 
In 1974, Congress passed a law with the intent to limit the president's power of impoundment. 

The Impoundment Control Act of 1974 created procedural mechanisms by which the Congress considers and reviews executive branch withholdings of budget authority.  It requires the President to report promptly to the Congress all withholdings of appropriations and to abide by the outcome of the congressional impoundment review process. 

Although the basic framework of the act is sound, it set the table for a clash between the three branches of government - Executive, Legislative and Judicial. The Founding Fathers May have been prescient.

Enter the Unitary Executive Theory; a Constitutional law theory according to which the President of the United States has sole authority over the executive branch. It is an expansive interpretation of presidential power that aims to centralize greater control over the government in the White House.

The Executive Branch of the government exists because of Article II of the Constitution, which vests executive authority with the president.  Yeah, in a very short period of less than a month our new president has cut spending authorized by Congress.  Some are sore about this sudden turnabout.  Consider this; if a president is to have reign over the executive branch, has he the authority to eliminate the positions needed to spend that money?  Or can Congress or unelected judges force him to spend it by essentially commandeering executive power?

Therein lies the rub.

This is not rocket science.  If Congress passed a law last year saying money should be spent this year, then it might come as a surprise that a new president can just cancel that spending.  It is already impacting local government where I live.  The seeming abruptness of this is we haven’t had a president in fifty-plus years willing to fully test the limits of their constitutional authority, including impoundment. 

It's still very early in the game and the president has flooded the zone with enough sound and fury as to make one's head spin.

We'll have to wait a bit to see how this plays-out.  Only time will tell.

You're welcome......

Begging The Obvious

How Many Federal Worker Resignations Would Be a Lot?

Seventy-five thousand have submitted resignations as part of Elon Musk’s “fork in the road” offer. 

But 150,000 voluntarily leave every year anyway.

Feel free to parse the data here. 

EDIT To Add:

A federal judge in Massachusetts allowed the Trump administration's bid to offer "deferred resignations" to federal workers who voluntarily leave government service to continue and lifted a previous court order pausing the program's deadline.

Shortly after the ruling, Office of Personnel Management spokesperson McLaurine Pinover said in a statement that the office was "pleased" with the court's decision and that the deferred resignation program was closed as of 7 p.m. Wednesday. Roughly 75,000 federal workers have accepted the offer to leave their government positions, according to White House press secretary Karoline Leavitt. The White House had expected as many as 200,000 workers to accept the offer.

 

Doge - American Style

Doge - Venetian Italian for Duke - the highest official of the Republic of Venice.  Spanning the 8th to 18th centuries, more than a thousand years, the Doge was the sovereign ruler of the Venetian State.  

The palace of the Doge is famous for its flamboyant gothic architecture and its Great Council Chamber which houses possibly the largest oil on canvas painting in the world:  The Glory of Paradise by Jacopo Tintoretto.  As the primary residence of the Doge of Venice the palace was the physical manifestation of this supreme sovereign authority.

It is fitting that billionaire oligarchs Elon Musk and Vivek Ramaswamy have been appointed sovereigns of the incoming Trump administration's Department of Government Efficiency or DOGE.  Of course, lacking the authority of a real government department there is no supreme authority.  

Sigh. 

Trump's transition team tells us that Musk and Ramaswamy are going to solve our country's debt problem. The DOGE is going to reduce the government's power, slash its workforce and crack-down on waste, fraud and abuse.  The sovereign oligarca announced they intend to reduce the federal budget by nearly thirty percent ($2 trillion).  So far, the chatter has been largely about cuts without much bandwidth devoted to a single ducat of additional revenue or investment in efficiency.  

Sure, I know it's early in the game and the president elect has yet to be sworn into office.  As a consequence I am resigned to the notion that for the present I will be subject to random dictum from Ramaswamy and Musk highlighting: The Usual Bill Of Fare.  Pledging to battle waste, fraud and abuse in Washington is as old as the hills.  Having been trotted-out with incessant frequency as a campaign promise by both sides it has become tread worn.  This spent refrain has become wearily uninspired.  It is tiresome.

Where to begin?  Try to stay with me as we take a deeper dive in the numbers. 

I've taken a run at this stuff before and it all comes down to money coming in (revenue) and money going out (expenses).  Nuanced by what is non-discretionary versus discretionary.  With a dose of old-fashioned politics thrown-in for good measure. 

The revenue side of the ledger includes a couple of large contributions; namely individual income taxes (about $2.2 trillion) and payroll taxes (about $1.6 trillion).  Smaller are corporate income taxes (about $420 billion) and various duties and tariffs, sales, estate and excise taxes (roughly $228 billion).  For the 2023 fiscal year money-in totaled $4.4 trillion+.

The president-elect has promised to reduce individual and corporate income taxes by at least $5 trillion over 10 years; reducing the money coming-in.  He has also promised substantial new tariffs on imports; although no estimates have been revealed for these tax increases.

Social Security and Medicare would be difficult to cut as Trump has promised he would not.  Nevertheless, both programs are living on borrowed time.  Without additional revenues and changes to the retirement formula, the Social Security and Medicare trust funds are already under stress from an aging population.  They will run out of money in 2033 and 2036 respectively.  This means that current retirees will experience a significant cut to their benefits anyway.  Trump's promise to end taxes on Social Security would accelerate the arrival of these cuts.

On the expense side of the ledger the three largest non-discretionary expenditures include the fore-mentioned Social Security and Medicare, federal civilian and military retirement and veteran benefits.  Total non-discretionary spending for 2023 was $3.8 trillion. 

There is an additional $659 billion of net interest (give or take) on the outstanding national debt.  It stands alone; but added to the non-discretionary component of the federal budget gets us to a grand total of $4.5 trillion.

What's left?  Discretionary spending of $1.7 trillion.  Included in this category is defense and roughly $9 trillion in non-defense spending.

Non-discretionary and discretionary explained

Non-discretionary programs are deemed mandatory spending which means funding doesn't require passage of an annual appropriation by Congress.  By example: if the DOGE Bros want to reduce Social Security, Medicare, federal retirement benefits (military and civilian) Congress would have to pass legislation reducing or defunding these benefits.  

There is net interest on the national debt -  almost $700 billion.  The credit-worthiness of our nation hinges on our promise to pay our debts.  I don't believe the DOGE Bros would recommend defaulting on the debt or devaluing our currency putting their own wealth at great peril.

On the discretionary side of the spending ledger the DOGE Illuminati have tweeted about unsupported billions upon billions of defense payments that cannot be tracked or audited. I'll not argue there isn't waste, fraud and abuse or other similar leakage in the defense budget; but not enough to reduce the federal budget by 30 percent.  I suppose Musk and Ramaswamy might recommend that Congress kill the F-35 program.  Alas, there is that nagging matter of Congress, national security and jobs. 

What's left? 

That leaves a grab-bag of leftovers the DOGE can submit to Congress and the President for elimination and defunding.  In the grab-bag is found Assistance to Individuals (namely nutritional and healthcare programs), transfers to states (Medicaid coverage for poor people, education, roads, bridges, highways, ports, airports and other infrastructure), National Parks, the National Weather Service, arts funding (public broadcasting); you get the drift.  

Of course, in the grand scheme of things, this grab-bag of leftovers doesn't even come close to scratching the surface of reducing the federal budget by thirty percent.  And here's the catch; a considerable portion of the grab-bag is decidedly popular with much of the public.  Defunding it would result in a cascade of serious budget shortfalls for the states leaving all the governors and the people very grumpy.  

The challenge for Trump and the DOGE is that a 10,000 foot view of the discretionary side of the federal budget reveals that it is just two things - military and defense; including a vast health and social insurance program that comes with it; and everything else.  Compared to defense, the rest of the discretionary budget is much more transparent because average Americans are witness almost on a daily basis to weather forecasting, highways, air traffic control, public broadcasting, national parks and monuments.  They cost relatively little money in a ginormous federal budget and are generally liked.

I readily admit I struggle with coming-across as slightly snarky about quirky oligarchs like Musk and Ramaswamy; they're billionaires after-all.  Who among us actually believe they are sincerely empathetic to the needs and wants of ordinary Americans?  How many of you think they relish the attention of the Trump reality show?   These juxtapositions mean they have to work harder at candor and authenticity if they want to be taken seriously and actually add value to the incoming administration.

If the DOGE only looks at cutting the budget their task may become virtually impossible as it would result in a significant disruption of services average Americans have come to expect from government.  The DOGE must explore creative initiatives that require investment in efficiencies and alternative sources of revenue and think big.  They need to go after the big money to make a historic splash. 

I'll let you in on a secret:  They need to shift that thing we refer to as an 800 pound gorilla.  They need to look to Social Security and Medicare - the root cause of our budget woes.  The subject politicians are so loathe to speak-of that they tip toe and shrink from it like timid sissies.   

I am not being snarky - if Elon and Vivek put their thinking caps on and put their minds to meaningful reform of both of these programs with a view to securing their future for the next couple of generations it would be earthshaking and enshrine their boss in history.  Who knows, I might even become a believer.

To be clear this would be a heavy lift.  Politically-fraught too.  The last president to pull it off was Ronald Reagan.

I wish them well as President-elect Trump will be a lame duck president; with effectively only a couple of years to implement meaningful change.   Which may partially explain why only a few days ago the richest man in the world is now walking-back his boast of $2 trillion budget cuts.    

There is enough meat on this bone there is a high probability of another couple-three blog posts to do it justice.  And since it is very early in the game there is ample time for bonafide policy to evolve and unfold.  Detailed policy which will improve your and my prosperity and general lot in life.  And perhaps make the world a safer place.

Of course, There is time for additional hedging and moving of goal posts; so stay tuned.

Cheers!

Don't Forecast The Election

Last week, and before I left for South Dakota for a vacation and escape from the election nonsense, an email from a neighbor showed-up asking for me to make sense of an October Market Recap he had received from his financial guy.  This was a lay-up for me and I notified my pal that I would be happy to oblige - after I had returned from my ringneck-chasing getaway.  

I emailed him last evening as my last task before going to bed bone-tired.  What follows is a distillation of what I shared:

Neighbor...

What you received from Mr. So And So, CFP® is a rather detailed recap of the investment market's out-performance for YTD 2024.  It is nicely summarized and annotated with supporting details.

Contrary to some of the political rhetoric we've been subjected-to in the run-up to the election is the fact that the US economy is on a tear in most all of the sectors that matter.  Inflation has returned to normal and I paid $2.77 last week at the Brussels BP for a tank of unleaded regular.  You needn't look any further beyond the same observations and additional stats your guy provided.  None of that data is imaginary and the markets reflect it.  You, myself and others similarly situated in the 'ownership class' (retired owners of stocks, bonds and real estate with little if any debt) benefit greatly from an economic cycle such as this.  Emancipated from raising and educating our children our focus turns-back to children, grandchildren and great-grandchildren - but without the demands of a day job.

Getting back to the markets, and pointing out something your financial guy did not address, is an interesting implication for tomorrow's election.  When the S&P 500 Index rises in the final three months before the election the incumbent party typically remains in office.  Conversely, a drop in the index has historically indicated that the opposition will claim victory.

In 12 out of the 15 presidential elections since 1926 the ruling party has benefited from a strong stock market performance in the three months leading up to the election and went on to win.  That is an 83% streak.  

While a streak such as this would signal a Harris win; a streak is nothing more than a streak.  Streaks can be broken and I happen to believe that this election is too close to call.  Even the betting markets are evenly divided tonite.

If I was still in the day job, and was communicating with my clients, I would be telling them something on this order:  'It is important to be mindful that the outcome of the election (whether it suits your personal politics or not) is not a reason to react emotionally.  That invites investment mistakes.  If you don't like the outcome of this election, there is a high probability you will be pleased with the mid-term elections in 2026.  This is because the party that loses the race for the presidency this year will likely win the House in two years putting a halt to the new President's legislative agenda.  That's just the way things happen to play-out most of the time. '

I went on the explain that polling suggests that neither party will hold a super-majority.  In other words there will be divided government much as the Founders intended.  This will require compromise.

So, as we watch the returns tonite we should remain mindful that our Constitution has survived 235 years.  This will not be the last election and if the people dislike the policies they get; they'll get around to changing them eventually.   Blah, blah, blah.

I closed with an admonition on a subject (I have blogged about many times) - that being the federal debt and deficit.  The budgets under both Trump and Biden have manifested unprecedented deficits.  Given the reality of record high employment and our country not being at war this aberration absolutely requires attention in the years ahead.

What I did not share is my skepticism over either candidate rising to this task.  So time will tell.

All I gotta say is it has been a terrific game to watch for the last 16 weeks.  Sudden Death Overtime?  Who knows?

Sometimes elections, investment markets and football, are a roll of the dice.

See you all on the flip side....

Skin In The Game

So here we are; several months since Joe Biden abdicated the throne and Vice President Harris and Governor Walz have turned the election campaign on it's head.  If you watch the polls the democrats have turned the tables in several battle ground states and possibly reversed the trend in others and nationally.  What I would give to be a fly on the wall in Trump or Harris campaign HQ.  But let's not get over our skis -  is this a sugar high, a honeymoon or an implosion?  No way to know for sure.  Besides,  polls have been sketchy the last couple-three national elections; and I happen to believe that the outcome remains a tossup.  So I want to speak to the subject of gambling, or wagering.  

I've touched-upon this subject from time to time; sometimes from the POV of a financial guy and sometimes outright humor.  Back in the first week of June I took a stab at a topic I had been reading-up on and listening about; a subject that I thought was maybe gonna gain some traction - that of actually wagering on US Elections.  With every passing week it seems to be gaining traction now that we have a real competitive campaign.

For some time government regulators with oversight on Wall Street have been trying to clamp down on growing election wagering in the US.  With a completely reconfigured presidential race a tsunami of trading on this fall's election has taken-off.  At the time of the publication of this post, traders (gamblers) favor Harris over Trump.

PredictIt, formerly a largely academic pursuit and now off-shored was witness in July to its busiest wagering volume reaching roughly 120 million contracts - a spike of more than 500% over June.  $1.1 billion has been bet on crypto-based Polymarket since June, according to Dune Analytics, and 88% of that has been political bets on the U.S. election.

Consequently, this has the increased attention of the Commodity Futures Trading Commission (CFTC) who has proposed rule-making that would expressly outlaw wagering of this sort with scattered support in the US Senate.

As a recovering financial guy with almost forty years in the wealth management biz I've seen more than my share of feeding frenzies in the equity, fixed-income, commodities, futures and other derivatives markets; and market bubbles, more often-than not, end badly.  After-which seasoned veterans, put on their boots, roll-up their sleeves, slip-on their autopsy gloves and sift thru the bloody detritus of mostly novice online traders who got themselves slaughtered chasing phantom profits.

Markets always correct.

Nevertheless, none of this is outlawed or banned.  Financial markets are regulated and there is ample opportunity for the unguided to squander their savings on dreams, brass rings or Pumpkins and Mice.  The CFTC needn't ban wagering on election outcomes as much as they might regulate them with reasonable guardrails just like any other market. 

The UK has grappled with their own tempest in a teapot with the revelation that some conservative members of parliament got caught placing bets on the timing of their recent snap election.  Did it impact the July 4th outcome?  Who knows?  Considering the level of outrage when this got found-out it's entirely possible.  Should politicians be barred from betting on elections?  Or allowed to do so at their own political peril?  

A week and a half ago, a federal judge cleared the way for Americans to place bets on the outcome of congressional elections via a prediction-market startup.  A ruling that may potentially expand further legalized wagers on elections in this country.

Wagering requires bettors to put their money where their mouth is.  Betting markets may be useful when politics are chaotic.  With skin in the game facts displace misinformation.  

We got a game-on folks....

Hot Tip

A couple of months ago I was chilling-out at the airport in Chicago waiting for a connecting flight.  At a kiosk to purchase an $8 bottle of water the credit card terminal said ADD GRATUITY.  What the hell?  Tipping an attendant watching me process my own transaction?  An interaction that lasted less than 15 seconds?  I even had to fetch my own water.  The attendant's sole purpose was to scan the bar code.  Some days I think that this business of tipping has gotten out of hand.  

It's madness and it makes me grumpy.

Yet the madness has spread.  Both contenders for the White House have gone on record as supporting an exemption of tipped income from the federal income tax.  Donald Trump had this to say: It's a large group of people that are being hurt badly.  They make money - let them keep their money.

It's not an original idea and it enjoys a reasonably high level of populist support.  Because, (surprise, surprise) nobody likes to pay income taxes.  Nevertheless it is bad policy.  Allow me to explain.

Between 1972 and 1978 I worked in the restaurant business as a waiter and bartender.  As a consequence I know how tipped income works.  I made a pretty good living with this arrangement considering it was a part-time gig.  And just like today tips were taxable income fifty years ago.

In an election year this concept plays well with workers in the hospitality industry.  It is Silly Season after-all and Nevada also happens to be a swing state so I get the need for pandering.  Nevertheless, carving-out one form of income for preferential treatment while ignoring all other sources of income runs afoul of all manner of unintended consequences.

Most obvious is how are you going to pay for it?  The nonpartisan Committee for a Responsible Federal Budget (CRFB) estimated that the Harris plan would increase deficits by $100 to $200 billion over a decade.  The Trump plan to exempt all tips from federal income AND payroll (FICA) taxes would reduce revenue by $150 billion to $250 billion.  So, how do you replace the loss of revenue?  Eliminating waste fraud and abuse ain't gonna cover it.  That worn-out refrain is bogus.  Unless you're willing to raise someone else's taxes the deficit and debt will balloon at an even faster rate.

The Trump plan has an additional consequence.  Exempting Social Security and Medicare reduces revenues to these programs thereby accelerating the insolvency dates for both.  It also impairs an employee's eligibility and level of retirement benefits.  

What about the matter of fairness?  A hotel or resort's tipped waitstaff may make the same hourly wage as someone working in a warehouse.  Is it fair that the person who pours you a drink pays less income tax than the person who is filling your Amazon Prime order?

Tipped workers tend to skew lower income.  Consequently, almost forty percent of them do not earn enough to to pay any federal income tax anyway.  They do pay FICA payroll taxes for Social Security and Medicare however.

The CRFB has also raised a caution flag about the behavioral effects of making tips tax free.  The group suggests that this would incentivize employees and employers to make gratuities  a larger share of their income.  The practical consequence is the airport kiosk experience I shared at the outset.  When we swipe our cards we're going to see ADD GRATUITY not just at restaurants, cafes and bars - but a growing number of additional businesses.

Madness that will make me really, really grumpy.

Finally, some creative accountants, financial guys and other geniuses will get around to finding or creating loopholes for those at the higher rungs of the income ladder to exploit this federal largess.  Trust me on this.

If you really care about workers on the lower rungs of the wage ladder instead of singling-out a particular subset of workers for preferential treatment; how about a policy that treats everyone equitably.  All that really matters is disposable income; as it is lower-paid labor that struggles more than anyone else with the impacts of inflation. 

Consider this:  Expand the personal exemption, Earned Income Tax Credit, Child Tax Credit, and lower marginal tax rates.  Or some combination of all.  Using the existing income tax framework is an easier approach as we're already familiar with how it works.

And don't lose sight of paying for it.  Otherwise you're just blowing smoke up somebody's backside.

The Big Wager

In the world of wagering you can place a bet on virtually anything.  It doesn't have to be on the outcome of a ball game or a horse race.  People place bets on all sorts of subject matter; both common and arcane.

Starting a small business is a bet.  Investing in stocks may sound like a bet or walk like a bet; nevertheless, it requires an ownership interest.  

In the financial markets, spread betting is a form or derivative trading on various types of securities.  Traders (gamblers) speculate on how the price of a financial asset will move and make a profit or loss based-upon the outcome.  Unlike investing in stocks, they do not own or take a position in the underlying asset. 

Not all bookmakers take bets on anything and often you cannot find the bet you want to make available.  Nevertheless, you can wager on the possible outcome of anything from an emerging COVID variant, the Academy Awards, gasoline prices, flight delays and natural disasters.  Naturally distrustful of polling data, for a long time I have followed the Vegas line on election outcomes.  More information builds a basis for rational predictions.  Not that I am any better at it.

Speaking of which, PredictIt specializes in elections.  A contract for President Biden winning in November recently cost 51 cents versus 47 cents for former President Trump.  Both contracts pay $1 if you're correct. 

Alas, the Commodities Futures Trading Commission (CFTC) has been grabbing the bull by the balls with prediction market operators over both the merits and legality of wagering on domestic elections.  

In 2023 the CFTC rejected a bid by derivatives start-up Kalshi as a consequence of perceptions of violations of election law.   The CFTC has taken both Kalshi and PredictIt to court.

Much of this is an academic pursuit.  Common sense suggests to me that derivatives contracts are used all day long to help (and protect) businesses and individuals from the consequences of unexpected and disastrous outcomes.  If I had significant exposure to electric vehicle stocks I might hold a contract protecting me from a Trump election win in November.  Elections have consequences after-all.  And depending upon where you stand both good and bad.  But I digress.

The bottom line is the Vegas line on election outcomes,  I happen to think the odds-makers play an important role with the use of an additional tool to measure where voters might stand on a particular candidate. 

Does a financial services regulator have a role in elections?  Is this the purview of Congress and lawmaking?  I dunno.

Stay-tuned....

This Is What Governing Looks Like

Bravo Mike Johnson for straight-up votes on foreign policy and global security interests. 

No one likes war yet Russia, China and Hamas are antithetical to basic western values.  

Johnson did the correct thing because, as a leader, he saw a differing perspective than a back-bencher like Marjorie Taylor Greene. His leadership today was courageous and he must be congratulated by all regardless of any other consideration.

This is what governing looks like.

Reproduction Meets Religion

Last week The state of Alabama found itself in an unforced and awkward situation.  The Alabama Supreme Court ruled that frozen embryos are children.  Yes, embryos produced as a consequence of In Vitro Fertilization (IVF) procedures are children.  They have personhood just like me and you.

All of this means that Alabama finds itself in the unique position of being a state where a female can be forced to carry a pregnancy to term - even if a twelve year-old is raped by her incestuous father.  If you find yourself unable to naturally conceive a child, IVF treatment is no longer available to you. 

All of this stems from the Law of Unintended Consequences as no one wants to be arrested and thrown in jail or get cross ways with the State Supreme Court because nobody knows what to do with thousands of frozen children.  Murder is a capital offense in Alabama; so it's not much of a stretch to believe you could be executed if found responsible for the loss of frozen embryos.

When it comes to reproductive options Alabama now finds itself a very unwelcoming place to live.  Republicans have concocted a fine kettle of fish for themselves and I'd be willing to bet that since it's an election year the dems are going to rub their noses in this shit.  Another nail in the coffin of the suburban women vote, eh?  But I digress.

What I really want to talk about is the religious angle on all of this because Chief Justice Tom Parker had this to say about the court's decision:  Human life cannot be wrongfully destroyed without incurring the wrath of a holy God.

Once you get beyond the divine retribution part, he makes a good point.  He's being morally honest.  For him it's all about God and for many of us reproductive decisions are frequently tangled-up in moral, religious and faith beliefs.

I was raised in the Roman Catholic tradition of the Christian faith, and even though The Church has washed its hands of me following a divorce decades ago, many of the beliefs I learned as a child and young adult still ring true and continue to shape my life. 

Guidance for many conservative Christians includes a belief that life begins at conception.  This applies to IVF treatment and abortion.  There is no compromise.  Catholic doctrine expressly forbids both including virtually all modern birth control interventions as well.  Just last month Pope Francis condemned surrogacy as despicable and called for a global ban on the practice.

Catholicism also happens to have a long and rich tradition of beliefs couched in social policy regarding reverence for life and care for the the poor.  Sex outside of marriage is forbidden - the act of which is reserved for married individuals and is solely for procreation.  Masturbation causes blindness too.  That's the doctrinaire part of it; truthfully, many Catholics are not that observant and routinely use hormonal birth control and seek IVF treatment.

Protestant beliefs can be more forgiving on the subject of IVF - possibly because the result is more children.  Furthermore, Evangelicals also tend to rely-upon literal interpretation of the bible; and naturally, the bible says nothing about IVF treatment.

The Chief Justice invoked God in his ruling - presumably this is the God of Abraham from whom the three major world religions hail.  

Judaism allows assisted reproduction when medically necessary.  Having children bears witness to the command to be fruitful and multiply.  Furthermore, the destruction of unused embryos is allowed as long as they thaw and dry naturally.

Islamic beliefs also allow all assisted reproductive technologies providing that the sperm, ovum and uterus belong to a legal-married couple during the term of their marriage.  If infertility is beyond cure it should be accepted.  If there are unused fertilized eggs their treatment is consistent with that of Judaism.

Respectfully, faith traditions are not in general agreement on much of this.  And adherents to a belief system should be guided appropriately.  Unlike Iran our country is not a theocracy ruled by mullahs; our government and system of laws is secular.  So if you don't believe in IVF, abortion, divorce, birth control or whatever, don't engage in the practice.  I am not going to impose my beliefs on someone else and I expect reciprocity.  

I happen to think that government already intrudes too much in the private lives of its citizenry.  So stay out of my life, my home, my bedroom and keep your damn hands off my body.  We're rational beings and consequently should be making our own decisions about our own destiny guided only by common sense, family, medical professionals and our faith beliefs.

I know I'm being snarky; but if frozen embryos are children, why aren't parents allowed extra exemptions on their tax return?

Now get off my lawn....

A Fine Kettle OF Fish

The title of this post has origins in the Scottish tradition of cooking-up a kettle of fish parts to make guests feel welcome.  The modern etymology of the title is reference to an awkward situation.  And indeed, Alabamians and their lawmakers have found themselves in an awkward situation today.

Some basics about natural conception and reproduction.  

A male gamete (sperm) combines with a female gamete (ovum) resulting in a fertilized ovum called a zygote. The zygote holds 100% of the genetic material - mother and father each contribute one-half - this develops into an embryo.  When an embryo successfully completes its journey of days and attaches to the wall of the uterus it will develop into a fetus.  And a child is born in the end.  That doesn't sound very romantic but that's the science of it.  There's a lot of moving parts and plenty of opportunity for something to go wrong along the way.  In a perfect world all of this happens without scientific intervention.   

What about people who cannot naturally conceive and reproduce?

The term In Vitro - Latin for 'in glass' - describes medical procedures, tests and experiments that scientists perform outside of a living organism.  In Vitro Fertilization (IVF) is a treatment process whereby a woman unable to naturally conceive a child can become pregnant.  IVF has been a godsend for people who cannot naturally conceive children.  Sperm and ovum are combined in a laboratory setting resulting in a fertilized zygote which will become an embryo.

IVF Human Embryo

This embryo is frozen for future implantation.  Once implanted, if the embryo successfully attaches to the lining of the uterus it becomes a fetus and, voila!  Maybe a child is born.  The uterine part of the process is critical because without that step the embryo cannot survive.

Collecting eggs for in vitro fertilization is complicated and includes some risk.  As a consequence multiple eggs are collected with the knowledge that once fertilized some will be genetically flawed (and discarded) and some will never successfully attach to the uterus following implantation.  Many couples naturally grow their families over a number of years so having some extra frozen embryos on hand solves the defective embryo situation along with implantation failures and can lead to more children.

Unused frozen embryos have typically been discarded.  Just as an acorn is not an oak until planted and successfully germinated; without uterine implantation the genetic material of the embryo cannot result in a child. 

Back to Alabama.  The Alabama Supreme Court ruled yesterday that frozen embryos - the product of in vitro fertilization - are children.  You can read the ruling here.  This complicates things for all of the embryos in cold storage.  What if the power goes off and they spoil?  Or you drop and break the container?  Discard genetically defective ones?  Discard good ones? 

It's none of my business if someone chooses to have a family or not to have a family.  Some couples have large families and some couples never have families for all kinds of reasons within and beyond their control.  That's their business and none of my concern.  Although I should add that I have personal knowledge of many families, immediate and otherwise, who have had children as a consequence of IVF treatments performed by doctors who God has endowed with tremendous and valuable medical talents.  

I also know that in a post-Roe world which restricts abortions in many states; if Republicans want to deprive couples from using the science of IVF to conceive and welcome children into a loving family then Alabama today finds itself in a awkward position.  A place where you are forced to give birth if you naturally conceive along with being a place where you cannot obtain IVF treatment if you really, really want to have a family. 

Having classified frozen embryos as children has complicated things.  Fearful of being civilly or criminally liable and arrested and thrown in jail or otherwise get cross-ways with the Alabama Supreme Court nobody knows what to do with all the frozen embryos.  The Law of Unintended Consequences has brought IVF treatment to a screeching halt.    

Reproductive stuff is complicated and the more Republicans continue to insert themselves into the reproductive lives and decisions of ordinary people the more they will continue to have a much larger problem with getting suburban women to vote for them on election day.  It's a fine kettle of fish they have concocted for themselves.

And don't forget.  Alabama is a Capital Punishment state.  They will put you to death for murder.  They're going to have a whole heap of trouble on their hands once they begin executing moms and dads and medical professionals over any mishandling of frozen embryos.

Sweet Home Alabama!

What The Hell?

We learn that the hospitalization of Defense Secretary Lloyd Austin was kept from the White House and his own top aids for days.

The world is an exceedingly dangerous place and the Chairman of the Joint Chiefs  knew of Austin's condition last Tuesday, the day following Austin's hospitalization at Walter Reed.  Yet it was two more days before the Pentagon Chief of Staff, Kelly Magsamen notified the Deputy Defense Secretary, Kathleen Hicks and Biden's National Security Advisor Jake Sullivan.

If these three individuals knew how is it the White House was uninformed? 

The US assassinated an Iran-backed militia leader in Iraq last week.  Who was in charge?

This is the sort of drama I'd expect from the former occupant of the the White House. 

What the hell?

And what's anybody going to do about it?

Inflation Paradox

Happy New Year gentle readers.  

With the dawn of the New Year unemployment is still below 4 percent, inflation has cooled to 3 percent, third quarter economic growth came in a 5.2% 4.9% (revised a second time) the ratio of job openings to unemployed workers has returned to pre-pandemic levels and wages are growing faster than prices.  All good news as we turn the page on a new calendar.

As supply chains have finally caught-up we've even settled into consumption patterns that are near normal.  (Note: If Iranian-back Houthi rebels step-up harassment of Red Sea shipping; supply chains are gonna get rocked).

All of that aside, what we know for sure is that us boomers are continuing to retire in droves; and as a consequence have created a demographic disturbance in the force.  The millennials and Gen Z population cohorts might not be capable of meeting future labor demands.  So, while we can momentarily bask in the warmth of recent positive economic news, inflation might be a stickler for awhile.  We have to wait and see.

And there is that nagging disconnect between consumer behavior and consumer perception.  So check back Sunday while I take another whack at that piñata.  

 

Fun Factoid:

Declaring it Public Enemy Number One, in 1974 President Gerald Ford mounted a campaign to suppress inflation.  It was called Whip Inflation Now (WIN) and an attempt to spur a grassroots movement to combat inflation by means of encouraging personal savings and disciplined spending habits in combination with 55 presidential vetoes (45 upheld by Congress) saving US taxpayers $9.5 billion.  I'm old enough to remember.

Serious Thoughts About Serious Reforms

Baby boomers are that demographic born between 1946 and 1964.  I happen to be a member of that cohort.  We are referred-to as 'boomers' because it was during this period there was a statistical increase in the number of births.  Our parents were busy making babies which resulted in a boom or bulge in the broader, general population.  When I was advising individuals on financial matters I would counsel them to to think of this as the pig moving through the python.  

Why is this on my mind?  First, I'm a retired guy with time on his hands so I think about this from time to time.  Second, there is a minority caucus in congress that would lead you to believe (loudly) that our annual deficit and accumulated debt can be made to be magically solved by reducing discretionary spending in the federal budget.

Nonsense.  The real problem that nobody, Republican or Democrat, wants to talk about is this.

As recently as last year federal spending for Social Security, Medicare, Medicaid, Obamacare and other healthcare programs accounted for 46 percent of all federal spending.  Very likely this year it will tip over the halfway point of 50 percent and be larger than spending for all other priorities.

About 10,000 boomers attain 65 years of age every day.  In 2029 the youngest of the baby boomers will turn 65.  Stated differently, all of us boomers will be age 65 and older.  This has multiple implications.

The growing ranks of retiring boomers is having a direct impact on the number of available workers in the U.S. workforce.  This turnover in the labor force has resulted in a shortage of workers in some occupations and locations; but it also creates opportunities. 

Social Security is primarily funded by payroll taxes assessed on wages.  The share of workers paying taxes has been falling relative to the share of beneficiaries creating an imbalance. This introduces an element of risk.  We all know about this and we should make a plan over the next generation to address it.  Without a plan the problem can escalate to a crisis.  Delaying to plan simply increases the risk and the scale of possible crisis.

Complicating this is only 55% of my boomer cohort has some retirement savings.  Of those who have saved, 42 percent have less than $100,000 set-aside.  Consequently, roughly half of retired boomers will have to rely on Social Security as their principle source of retirement income.  That is scary. 

Furthermore, we are living longer than ever before.  Each generation is exceeding the average life expectancy of the previous. 

When Franklin Roosevelt signed Social Security into law in 1935, the age to qualify for Old-Age, Survivors and Disability Insurance was 65.  In those days the number of poor people was greater and lacked health insurance.  When benefits were first paid in 1940, 46 percent of adult males did not survive to age 65.  For those who did, the average life expectancy was less than 13 years.  For women it was only slightly better.

For a 65 year-old couple nowadays there is a high probability that at least one of them will survive to 90 years of age or beyond.  And while life expectancy has risen the minimum qualifying age for receiving a reduced Social Security benefit has fallen to 62.  The result is a significant percentage of beneficiaries will collect benefits for a third of their adult lives.

Declining birth rates and the absence of a comprehensive immigration policy have contributed to a decline in the ratio of workers to beneficiaries from 5.1 in 1965 to 2.7 today.

Where do we go from here?   

Doing nothing simply increases the probability of a greater crisis.  Continued borrowing to protect the growth of Social Security and Medicare is unsustainable.  Budget voodoo suggesting that cuts solely to the ever-shrinking discretionary portion of the federal budget is equally unsustainable.  Shoring-up the system on the backs of today's working families is unfair.  Threatening another government shutdown is dangerous to our credit rating and fixes nothing.  None of the foregoing is serious.

The last time policymakers took a serious run at this was 1983 when Reagan signed into law major Social Security reforms as a consequence of an urgent benefits crisis.  In the intervening years those reforms have generally held-up.  Nonetheless, any number of demographic and economic factors have contributed to a projected exhaustion of the trust fund in 2033.  

Today we're not facing a funding crisis and reduction of benefits in three short months.  There is a big difference between a few months and a couple of decades.  Yet 1983 does have lessons for us.  One is the importance of a bipartisan deal like the one forged by Speaker Tip O'Neill and President Ronald Reagan along with support by both parties.

An additional lesson is the importance of phasing in change over a generation.  The 1983 reforms included accelerating scheduled payroll tax increases and raising the full retirement age; none of which impacted beneficiaries already on the rolls.  This afforded future beneficiaries decades to plan for retirement.  And the politics of gradual change is more easily accepted than abrupt change.   

What defines middle age and old age continues to change as most Americans are living longer and better than ever before so we must revisit our retirement expectations and the government and private programs that support them.  

We need to revisit the wage cap on contributions as a means to increase revenue.  I am smart enough to know that it is the wealthiest who live the longest and stand to benefit from smart reforms.  We can reduce spending by adjusting the earliest retirement age from 62 and full retirement from 67.  Remember:  The last increase was 40 years ago.  I am mindful that our population demographics are imperfect but far better than countries like China, Russia, Germany and France.  Yet unless we start cranking out more babies there is a very good case for embracing comprehensive immigration reform. The sixth paragraph (above) suggests opportunities.

We should be looking for saving money on those who don't need it and spending money on those who need it the most.  Medicare needs to be reformed for those who choose to work longer and those who might have to retire earlier as a consequence of a job that has exacted a physical toll.

Beneficiaries should be induced to delay retirement by means of crediting higher benefits later in life for increasingly delaying their retirement.

Add to this the hodgepodge of state by state perks granted to us seniors as a consequence of living to age 65.  On balance young families with similar incomes pay a higher tax burden than their parents who are better-off.

Now get off of my damn lawn!

Charts: Heritage Foundation