The Retired Investor: Weather Worsens Global Trade
Changes in climate are impacting a global economy that is fighting to recover from a pandemic. Supply chain bottlenecks continue to worsen as continuous weather-related catastrophes close ports, and snarl land, sea, and air transportation routes. Can it get any worse?
Yes, and it probably will, according to climate experts. Nearly all actively publishing climate scientists agree that humans are causing global warming and climate change. The less than 2 percent of experts that disagree have published contrarian studies that either cannot be replicated or contain errors. I'll go with the consensus on this issue.
Here in the U.S., we receive ample proof of that change almost on a daily basis. I have lost count of the number of hurricanes hitting our shores so far this season. Rivers are drying up, some permanently, while heat domes and uncontrolled forest fires afflict the American West and Pacific Northwest. Similar occurrences are happening throughout the world from flooding in Germany typhoons in Asia and drought just about everywhere.
These weather-related events significantly increase the price of production, no matter the product, while reducing the speed with which supplies can be delivered. The quality of goods and services also suffers. Increasingly, the timing of deliveries is being thrown into disarray. Delays in components and parts that may make up a finished product further disrupts supply chains. If you add in shutdowns and labor shortages caused by the ongoing pandemic, you may now understand why some consumers are doing their holiday shopping in September rather than December.
Swiss Re, a world-class insurance company, recently predicted in a research report that the effects of climate change could shave anywhere from 11 percent to 14 percent off global economic output by 2050. That comes to $23 trillion. Every year, however, billions of dollars in lost trade go unreported and uncounted.
Using the U.S. as a ready example, over the past four decades, we have suffered through 300 weather and climate-related disasters that cost the country more than $1 billion each in losses. In 2020, there were 22 such billion-dollar disasters. But none of those losses include the disruption in economic output and lost trade that accompanied the death and destruction.
Until recently, supply chain managements considered weather as a short-term risk where disruptions would be temporary at best. Only now are companies realizing that they need a long-term understanding of weather and climate trends that encompass several years or more. How to mitigate this physical climate risk on supply chains is becoming, quite literally, a hot topic.
Most of the world's populations, for example, lives near seacoasts, where there is increasing risk that sea levels will rise, causing more storms, flooding, and hurricanes. Buying, or building a property (or contracting with a supplier) in a coastal area that lacks infrastructure protection in the event of coastal flooding may no longer be advantageous. Factors like this are now becoming more of a consideration among corporate planners.
Climate-driven weather extremes are most evident and visible in the area of food production. Prices are skyrocketing and scarcities are becoming more frequent.
Problems in pork production in China, tomatoes in California, sugar and coffee in Brazil, and grains of all kinds in various locales are devastating certain producers while benefiting others. Human-driven climate change is hammering agricultural areas throughout the world.
I could also address the risk to the world of a diminishing water supply, but by now you are getting the idea that climate change is not only here to stay but its impact is increasing. It is going to make goods and services less plentiful and far more expensive in the years ahead. Corporations that plan today for the risks ahead should come out on top.
The Retired Investor: Moderates Winning on Tax Debate
For months, wealthy U.S. taxpayers and corporations have been living with the specter of higher taxes under the Biden administration. It is a pretty good bet that taxes will go up, but not as much as you might expect.
Throughout the week, Democrats in the House and the Senate have been horse-trading over the amount of spending versus the amount of taxes necessary to pay for President Biden's $2.3 trillion budget plan. Republicans are already on record that they will oppose any new tax hikes at all.
Since the Democrats hold such a slim majority in both the House and the Senate, any legislation will need to accommodate both moderates and progressives within the party in order to pass. The battle between the progressives and the moderates has already started.
It appears that Senate progressives, like Bernie Sanders and Elizabeth Warren, along with House liberals, such as Alexandria Ocasio-Cortez, will need to temper their expectations on how high the corporate tax rate (and other taxes) should be raised. Draft legislation, released this week, indicated that the corporate tax rate, which is at 21 percent, may rise to 26.5 percent (on anything over $5 million in income) and not the 29 percent that was first suggested in the president's initial proposals.
As for individual tax rates, there is some on-going discussion among moderates who might want to raise the top bracket for wealthy individuals and married couples by $50,000 or so.
The original idea was that those individuals earning over $400,000 per year (and married couples earning over $450,000) would be taxed at 39.6 percent, up from 37 percent starting in 2022.
However, the key battle will still-to- be waged is over changes to the capital gains tax.
Under current law, people who die with unrealized gains don't pay capital gains taxes. Their beneficiaries do pay, but only on gains dated after the prior owner's death, and only when they actually sell those assets. The Biden plan would treat a death in the same way the IRS treats a sale, that is, a capital gains tax would automatically be applied.
The initial proposal would also increase the capital gains tax from 23.8 percent to 43.4 percent. The House Ways and Means Committee has suggested limiting the capital gains tax to just 25 percent, which does not sit well with progressives.
Capital gains taxes are a sore point for many (but not all Democrats), who have complained for years that the present tax laws unfairly benefit the wealthiest Americans. Not so, say others. Moderates argue that there are plenty of small family businesses and farms that would be devastated by these changes.
The Biden proposal would offer a $1 million exemption to everyone and would allow farm and business owners to defer taxes as long as their businesses remain family-owned. A new
Senate Finance Committee proposal would ease the capital gains hit by raising the per-person exemption to $5 million, and up to $25 million for family farms.
Then there is a group of senators and congresspeople (regardless of whether they are progressives or moderates) from New Jersey, New York, and other high-tax states that are insisting that they won't back a budget deal without a relaxation of the limits on the state and local tax deduction, the so-called SALT tax passed in 2018 by Republicans. Progressives are just as insistent that the lion's share of these benefits would accrue to the rich and not the middle class. A compromise might be found in capping any SALT tax breaks to a specific middle-class income bracket.
As you can imagine, this debate is not over. I expect it will take at least two more months before a compromise will be hammered out between the opposing wings of the Democrat Party.
Investors can be almost certain that taxes will rise for some, but the sting will be lessened to some degree.
Fortunately, the chances of compromise are quite high, especially when one considers the stakes. The expansion of the U.S. social safety net, the critical need for a new climate policy, and the fact that mid-term elections are not that far away, indicate a deal will get done.
The Retired Investor: Japan Is Worth a Look
It has been 30 years since the Nikkei 225 last touched the 30,000 level. However, many investors look beyond this island nation and focus instead on its Chinese neighbor. That may prove to be a mistake.
To some investors, it is the epitome of value investing. Warren Buffet's Berkshire Hathaway made some sizable bets on several Japanese trading companies last year. Japan's stock market is cheap compared to many other markets. But deservedly so, say the bears, since investors have had to put up with years of sluggish growth and perennial deflation.
Japan is home to many well-known companies, (think Sony and Toyota) that have balance sheets flush with cash. More than half of Japanese companies have net cash positions on their books, compared to just 10-20 percent of most companies in the Western developed world.
Over the past few years, an increasing number of activist's equity funds and private equity firms have lobbied these cash-rich firms to begin to share the wealth with shareholders. Japanese corporations are listening. As a result, dividend income is increasing. The dividend yield now tops that of the U.S. stock market. The average Japanese company is still paying out only a third of profits as dividends. there is a lot of room for growth in the years ahead.
Those trends tend to fall on deaf ears, however. That is understandable given the nation's aging population, insular business culture, and overwhelming national debt.
Japan is the developed world's most indebted nation with a debt to GDP ratio this year of 256.49 percent. It has been so for decades. What most investors fail to understand is that Japan, unlike many other nations, has little to no risk of ever going bankrupt. That is because it also happens to be the greatest creditor ration in the world. The Japanese are among the world's best savers. Their savings rate is about 20 percent, compared to just 5 percent in the U.S.
The fact is that its debt is entirely denominated in Japan's own currency, the yen. And about half that debt is owned by the Japanese Central Bank. In other words, the government is lending money to itself. It has no fear of default as a result. Of course, by creating too much money, the nation runs the risk of generating inflation. That would be ideal in the case of Japan. since inflation is currently stuck around zero. For years, Japan has been battling deflation, noy inflation.
Like all nations, the Japanese have been wrestling with the COVID-19 pandemic with varying success. After postponing the 2020 Tokyo Olympics, Prime Minister Yoshihide Suga, of the Liberal Democratic Party (LDP), despite opinion polls to the contrary, decided to risk holding the games in July 2021. At the same time, the Delta variant pushed COVID cases to a record high. On the economic front, massive fiscal and monetary spending has had only a modest impact on growth. Japan's economy is expected to grow by 2.8 percent in 2021. Public support for the ruling, market-friendly, Liberal Democratic Party has been waning as a result.
In response, Prime Minster Suga abruptly announced last week that he would not be seeking reelection after only a one-year tenure. His resignation likely improves the chances that the next leader will come from the LDP, which removes a major concern for equity investors. The clear winner of Suga's announcement has been the Japanese stock market. It has risen by more than 4 percent since the announcement.
There is a short list of prospective candidates from the LDP, but investors are expecting that whoever wins, improving the rate of vaccinations, and additional fiscal spending program of "tens of trillions of yen" will be in the cards. If so, investors should keep their eyes peeled for any downside in the Japanese stock market in September 2021and October 2021. It would be an ideal time to commit some capital to Japan.
The Retired Investor: Non-Fungible Tokens Come of Age
Non-fungible tokens (NFTs) have been around since 2014, but I'll bet you haven't heard of them until this year. As part of the crypto craze, these NFTs are commanding millions of dollars in spending and expanding into everything from original art to tacos.
NFTs are digital assets. For those like me, who are old enough to be grandparents, and may still read the newspapers, the concept of a digital asset may not be all that intuitive. "Non-fungible" means that it is a unique asset that can't be replaced with something else.
NFTs are bought and sold online (usually with a cryptocurrency), and stored and encoded in the same way. The difference is that cryptocurrencies, such as Bitcoin, are fungible and can be traded, or replaced, with another bitcoin. These digital assets can include everything from original art, videos, and music, as well as collectables like electronic sports cards, in-game articles, and whatever else sellers believe will have value to the spending public.
Most NFTs are bought, sold and supported by the Ethereum blockchain. Ethereum, for those who don't know, is both a cryptocurrency, like Bitcoin or Dogecoin, but also offers a sophisticated, state-of-the-art blockchain that stores extra information needed for all sorts of digital transactions including the processing and handling of NFTs.
Ethereum is not the only game in town, however. There is a growing list of competitors that have also entered the market. They function as a marketplace where NFTs can be stored, displayed, traded, and in some cases, created. These marketplaces are to NFTs what Amazon or eBay are to goods. So how do you access them?
You need to have a crypto wallet. If you already buy or sell cryptocurrencies, you probably already have one. But it must be compatible (and prefunded) with a blockchain that supports the NFT you want to buy. NFTs are usually purchased for a fixed price, or through an auction like on eBay.
The purchase includes a built-in authentication, which serves as proof of ownership. Each original object has its own digital signature that makes it impossible to be traded or exchanged for something that may look similar, but isn't. Therefore, the buyer can never be stuck with a fake copy of something like a digital Mona Lisa.
Today, although there are many types of marketplaces, universal and art-oriented platforms are the most popular. There are also nice niche players that specialize in things like collectible cards, virtual real estate, and in-game articles.
Some items have sold for substantial sums like a tweet from Jack Dorsey, the founder of Twitter, that sold for almost $3 million. Big business is also starting to dabble in this market. A number of Fortune 500 companies are jumping into NFTs as part of their marketing strategies. Visa, for example, paid $150,000 for "CryptoPunk," which is just one of thousands of NFT digital avatars up for sale. Nike has patented a method to verify sneakers' authenticity using an NFT system called CryptoKicks. Marvel, the home of so many superheroes, launched its own NFTs, as did Wayne Gretsky.
Then there is "Beeple," a digital artist, whose real name is Mike Winkleman, who rocketed to fame when Christie's, the art auction house, announced it was selling a digital work by him. The auction attracted 125 bidders and sold for $69 million. That was $15 million more than Monet's painting "Nympheas," which sold for $14 million in 2014. A video by the same artist brought in $6.6 million.
The clip art of a rock just sold for 400 ether, that's about $1.3 million. The transaction marks the latest sale of EtherRock, a brand of crypto collectables. EtherRock is a JPEG of a cartoon rock, built and sold on the Ethereum blockchain. There are only a hundred available, which I'm guessing is part of the attraction.
What makes a cartoon rock (not even a real rock) valuable? Its scarcity value. In a world where there is an infinite supply of most digital creations, NFTs stand out because they are generally, one-of-a-kind, original artwork. Of course, like any product there is an implied assumption that there is a demand for the object on sale.
Owners of NFTs are taking the chance that no matter how many times you might be able to download a copy of their original, it isn't the same as owning the Real McCoy. Frankly, you won't see me lining up to buy a virtual rock anytime soon. To me, it serves no purpose I can see beyond its ability to be bought and sold. I guess it could give you a sense of pride and maybe bragging rights in being the owner of one of only 100 such rocks, although I doubt I would want to brag about that.
Don't be too quick to dismiss NFTs as just another craze, however. For the starving artist, for example, it is an avenue (without middlemen) where they can sell their works direct to the public and make a living. I believe that in the years ahead, crypto and other electronic currencies, blockchains and the like will replace existing exchange systems as well as transaction settlements.
As the world continues its journey into a digital reality, NFTs could grow and become an accepted part of that brave new world. As we have replaced the ubiquitous oversized travel photo books on our coffee tables, the slide show of our vacations, and even our family photo albums with digital memories, is it so hard to believe that there will be a market for NFTs?
The Retired Investor: Corporate Activism Comes of Age
For decades, corporations stuck to their knitting, while letting Washington and the voters decide how to deal with social and political issues. But times are changing as companies become bigger and more powerful.
Corporations are speaking out on issues from LGBTQ rights to gun control. To some politicians, managements and their boards are throwing their weight around in ways that make elected officials uncomfortable. At first, I dismissed much of their actions as simply rhetoric, or just good public relations, but more companies are speaking out frequently on many issues.
Take the gun control issue. U.S. politicians on both sides of the aisle have failed to pass legislation that would reign in the slaughter of our citizens (especially our children) for decades. In response, some companies such as Salesforce, Shopify, Amazon, Walmart, and eBay, have taken matters into their own hands. Several companies have simply banned sales of firearms on their platforms, or have refused to supply e-commerce software to gun sellers. Their actions have all but stopped online sales of firearms in the U.S.
Other issues such as abortion, LGBTQ, and voting rights have also been taken up by a wide spectrum of corporations. Film studios have boycotted the state of Georgia, for example, over abortion rights, while Bank of America and PayPal forced North Carolina to roll back a bathroom bill that discriminated against transgender people.
Most of the big social media companies such as Facebook, Twitter, and Google, are actively attempting to limit misleading or false information, as well as hate speech, on their platforms. To their credit, the backlash from some politicians and individuals has not deterred them from pursuing those goals — and they are succeeding.
And while the country continues to debate and argue over the need to require vaccinations, corporations are not waiting around for Washington to make up their minds on that either. Proof of vaccinations started with retail shops and restaurants, which are on the frontline of potential contagion from the latest surge of the coronavirus Delta variant cases. Since then, the number of employers who are posting jobs requiring proof of vaccination is steadily increasing. The number of job postings on Indeed.com, an online employment website, for example, requiring vaccinations as a job condition, has increased by 90 percent over the last month. Google, Netflix, Disney, Morgan Stanley and Facebook are just some of the big companies involved in this trend.
You might also remember President Biden's effort to raise the minimum wage to $15 an hour as part of the $1.9 trillion COVID relief package. It was shot down back in February by the Senate parliamentarian, who would not include it as part of the reconciliation budget process. Republicans refused to back it, claiming that it would hamper small businesses in various parts of the country. Fast forward to today. Corporations, both large and small, took matters into their own hands. As of June 2021, almost 80 percent of U.S. workers are now making more than $15 an hour, according to a Washington Post newspaper survey.
Corporations have always had a fair amount of influence and power in this country, but it has usually been exercised in cloakrooms and behind the scenes. Now, however, companies face a groundswell of pressure from a socially aware public (as well as their own employees) to right perceived wrongs.
A big change has occurred within certain elements of our society. The vast majority of millennials, Gen Xers, and baby boomers believe that companies they buy from should be investing and supporting causes they care about. And if not, boycotting a company or brand, they have learned, is far more effective than writing a letter to your congressperson.
National politics are at an impasse with neither party willing to compromise on issues as diverse (or deadly) as climate change, health, or even raising the debt ceiling. Clearly, part of this new corporate direction is meant to fill a power vacuum in Washington. Critics argue that affecting policy changes through unelected corporate leaders is troubling at best.
It is. But at the same time, with public confidence in our leaders and institutions at an all-time low, the consumer (voter) evidently feels more confident in corporations and the brands they identify with to get things done than they do in some politician they rarely if ever see.