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February 2020 Insight

Up until last Friday my efforts for this month’s Altus Insight had revolved around research on the Coronavirus’s potential impact on economic performance. With flights cut to China (and now Korea), factories closed with workers quarantined and unable to return from the Chinese New Year vacations, and tourism plunging (down 90% in Hong Kong), there didn’t seem to be any question that there would be substantial impact to the Q1 (and possibly Q2) numbers. Friday the stock market woke up to the situation, and the events since have stolen my thunder. This isn’t a forum to discuss the virus itself, but I think we can very safely say the economic impact is, and will be, substantial. The only real questions left to answer are how substantial are the effects, and does the world bounce back by writing things off as an aberration, or does it push the world economy into a true recession. [Friday update – The financial world has fallen off its rocker. Ten-year treasury rates are down over 10% – THIS MORNING ALONE. And over 20% for the week.]

Instead, let’s discuss four individual and seemingly unconnected statistics I discovered over the past couple weeks:

  1. Fifty percent of American’s between ages 18 and 38 would prefer to live in a socialist country (Harris poll – via Mauldin Economics).
  2. A Gallup poll done in January (published by qz.com) reported a 12% increase of people that say they are better off financially this January than January 2015. The improvements were nearly ubiquitous across various categories, though “non-whites” and “college graduates” only saw increases of 1% and 2% respectively. The one outlier to the negative side were “Democrats”, who measured a 19% decrease in financial well-being and were the only category measured where more than a majority (63%) reported that their financial situation had not improved. Conversely, the percentage of Republicans that reported improved economic conditions increased an astounding 38% over that same time period.
  3. Small business confidence in January was the highest reading since Trump was elected (Reuters). Also, per Reuters, consumer confidence stayed strong through January (with a reading over 100).
  4. While low unemployment has been expected to drive wages upward, and aggregate hourly wages did increase 3% last year, a full fifty percent of US workers neither got a pay raise nor changed to a higher paying job last year. Meaning in real terms they are making less now than they were making 12 months ago, despite the tight labor market (Bankrate).

While we have to be skeptical of statistics in general, the dissidence between the statistics themselves is striking.

  1. Let’s start with a list of countries that embrace socialism somewhere in their governing documents. It is a short list (per Wikipedia):
    The People’s Republic of China
  2. Republic of Cuba
  3. Lao People’s Democratic Republic (huge misnomer by the way)
  4. Socialist Republic of Vietnam
  5. People’s Democratic Republic of Algeria
  6. People’s Republic of Bangladesh
  7. Cooperative Republic of Guyana
  8. Republic of India
  9. Republic of Nicaragua
  10. Federal Democratic Republic of Nepal
  11. Portuguese Republic
  12. Democratic Socialist Republic of Sri Lanka
  13. United Republic of Tanzania; and of course
  14. Democratic People’s Republic of Korea, also known as North Korea, and like Laos, a huge naming misnomer

Do America’s youth really want to live in one of the above countries? I find it hard to fathom. So what do they imagine as their utopia? Judging by the surge of Bernie Sanders1 in the polls, maybe what they are calling “socialism” is really meant to be democratic socialism. According to Sanders, Denmark is an example of the democratic socialism he wants to create in the United States. However, the prime minister of Denmark (and other government officials) has gone out of his way to tell the world that Denmark is not at all socialist. If socialism is the redistribution of wealth2 then the prime minister is correct. I am certainly not an expert on Denmark’s tax code, but as best as I can research Denmark has only three tax brackets. Eight percent on income under DKK 46,200 (~$7000), an additional 12.16% on income above DKK 46,200 to DKK 513,400 (~$76,000) and a top tax bracket of additional 15% for any income above DKK 513,400. USNews reports that the median income in Denmark is around $43,000 and the average Dane pays a 45% income tax rate. In the US, 47% of the population pays no federal taxes and then the brackets increase steeply from there. Per the OECD the average tax payer in the US pays a tax rate of 23.8% (the average across all OECD nations is 25.5%). If Sanders were to be elected and model his policies and tax plan after Denmark, a huge percentage of the population that is currently paying no taxes would have large tax increases. The middle class, especially the mid middle and upper middle, would have massive tax increases. The highest income earners would also see increases, but much more moderate in impact. When Bernie is saying that we need a more “fair” tax structure he is verbalizing that he wants higher taxes on the “rich”2 but messaging a plan that instead would move a much higher tax burden to the rest of the populace. More evidence…The top 10% of income earners in Denmark provide a little under a third of income tax revenue while in the US the top 10% of income earners pay a dramatically higher 70%3 of tax revenue, more than double the share paid by top earners in Denmark. The US has a more progressive tax structure than Denmark. And this doesn’t take into account the high VAT taxes, a tax structure that is considerably regressive.

And did I mention that the corporate tax rate in Denmark was recently lowered to 22%? This is roughly in line with the 21% paid by corporations in the US, though without the added burden of state income taxes impacting most US corporations.

Looking at the last statistic in my list, it makes sense that people want something different than they have now, or are now experiencing. Since few in the US have experienced socialism, and most don’t know what it is or how to define it, we can almost see why socialism would appear to be attractive.

And that brings us to the last three statistics. If 59% of the population feels like their economic situation has improved, then it makes sense that consumer confidence is also strong. It doesn’t make sense that half of the country’s workers haven’t seen a financial improvement in their work situation in the past year (in the year of highest wage increases since the recession), but over 50% of the population believes that their economic situation has improved.

Meanwhile, small business confidence is at the highest level of the current presidency despite being two years removed from large tax cuts, coming out (supposedly) of a protractive trade stand-off with China, and continuing difficulty of filling open employment positions.

Additionally, the study shows 19% of Democrats feel like their economic situation has gotten worse. Taken at face value we should be able to extrapolate that Democrats are not small business owners (or for that matter consumers) and ARE among the 50% of the population who didn’t see an improvement of their work situation last year. But this also doesn’t add up because per political polls a large majority of voters supporting Trump’s reelection are the same voters that haven’t seen economic improvements, in other words, non-Democrats (though 38% of small business owners are Republican – versus 28% Democrat4 – so their optimism is more explainable).

  1. I have mentioned repeatedly in previous Insights, and at the risk of sounding redundant, it is highly important for us as investors to be aware of tax laws. They are going to change, probably dramatically. How do we as investors protect ourselves?
  2. The “angst” discussed in past Insights is real. This isn’t just in the US but across the world (see: riots in the world’s largest democracy – India).
  3. Because most people don’t step back from their situations and try to understand the source of the angst, choices made and routes chosen are unlikely to ease the angst; and likely will further enflame them.
  4. Results of the angst will change societal and investing norms. Like with taxes, how do we protect ourselves?
  5. Results indicating the specific Democratic belief of worsening financial situations despite evidence to the contrary, and soaring Republican optimism that isn’t supported by measurable economic improvement, are an indication of how many of us are unaware of the impact of outside events viewed through our internal biases. These biases directly impact our emotions, outlooks, and thus decisions. It is easy to think and say that we are like Spock and don’t let our emotions affect our investing decisions, but the reality is that most of us are lying to ourselves. Even in good times (supposedly like those in existence through the end of January), how can we structure our decision-making safeguards to protect us from clouded judgement? And, looking ahead to substantial turbulence (we don’t know for sure when, though the current stock market swings are a fun starting exercise), how do we protect ourselves from ourselves?

If we are able to detach from emotion (I hate Trump/I love Trump) and fear (Coronavirus is going to destroy the world), and look at our situations dispassionately to answer the above questions, we will discover that our answers will necessarily be unique to our own situation. We are unique individuals with unique circumstances, skills, and desires. This means we need to have our own answers to the questions. And we need to review those answers (and look for other questions) on a consistent basis.

1 For full disclosure, I have respect for Bernie Sanders as a man of principle, but I think his ideas are crazy.

2 Wealth/”richness” and high income are often misunderstood. The words are often used interchangeably, when in fact they are two completely different things.

3 Per National Taxpayers Union

4 Per USA Today, September 13, 2019

Happy Investing.

About the Author: Forrest Jinks is CEO of Altus Equity Group Inc and a licensed real estate broker. Forrest has decades of experience as principal in a variety of alternative investment segments including real estate (residential rehab, in-fill development, multi-family, office and retail), debt, and small business start-up (online marketing and site retail). He can be reached at fjinks@altusequity.com.

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