December 30

Fingers crossed, omicron will be the variant that gets us to the endemic stage of Covid. The data continues to indicate that omicron is less virulent and is crowding out other variants while providing  some protection against all other Covid variants.

The immune response of people infected with omicron appears to increase protection against delta more than fourfold, according to a study from South Africa. Omicron could displace delta as a consequence, the team of scientists found. If omicron also proves less severe, Covid infections could prove less disruptive to society. 

In the United States, positive cases are at an all time high, but hospitalizations are 50 percent below prior peaks. Covid deaths are down 3 percent on a 14 day average while infections are up 129 percent. See NYT.

As Bloomberg puts it: The omicron-fueled U.S. surge in Covid-19 cases appears to be triggering a lower rate of hospitalizations than earlier waves, more evidence that the highly transmissible variant leads to milder symptoms than other strains. 

The seven-day average of new cases hit 206,577 on Sunday, roughly 18% lower than the all-time high recorded on Jan. 11, according to data from the Centers for Disease Control and Prevention. Meanwhile, hospitalizations rose to a seven-day average of 8,964, only half their earlier peak recorded in January. 

Early studies have shown omicron to be about twice as transmissible as delta, the once-dominant version of the coronavirus that now appears to be receding. Because the new variant spreads so easily, the U.S. will likely see continued increases in hospitalizations and deaths, though not as severe as during the delta wave that hit mid-year, said Albert Ko, chair of the department of epidemiology and microbial diseases at the Yale School of Public Health. 

Markets and Stocks 

As we enter 2022, the key issues will be inflation and the Fed’s response. Over the next few months, inflation should continue to run hot. Energy prices are creeping back up. The price of the US benchmark for oil, West Texas Intermediate,  is up 10 percent over the past few weeks. WTI is currently trading around $75 a barrel. Gasoline prices will follow. The average price of gasoline across the country is $3.29 a gallon. 

The major food companies have announced plans to raise prices by 5-6 percent in January. See WSJ. 

The cost of renting a house or apartment is beginning to soar. Shelter costs which have been increasing at a rate of about 4 percent on an annual basis, are expected to rise at a rate of 8 percent over coming months. Housing has a 40 percent weighting in the Consumer Price Index. 

CNBC reports that demand  for single-family rental homes is so strong that rents have nowhere to go but up, and they are rising at an increasingly fast pace. Single-family rents in October were up 10.9% year over year, according to the latest report from CoreLogic. That is three times the 3.2% annual growth seen in October 2020. The jump comes as too much demand meets not enough supply. Vacancy rates on these homes are now at a 25-year low, as an increasingly competitive and pricey for-sale housing market drives more potential buyers to rentals.  

The Biden Administration and Democrats did a fiscal helicopter drop of money on the economy. Now they reap the wrath of a public which hates inflation. See Summers, Mankiw, Furman and Cochrane. 

Consensus is for three quarter point rate hikes in 2022. 

The Journal says former Fed Governor and Treasury official Sarah Bloom Raskin is being considered as the replacement for current Fed Governor Randal Quarles who will leave his position as head of banking supervision for the Fed. Raskin would be a good choice. She is popular on both sides of the political aisle. She is a pragmatist, not an ideologue. She is a frequent guest on CNBC. She would not be controversial. 

Climate change will be a nuisance, not a major headwind  for the largest banks. Researchers at the New York Fed found that climate change is not a systemic risk for the US banking sector. 

How Bad Are Weather Disasters for Banks? Federal Reserve Bank of New York Staff Reports, no. 990 November 2021

Abstract

Not very. We find that weather disasters over the last quarter century had insignificant or small effects on U.S. banks’ performance. This stability seems endogenous rather than a mere reflection of federal aid. Disasters increase loan demand, which offsets losses and actually boosts profits at larger banks. Local banks tend to avoid mortgage lending where floods are more common than official flood maps would predict, suggesting that local knowledge may also mitigate disaster impacts.

Our main findings are generally consistent with the few papers that study the bank stability effects of disaster. Looking across countries, Klomp (2014) finds that disasters do not effect default risk of banks in developed countries. Brei et al. (2019) find that hurricanes (the most destructive weather disaster) do not significantly weaken Caribbean banks. Koetter et al. (2019) finds increased lending and profits at German banks exposed to flooding along the Elbe River. The study closest to ours by Noth and Schuewer (2018) finds default risk increases at U.S. banks following disasters but the effects are small and short-lived. Barth et al. (2019) find higher profits and interest spreads at U.S. banks after disasters but did not look at bank risk. Based on four case studies of extreme disasters and small banks, FDIC (2005) concluded that ..."historically, natural disasters did not appear to have a significant negative impact  on bank performance." 

Economics 

The New York Times takes umbrage with a popular tax break for entrepreneurs, especially Silicon Valley innovators.  Reporters for the paper write: 

In 2004, David Baszucki, fresh off a stint as a radio host in Santa Cruz, Calif., started a tiny video-game company. It was eligible for a tax break that lets investors in small businesses avoid millions of dollars in capital gains taxes if the start-ups hit it big.

Today Mr. Baszucki’s company, Roblox, the maker of one of the world’s most popular video-gaming platforms, is valued at about $60 billion. Mr. Baszucki is worth an estimated $7 billion.

Yet he and his extended family are reaping big benefits from a tax break aimed at small businesses.

Mr. Baszucki and his relatives have been able to multiply the tax break at least 12 times. Among those poised to avoid millions of dollars in capital gains taxes are Mr. Baszucki’s wife, his four children, his mother-in-law and even his first cousin-in-law, according to securities filings and people with knowledge of the matter.

The tax break is known as the Qualified Small Business Stock, or Q.S.B.S., exemption. It allows early investors in companies in many industries to avoid taxes on at least $10 million in profits.

The goal, when it was established in the early 1990s, was to coax people to put money into small companies. But over the next three decades, it would be contorted into the latest tax dodge in Silicon Valley, where new billionaires seem to sprout each week.

Thanks to the ingenuity of the tax-avoidance industry, investors in hot tech companies are exponentially enlarging the tax break. The trick is to give shares in those companies to friends or relatives. Even though these recipients didn’t put their money into the companies, they nonetheless inherit the tax break, and a further $10 million or more in profits becomes tax-free.

The savings for the richest American families — who would otherwise face a 23.8 percent capital gains tax — can quickly swell into the tens of millions.

The manoeuvre, which is legal, is known as “stacking,” because the tax breaks are piled on top of one another.

The paper is outraged by the Qualified Small Business Stock exemption and really really outraged that “qualified” stock can be “gifted” so that the QSBS exemption continues with the giftee. 

Experts say that the legal tax exemption costs the US Treasury $6 billion over a ten year period. 

I shrug my shoulders and laugh out loud at the outrage expressed by the NYT. In an economically efficient tax system, capital gains would not be taxed. We want more capital investment, not less. To paraphrase James Mirrlees, deceased Nobel laureate, “when you want more of something, the most efficient tax is zero.”

To be fair, I do see the paper’s point about gifting qualified stock, but can anyone debate that the QSBS exemption is achieving its purpose. Entrepreneurship in Silicon Valley is a stunning success for the United States and the world. 

The Brookings Institute, left of center, finds that: 

Over the last 20 years, Silicon Valley has benefited from a once-in-a-lifetime alignment of advantages. American primacy, the ubiquity of cheap capital, the arrival of the smartphone (among other widely adopted tech innovations), and, perhaps most significantly, a benign regulatory environment have all conspired to create a historic concentration of wealth and power. The titans of the Valley and their heirs have been free to roam far ahead of lawmakers, watchdogs, and tax codes.

A recent study by Kortum and Lerner (1998) in the United States demonstrates that a dollar invested in venture capital creates three times more patents than a dollar invested in research and development (R&D). This suggests an important benefit of venture capital is in encouraging the transformation of R&D into commercially useful patents. The consequence is diffusion of technology across the whole economy, increasing productivity and augmenting both the economic and social return on venture capital investment.
There is also a strong link between the availability of venture capital and job creation. In his recent study, “The Job Destruction and Creation Models,” W. Brock highlights the linkage between the IPO market and the labour market. Based on interviews with US venture capitalists, he suggests that between 80 and 90 percent of the funds raised go towards hiring. The more authoritative US Bureau of Labour Statistics estimates only 50 percent. In either case, this is a very high percentage and such a high “job multiplier” is understandable since labour costs dominate the cost structure of “new economy” service activities. 

Rather than whining about the QSBS exemption, the Times should be lobbying for more tax exemptions for entrepreneurs. Trickle becomes a cornucopia in Silicon Valley. 

Politics 

Supreme Court Chief Justice John Roberts received the highest approval rating among leaders from across the three branches of federal government, according to a new poll in which Roberts was the only official to gain majority support from both Democrats and Republicans.

Roberts, widely seen as an incrementalist and institutionalist, earned 60 percent approval in the Gallup poll released on Monday. That included approval from 55 percent of Democrats, 57 percent of Republicans and 64 percent of independents.

The chief justice received the highest rating among the 11 federal leaders included in the poll, placing him just ahead of Federal Reserve Chairman Jerome Powell (53 percent) and Director of the National Institute of Allergy and Infectious Disease Anthony Fauci (52 percent). The lowest rated official was Senate Minority Leader Mitch McConnell, at just 34 percent approval. President Biden ranked near the bottom with 43 percent support.

The poll was conducted over the first half of December, nearly a third of the way through one of the Supreme Court’s most highly charged terms in recent memory, with a docket that includes major disputes over abortion, guns and church-state separation. 

The poll tells me three things, the United States is a centrist nation, the people want compromise not division and talk of a looming civil war is BS.

Sociology 

Violent crime is out of control in many of America’s largest cities. Philadelphia is ground zero for violent crime and progressive nonsense that racism drives homicides not the failed culture of poverty. In Philadelphia two political leaders are going toe to toe over violent crime. One leader the DA, is White and woke. The other leader is Black and fed up with progressives. 

“When Larry Krasner, Philadelphia’s liberal district attorney, was asked this month about the city’s crime surge that includes an unprecedented 550 homicides this year, he appeared to play it down. “We don’t have a crisis of lawlessness,” Krasner said. “We don’t have a crisis of crime. We don’t have a crisis of violence.”

Krasner, who is White, has been an ally of Black leaders pushing for changes to the criminal justice system, but Michael Nutter, a former Philadelphia mayor who is African American, erupted at Krasner, accusing him of dismissing the pain of Black residents who suffer from the violence while purporting to support them.

“It all goes back to supremacy, paternalism. 'I’m woke. I’m paying attention. I spend a lot of time with Black people. Some of my best friends … ’ All that bulls---," Nutter said in an interview. “And so you get a guy like Larry Krasner who is the great White hope and ‘I’m gonna ride in on a white horse with a white hat.’ ”

It was a jarring rebuke of one Democrat by another. But it also laid bare a broader turbulence within the party and the progressive movement, as those pushing a message of racial equity sometimes do so with a zeal or tone that fails to resonate with portions of the Black or Latino communities. The dynamic is even more fraught when those ideas are championed by White leaders.

The year 2021 in the City of Brotherly Love will always be marked by the shocking number of people whose lives came to an abrupt and violent end: an 18-year-old shot two weeks before his high school graduation, two men killed in a hail of gunfire at a July Fourth cookout, a pregnant woman gunned down as she unpacked presents from her baby shower.

On Wednesday, Congresswoman Mary Gay Scanlon (D-Pa.) was carjacked at gunpoint in the city. She was unharmed, and five suspects have been taken into custody.

This year Philadelphia will experience over 550 homicides,  more homicides than NYC and LA combined, two cities with a combined population more than 10 times that of Philadelphia. 

The out of wedlock birth rate in Philadelphia is over 70 percent, the data says and my experience in prison confirms the data,  when children especially male children grow up without a nurturing father, bad shit follows. 

We can shout and yell about systemic racism but it is a fact that young Black men who grow up in inner cities without fathers are 25 to 50 times more likely to commit a felony homicide than any other segment of society. And the young Black men are killing other young Black men. 

The facts are the damn facts.