September 24
Yesterday afternoon in a blog post, the White House said that America’s billionaires pay an effective federal income tax rate of 8 percent and that the typical American pays an effective federal income tax rate of more than 8 percent.
The White House statement is false. I will provide details in Saturday’s note.
On so many matters, Biden is a clone of his predecessor, so sad for the nation.
Why don’t the best and brightest represent the country?
Chinese property developer Evergrande is struggling because China is trying to pivot away from a model of economics dependent on debt, a lot of debt. If this ultimately funnels credit to more productive uses, that would be positive for Chinese growth in the long run. Yet Beijing is undermining that prospect through its simultaneous expansion of state control of the economy. Creeping nationalization could actually undercut the broader goal of reducing the economy’s dependence on debt and boosting productivity growth.
An International Monetary Fund study compared state-owned firms with private-owned companies and found that a company in which state investors had majority control was 30% less productive than its private equivalent. This was because it invested less efficiently: A state-owned firm gets 50% less revenue per unit of capital on average than its private equivalent, Greg Ip writes.
I realize I am being repetitive, I am not going to stop talking about the existential threat that China poses to the United States of America and countries that believe in freedom and the rule of law.
MARKETS AND STOCKS
I continue to like the market. The Covid risk is waning but the issue of inflation is waxing. The Federal Reserve acknowledges that inflation is presenting more of a problem than previously anticipated.
At its latest meeting which ended on Wednesday, the Fed indicated that it is less sanguine about inflation. Consequently, it is eager to start raising interest rates. A year ago, long before the supply bottlenecks emerged, the median forecast by Fed officials was for core inflation of 1.8 percent in 2022. Every few months since September 2020, the Fed has been nudging up its inflation forecast. Now the Fed sees core inflation for 2022 at 2.3 percent. The message from the Fed’s latest projection is that transitory inflation is lasting quite a long time. Inflation is the risk.
FedEx’s earnings report of earlier this week highlights the inflation risk. FedEx is experiencing wage inflation as it tries to address the supply side bottle necks. American business is experiencing severe problems with moving goods across the nation. A few days ago, I spoke with the owner of a popular local restaurant. He said that he is finding it difficult to source fresh produce from California – artichokes – and seafood from New England. Transportation time has doubled. He has had to modify his menu.
The port of Long Beach, California is becoming more crowded not less crowded. There are 71 ships at anchor. Before the pandemic, there would only be 2 or 3 ships at anchor. Import bottlenecks are significant. Business is shifting cargo from railroads to trucks. Freight rates for truck companies are up 400 to 500 percent.
Old Dominion Freight Lines symbol ODFL is a leading truckload shipping company. Over the past year its share price is up 64 percent. As long as the supply chain bottlenecks continue, ODFL is going to mint money. Logistics companies will also mint money. XPO is an American freight transportation company that primarily provides less than a truck a load and truck brokerage services in 18 countries. Over the past year, the share price of XPO has appreciated by 76 percent. As long as the bottlenecks remain in place XPO will mint money.
In the long run however, FedEx and UPS will be the big winners. Both are well-managed companies, both are best in class. For patient investors, I like both. They will fix the wage problem. They will pass the costs along to the consumer. I believe in mean reversion. FedEx is selling at a 52 week low. UPS is selling 20 percent below its all time high. I am adding both to my watch list. I see 50 percent upside in both names by the end of 2023. Momentum investors should run with Old Dominion and XPO.
http://www.roganandrogan.com/stocks/
I would be cautious on the railroads. The rail stocks are great investments, but the supply chain problems are hurting rail traffic. According to CNBC, rail traffic is down 10 percent this quarter.
I like Facebook. Facebook is under pressure because of Apple’s software update that dented the targeted advertising market. Facebook acknowledged that revenues for the current quarter would be a little light of expectations because of Apple’s decision on privacy. But Facebook touches billions of people each month. Facebook is a juggernaut that can’t be stopped. Facebook will win any antitrust case. Facebook is not a monopoly, it does not engage in any illegal monopolization activities. Consumers like Facebook, US antitrust law is all about the consumer. It is not about the competitor.
On the legislative front, Facebook has nothing to worry about. Congress is too polarized to pass legislation that would harm Facebook.
On Facebook the key metric is that the company touches over 2 billion people each month. Facebook is trading at around $348, my 12 month target is $420.
I am going to keep going on about the oil and gas space. Over the next several weeks, because the UN is in session, and because environmental activists are agitating on climate change, the media will be terrifying the public about climate change. Climate change is real. The causes are complex. I am skeptical of climate change models produced by progressive academics. They are human, they are biased, the models will reflect their bias.
What is important to remember on climate change is that nothing the United States does today or at any point over the next two decades will have any impact on global climate change. I don’t advocate doing nothing, but the Biden Administration and climate activists should tell us the truth. We are pissing in the wind unless China and India get on board the climate change train. Moreover, unless technology is developed to extract greenhouse gasses from the atmosphere, the earth's climate is fixed for the next 50 years. Nothing we do is going to change matters.
The most appropriate way to deal with climate change is through a carbon tax, and through technological innovation. A rich country can deal with climate change better than a poor country.
In the meantime, the United States is going to continue to consume oil and gas. When the public gets its fuel bills for the upcoming winter, Biden’s approval ratings are going to fall further. Soon he will be as unpopular as Trump was, quite an accomplishment for a man who promised competence and cooperation.
Below is a chart on UK household expenditures on gas and electricity. Price increases for energy hit low income households hard. It’s the same in the United States. On energy, the poor do pay more than their fair share, thank you President Biden.
I am pounding the table on FANG. The stock is up 30 percent since I got aggressive when the share price touched $68. I doubled down at $68. I have a big smile and a lot of personality. Diamondback did not bite my ass.
I also like Cheniere, symbol LNG, a play on exporting liquified natural gas. I think this stock is going a lot higher. The United States is a low cost producer of LNG.
ECONOMICS
Professor Mankiw, Harvard economics, and the author of the nation’s most popular introductory text book for university level economics, got a lot of push back from the left on his view that high tax rates discourage work. On Wednesday Sept 22, at Gregmankiw.blogspot.com he pushed back. He cited four of America’s top economists who agree, tax rates matter. At the bottom of this note, I will quote from Mankiw’s blog.
I would note that I have personal experience with high tax rates and I can tell you that when government takes over 60 percent of every dollar, in my case pounds, that you earn, and throws that money down the rathole, you get pissed off. I got pissed off. Every man and woman on the trading desk got pissed off. I have promised myself to be less snarky, so all I will say is: the data says that progressives are wrong on tax policy.
POLITICS
Democrats face an even steeper uphill climb to enact their legislative agenda. They don’t have consensus on the bipartisan infrastructure bill. Progressives won’t support the bill unless the physical infrastructure bill is tied with a tight knot to the social welfare bill. But moderates especially those in the Senate, Manchin Sinema et al, want the social welfare bill to be pared back dramatically. In addition, the Democrats have to raise the debt ceiling. They can raise the debt ceiling through Reconciliation, simple majorities in the House and the Senate, no filibuster, but Democrats don’t want to raise the debt ceiling on their own. That would create a bad vote for the 2022 mid terms. Democrats find themselves in the proverbial hard place. Democrats want to increase dramatically deficit spending but they don’t want to own the added debt. When the 2022 midterms roll around, Democrats are going to own the debt problem. They are going to own the tax problem. They are going to own the inflation problem. They are going to own the immigration problem. And Biden will own the crimes against humanity problems which are taking place in Afghanistan
Eric Cantor, who is now a venture capitalist and a lobbyist, was the number two Republican in the House of Representatives when John Boehner was Speaker. Cantor represented the most Republican district in Virginia. He lost in a primary, moderates didn’t vote, Republican nut jobs did vote. In the most recent election, the nut job got beat, and now a Democrat holds that seat. That is what happens when the loony tunes take power.
Speaking on CNBC yesterday, Cantor said Republicans will retake his old seat in 2022. Republicans are going to hammer the Democratic incumbent on taxes and the deficit. What is most amusing about Eric Cantor is that he is a hard right Republican. He is no moderate, yet he got out-primaried by the whacko right. If America wants less polarization, Americans need to be responsible and to vote for moderates in the primaries.
To further illustrate the insanity of the American primary system, Senate Majority Leader Schumer, who is a liberal, is being pushed farther and farther to the left because he is afraid of a primary challenge from the progressive hot tamale, AOC. If you dress it, you own it.
SOCIOLOGY
I recommend Thomas Edsall’s September 22 essay in the New York Times. Though he is a progressive I always read Edsall’s stuff. He is smart, he makes me think. In his latest essay, Edsall asks, ‘is there a whole class of men who no longer fit into the social order?’
Edsall notes a research paper by economist Marianne Bertrand from the University of Chicago, and Jessica Pan, economics, National University of Singapore. Their research paper was titled, ‘The Trouble with Boys’.
The economists wrote. ‘Family structure is an important correlate of boys’ behavioral deficit. Boys that are raised outside of a traditional family (with two biological parents present) fare especially poorly. For example, the gender gap in externalizing problems when the children are in fifth grade is nearly twice as large for children raised by single mothers compared to children raised in traditional families. By eighth grade, the gender gap in school suspension is close to 25 percentage points among children raised by single mothers, while only 10 percentage points among children in intact families. Boys raised by teenage mothers also appear to be much more likely to act out.’
I roll my eyes when I read this stuff. It is all common sense. Boys need fathers, boys need positive role models. Boys and girls are different.
Willy who bunked in 52S when I bunked in 53S in Dorm B at Calhoun, did not know his father. His role model was his uncle who was a drug dealer on the streets of Miami. Willy entered the drug trade. Willy went to prison at 16 in 1980. Back then, Florida’s prisons were even more unpleasant than they are today. Willy was a 16 year old boy in prison. Bad stuff happened to Willy. Worse stuff happened to Willy’s uncle, he died on the streets of Miami in a hail of gunfire.
Boys need fathers who are positive role models. If progressives want to fix poverty and crime, they should focus on fixing family first. I am all ears on how they want to fix family. Welfare and dependence on the state will not fix family. Look at the economic and social history of the War on Poverty.
See Professor Amity Schlaes book, “Great Society.”