Thursday, April 26, 2018

What's Your "Social Credit" Score?

People in the United States know that your credit score is important. It determines your ability to access credit but your score may also affect your ability to get insurance, and its cost, and even your ability to get a job.

People in China have much greater concerns. The Chinese government is in the process of instituting a "social credit" score on every person in its enormous 1.4 billion population in order to monitor their behavior.


This is how Business Insider describes the ranking system which is due to being fully operational by 2020. It is already being piloted for millions of people in China right now.

The "social credit system," first announced in 2014, aims to reinforce the idea that "keeping trust is glorious and breaking trust is disgraceful," according to a government document.
Like private credit scores, a person's social score can move up and down depending on their behaviour. The exact methodology is a secret — but examples of infractions include bad driving, smoking in non-smoking zones, buying too many video games and posting fake news online.

China is using 176 million surveillance cameras it has installed to support the "social credit" system with plans to increase that to 660 million cameras by 2020.  Drivers who don't stop at crosswalks and jaywalkers risk losing points.

It is believed that saying positive things about the government, community service and purchasing Chinese-made products can boost your score.

What happens if you get a low score? Here are a few of the "penalties".

  1. Banning you from getting on an airplane or train to travel
  2. Throttling your internet speeds
  3. Banning you or your children from attending the best schools
  4. Preventing you from getting the best jobs
  5. Banning you from owning property
  6. Keeping you out of the best hotels
  7. Being publicly named as a "bad citizen"

According to CBS News, 11 million Chinese are already banned from flying and 4 million cannot travel by train due to low scores.

What are the benefits of a higher score? For starters, you can continue to travel, browse the internet, get your kids into the best schools and own property. You might also get your name on the "good citizen" list.

Those with higher point totals who are considered "trustworthy" may also get discounts on their energy bills, better interest rates or get their profile boosted on China's largest online dating site. You might laugh at that last one but when you are one of 37 million excess males in China under the age of 30 you will probably pay more attention to your "social credit" score with that in mind.

Those of us in the United States undoubtedly look at all of this with horror.

It should be a sober reminder of how fortunate we are to enjoy the freedoms that we do.

However, in some respects, we are not as far removed from where the Chinese are as you might think.

Look no further than what is going on in the United States of America today. Here are a few examples that have recently been in the news.

Shania Twain stated in a recent interview that she would have voted for Donald Trump if she was an American citizen (she is Canadian) and quickly became engulfed in an avalanche of criticism on social media. She subsequently apologized. Why?

Did anything similar occur if someone stated they voted for Barack Obama, Hillary Clinton or Bernie Sanders?

Kanye West said some nice things about a conservative black woman and Donald Trump. Another backlash ensues. Kanye did not back down and even doubled down with this tweet.

A New York City judge ruled that bars are allowed to refuse to serve Trump supporters. However, Christian bakers are not allowed to refuse to bake a cake for a gay wedding?

Conservative talk show hosts routinely have had their advertisers attacked in an attempt to keep them off the air. The latest was Laura Ingraham.

We also see conservative speakers on college campuses shouted down to such an extent that universities refuse to even allow them to speak on campus citing security concerns.

The Liberal Left and the Progressive Media believe that they know exactly how people should think and act. If you do not adhere to "their standards" you are a reprobate, a racist or a fascist.

Of course, the fundamental basis of a liberal, socialist or progressive ideology is that government does know best. Individual freedoms must be sacrificed for the greater good.

However, the United States of America was founded by men who were deeply suspicious of government power. They had experienced government oppression and overreach first-hand. The Constitution they wrote was intended to protect the governed, not the government. They even included a Bill of Rights to protect what they considered the most important individual rights and freedoms---speech, assembly, religion, the right to bear arms and the right to a trial of their peers.

Why do liberals complain about the constraints of the Constitution and argue that it should be interpreted as a "living document" that should interpreted based on the contemporary moral, political and cultural climate?

A big reason is that the Constitution favors individual freedoms over government power. Quite simply, the basic framework of the document is inimical to the interests of progressive, liberal ideology that seeks to increase government power and control.

We would all like to think that what is going on in China could never happen to us. However, you should never feel content or safe when talking about your freedom. What would happen with an extended period in which liberal Democrats control the Presidency and Congress? What does the Bill of Rights really mean to them? Is the Bill of Rights also subject to the contemporary political climate?

It is not a mystery as to what the Democrats believe on these issues. We see it every day in examples like those I cited above.

There is abundant  evidence of what their "social credit" scoring system might look like. I write the following somewhat "tongue in cheek" but, at the same time, we know that all of these are on the Liberal Left's list of what they see as deplorable behaviors.

Social Credit Scorecard (Points Subtracted)

-20 Voted for Trump

-10 Watch Fox News

-10 Believe that judges should interpret the law rather than legislate from the bench

-10 Own a gun

-10 Support traditional marriage

-10 Support voter id laws

-10 Believe that current immigration law should be enforced

-10 Believe in the words "In God We Trust"

-5  Believe you pay too much in taxes

-5  Eat at Chick-fil-A

On that scoring system, I would start out in the hole 100 points.

The Liberal Left likes to condemn, castigate, demean and delegitimize those that they disagree with. That is not consistent with the founding principles of the United States of America. It may be acceptable in Communist China. Let's hope it is never acceptable here.

God Bless our Founding Fathers.

God Bless our Constitution.

God Bless The United States of America.

Tuesday, April 24, 2018

Strikeout Spring

Baseball season is here. However, you can't tell it by the weather.


As of Sunday, April 22, there had been 26 major league baseball games postponed due to weather. That is the most postponements in April since records were first kept on cancellations beginning in 1986.

Since then, both Baltimore and Pittsburgh have postponed games bringing the total to 28.

The rainy and cold weather seems to be particularly challenging for hitters.

I can relate. Playing baseball in high school on a cold March day there was nothing worse that making poor contact with a bat in your hands. It felt like you were being electrocuted with the "stinger" that resulted.

Perhaps that is why, for the first time in almost 150 years of major league baseball, it appears there will be a full month where there are more strikeouts than hits.

Buster Olney reports that Elias Sports Bureau  has calculated that going into the games of April 23, there had been 5,562 strikeouts but only 5,174 hits this year.

This continues a trend because in each of the  last ten years major league baseball has set the record for most strikeouts in a season.

Last year the average team struck out 8 times per games.

To put that in context, the 1927 Yankees struck out an average of just 3 times per games.

The average for the major leagues did not get above 4 until 1952. It hit ( pun clearly intended)  5 in 1959, 6 in 1994 and 7 in 2010.

I guess it should not be surprising that the World Series Champion Houston Astros had the lowest team strikeout average per game last year---6.76.  Even more impressive was they dropped from 8.96 to 6.76 strikeouts per game between 2016 and 2017.


At the same time, the Astros also led major league baseball in average hits per game.


I guess it just goes to show you there is something to just getting your bat on the ball in order to play winning baseball. It is just as true today as it was when my highs school coach was telling me that over 50 years ago.

It is not easy to hit a baseball coming at you at 95 mph. However, it is a lot easier to do it when it is 85 degrees than when it is 45 degrees.

Bring on summer. The batters need it.

Sunday, April 22, 2018

Housing Presidential History

Do you know what this is?

When I first saw this architectural rendering I had several guesses of what it could be.

  • The proposed Mars space expedition vehicle assembly building
  • The new Indonesian National Bank in Jakarta
  • A new mosque proposed for Mecca in Saudi Arabia

I was wrong on all three counts.

This is the proposed Barack Obama Presidential Library in Chicago that is expected to cost $500 million to complete. That includes $175 million of estimated public funds for roadwork and infrastructure spending from the City of Chicago and state of Illinois.

In my last post I wrote about how profitable becoming President of the United States has become. It was not always this way. It might also not hold true for Donald Trump. Right now it looks like he will leave office poorer rather than richer.

In addition to the Presidency becoming a pathway to prosperity over the last 75 years, it also has become de rigueur to construct a library for the records and archives of each President. Most of the funding for these libraries are privately-funded by friendly donors of the President. There are no reporting requirements so there is no way of knowing what lies beneath the surface in this "generosity".

Up until this point, after construction is completed, the presidential library has been turned over to The National Archives and Records Administration which operates every facility for each President from Herbert Hoover through George W. Bush. The Obama Library will not do that. It will be owned and operated by the private Obama Foundation.

The Obama Library will also be different in that it will not actually contain any Presidential papers, records, archives or artifacts. All of the records will be digitized by the NARA and will be accessed remotely to where the records are stored in remote NARA facilities.

I think this means that if you want to view the Obama birth certificate, his school records when he went to a Muslim elementary school in Indonesia, or his college records, you are out of luck.

Of course, that is nothing out of the ordinary. These libraries are, by their very nature, attempting to tilt history in favor of their guy. For the same reason, I doubt we will also see Trump's tax returns on display in his future library.

Anthony Clark in Politico notes some of the shortcomings of what the presidential library has developed into.

Presidential libraries are perfect examples of just how far presidents will go to control their own legacies. Since the first one was created in 1941, what were intended to be serious research centers have grown into flashy, partisan temples touting huckster history. Built with undisclosed, unlimited donations, often to sitting presidents, libraries have traditionally been donated to the government after their construction. But even though they are taxpayer-funded and controlled by a federal agency, the private foundations established by former presidents to build the libraries retain outsize influence. The libraries’ whitewashed exhibits are created by presidential boosters; they host political events; their boards are stacked with loyalists; and many of their important historical records may never see the light of day.

At the same time, Clark believes that the Obama Library may establish a better presidential library model for the future in limiting governmental involvement in operating the facility while permitting the NARA to focus solely on the archiving of records and determining the proper time period for their release to the public.

It will be interesting to see how all of it plays out in the end.

Of course, if I am a betting man, I would wait until Donald Trump starts to plan his Presidential Library to see something that might me truly unique and trend setting.

Who knows what lurks in that real estate mind of his?

Then again, Trump many not even need to build an edifice to showcase his more important Presidential records.

It may turn out that one will simply go to Twitter and view the archives of his tweets.

These are Trump's tweets over the last 24 hours.

The only other thing needed would be a glossary of the nicknames in which Trump uses with his tweets. Trump has proven to have an uncanny ability to zero in on his enemies' biggest weakness or insecurity about themselves and immortalize it for all to forever remember.

Who can forget these nicknames even if we might want to?

"Little Rocket Man"

"Crooked Hillary"

"Low Energy Jeb"


"Little Marco"

"Cryin' Chuck Schumer"

I cannot count the number of times I talk to someone who says that they voted for Trump, they like what he is doing, but they wished he would stop using Twitter.

Would Trump be as effective in fighting against Fake News and the Deep State without Twitter?

I doubt it.

More importantly, I am sure there is absolutely no doubt in Trump's mind that he needs to be doing this to get his message out.

It has been said that "nice guys finish last."

I don't know if that is true. However, of those that Trump has graced with a nickname on Twitter, not many have outlasted Trump.

Thursday, April 19, 2018

Nice Work If You Can Get It

Throughout most of our history, being elected President of the United States was not a path to riches and wealth.

In fact, a number of well-known Presidents were close to penniless in their later years.

Thomas Jefferson left no inheritance and was saddled with enormous debt when he died. Jefferson's debts were such a problem in his old age that Congress attempted to bail him out by buying his collection of library books at $4 per volume to replace the books in the Library of Congress which had been burned in the War of 1812.

Harry Truman had almost no assets when he left the Presidency and his only income was a small pension from World War I. He and his wife Bess moved into his mother-in-law's house in Independence, Missouri when he left Washington, D.C.  Truman's precarious financial condition was a prime reason that Congress first enacted a pension for former Presidents in 1958. However, this was not done until almost 200 years after the nation's founding.

Ulysses Grant was another President who was almost penniless when he died. Grant spent his last days writing his memoirs while battling throat cancer in order in the hope of providing some income to his wife Julia. His book, published posthumously, was a great success and went on to secure the financial future of his wife.

How times have changed today.

When Bill Clinton entered The White House in 1993 he has stated he had the lowest net worth of any President in the 20th century. His net worth is now estimated at $75 million by 24/7

That puts Clinton in the Top Ten for richest ex-Presidents according to that same analysis (in constant 2016 dollars). Not bad for someone who came in with what was arguably zero net worth when he took office.

Until Donald Trump took office, George Washington was considered the richest President. Washington had a net worth estimated at $580 million (in 2016 dollars). His salary as President was also generous. At the time, it made up 2% of the entire federal budget.

If that percentage of pay based on the budget still held today, President Trump would be making $80 billion per year. Trump is effectively working without pay as he is donating his entire salary to charity.

You would think the Democrats and the Never Trumpers would give him some credit for that! Even George Washington did not turn down his salary.

Like Bill Clinton, Barack Obama had a very modest net worth when he became President. Four years before he became President of the United States he was an Illinois state senator making $85,000 per year.

Over the next 11 years, Barack and Michelle Obama made $20.5 million according to an analysis by Forbes magazine. And all of this while he was an elected government official!

How times have changed since the days of Harry S. Truman.


Notice that about three-fourths of the income of the Obamas over that period was from book royalties.

Now that Barack Obama is a private citizen he can really take advantage of the private enterprise, capitalist economy that he often spoke critically of as a public official.

He is making $400,000 per speech.  He is in advanced discussions with Netflix to be paid to produce a series of high profile shows for the streaming service. Most significantly, the Obamas have received a $65 million advance for each of them to write a memoir about their White House years.

That $65 million number got my attention because I know a little about how the financial aspects of book deals typically work regarding royalties for authors. Let's put that number in context by looking at the general guidelines that most New York publishing houses follow for book royalties for authors.

This is from Alan Jacobson on "The Business of Publishing".

Typically, an author can expect to receive the following royalties:

Hardback edition: 10% of the retail price on the first 5,000 copies; 12.5% for the next 5,000 copies sold, then 15% for all further copies sold.

Paperback: 8% of retail price on the first 150,000 copies sold, then 10% thereafter.

Most people are shocked to see how little the typical author makes from writing a book. However, consider the fact that the publisher must pay the costs of printing, binding, warehousing, distributing, shipping, promoting and advertising the book and it makes more sense.

Let's look at the Obama deal more closely from the economic perspective of the publisher.

If you apply a 15% royalty on a $30 book that would equal $4.50 per book. Assuming normal financial terms for the publisher, it would need to sell 14.4 million books by Barack and Michelle in order to recoup the $65 million advance.

I have no doubt that the Obama books will sell a lot of copies. However, 14.4 million copies? At $30 per book that would put total gross sales for the two books at $432 million.

The best-selling book of 2017 sold 1.1 million copies. Here is the top 10 list in unit sales as compiled by Statista. Hillary Clinton's book, "What Happened" did not make the list. It sold 449,000 hardcover copies in 2017 according to Wikipedia

I may prefer non-fiction but most readers seem to favor fiction titles.

Best Selling Print Books in the USA by unit sales

For additional perspective, here is a list of the best-selling individual books of all time (the Bible excluded).

Notice that they are all fiction titles and only Harry Potter and The DaVinci Code were published in the last 20 years.


For additional context, consider that Barack Obama only received 69.5 million votes when he was first elected President in 2008. That means he needs about one out of every five people who voted for him to buy one of the books.

How does this make any economic sense?

It does not in the world that you and I live in. However, in the world of political elites, payoffs, and paybacks, it is par for the course.

It also seems to be more profound when liberals are in control and making the decisions.

For example, I am always frustrated when I go to the local library and find that all of the titles I am interested in are checked out or they don't even have the book. I don't know if the people who make the decisions on what books to buy are Liberals. However, I would guess that they are more liberal in their political outlook than the average American voter.

How do I know?

Here is a photo I recently took of the new book section at my local library branch as I was browsing the bookshelves.

What is on the shelf waiting to be checked out?

5 copies of Hillary Clinton's book, "What Happened".

7 copies of Al Franken's book, "Giant of the Senate".

New Non-Fiction Bookshelf
The Public Library of Cincinnati and Hamilton County
Symmes Township Branch

Mind you this is a small branch library.

My tax dollars at work.

Just as assuredly your tax dollars will also be put to work buying multiple copies of the Obama books for your local library.

What I find most ironic in all of this talk about Presidential net worths is that our current President is so often criticized for his wealth (and supposed conflicts of interests).  However, unlike most other recent Presidents, he is very likely to leave office with less net worth than when he went in.

Forbes reduced its estimate of Trump's net worth by $600 million during his first year office due to the personal costs he paid for his campaign and fallout to his businesses due to his "unpopularity".

Obama has always been portrayed as the "selfless public servant" and Trump as the "greedy opportunist" by the mainstream media.

Could it be that they have it reversed?

Tuesday, April 17, 2018

Really, Really Serious

One of the topics I keep returning to time and again in BeeLine involves the looming crisis in public sector pension funds.

I believe it is an important topic for several reasons. Establishing and maintaining a pension plan requires significant financial discipline. Funds have to be set aside today to be used in the future. If this is not done it results in substantial intergenerational inequity. Current needs then need to be sacrificed for what should have been prior expenses.

These factors are particularly acute when public employees are involved. Politicians are predisposed to appeal to voters today rather than worry about the costs of tomorrow. They are also especially susceptible to the pressure of special interest groups.  Over the past 50 years, public sector unions have been preeminent among those groups. As a result, pension benefits were often increased while the necessary funds were never set aside for those increased benefits. It was easy to give the benefits away. It was not easy to raise taxes to pay for them.

We are now reaching the point where those bills are coming due. The impact of that financial neglect and irresponsible fiscal discipline will touch many people. Those costs will be high and will undoubtedly result in higher taxes and cuts in current government services. It might also culminate in cuts in pension benefits to public sector retirees if and when the pain of higher taxes and reduced services on the rest of the voters causes the politicians to understand where most of the votes are.

Here are links to recent posts I wrote on the pension issues in Kentucky and Illinois, which are two of the states that are in the worst shape. New Jersey and Connecticut are two other states that are in serious shape.

Another state that faces significant challenges in funding its public sector pension plans is California. Its pension funds are better funded than the four states mentioned above, but the sheer size of the CALPERS (the California Public Employees Retirement Systems) and CALSTRS (California Teachers) pension plans puts California at risk of major financial problems.

CALPERS has approximately $350 billion in assets under management.  That is a lot of money but it only represents 69% of what is currently owed to current and future retirees in present value terms.
That means California is short at least $150 billion for is state employees.

CALSTRS is the pension fund for teachers in the state. It was 64% funded at the end of its last fiscal year. It is short almost $100 billion in funds for future pensions.

13D Research recently looked at the public pension issue and concluded that we are near "The End of the Road for America's Pension Crisis". The article suggests that we are so late in the game that only two options now exist for many public pension plans---Implosion or Reform. There is nothing in-between.

13D Research reaches that conclusion by looking at where we are today after a spectacular 9-year bull market in equities.

Consider the fact that the S&P 500 almost tripled in value in the nine years ending December 31, 2017. However, many of the large public sector funds have not made any significant progress in improving their funded status over that period of time.

For example, here is a chart from CALSTRS that shows that the pension fund is essentially at the same funding level as it was in 2009. This has resulted from increasing numbers of teachers retiring and taking their pensions such that the investment funds cannot be replaced fast enough even with fantastic investment returns.

CALSTRS now only has about 1.5 actives for every retiree. It was nearly 6:1 in 1971 and will soon approach 1:1 as the following chart demonstrates.

13D Research asks the question of what happens in California when the inevitable difficult bear market in the stock market occurs?

We had a taste of what is possible last month, when CalPERs lost $18.5 billion in value, or 5% of total assets over a 10-day trading period. The fund has since gained much of that back, but the potential liability remains. Demographic realities mean this liability is deep and intractable. If state pension funds were unable to meet their benefit obligations after a 9-year bull market, how can they if there is a sustained downturn?

However, even without a bear market, California is facing massive increased funding costs to close the current funding gap.

According to a new report from the League of California Cities released after reviewing data for 451 municipalities that use CalPERS to administer their pensions, from fiscal year 2019 to 2025, city payments for pensions will increase an estimated 50%. Pension costs, which consumed an average of 8% of cities’ general fund budgets in 2007, will drain an average 16% by 2025. The bottom line — without tax increases there will be even less money for public services.

However, the new limitation on the deduction of state and local taxes for federal tax purposes is going to make it even more difficult for legislators to solve their problem with tax increases.

Consider this chart prepared by The Brookings Institute that shows the alternatives facing state legislators in the four states highlighted above that would be necessary to fund their public pension problem.

20% tax increases across the board or 20% cuts in direct spending or 500% increases in worker contributions? There are no good choices left in these states.

This is also assuming that stock market returns don't turn negative at some point.

13D Research looks at all of this and comes to the conclusion that public sector employees are going to have to accept pension reform. It is that or implosion.

The public sector unions have had a lot of clout for the last 50 years. I wrote six years ago in  "The Bloom Is Off The Rose that the power of those unions had reached an inflection point. I predicted that in the future that public sector unions would no longer be playing offense but they would soon have to spend most of their time playing defense. Public sector pensions would soon come under attack by voters and politicians.

Private sector workers and taxpayers are not going to put up with the rich defined benefit pension plans, early retirement packages, extended sick leave programs, vacation days that get converted into deferred compensation packages at retirement and low cost medical plans that the public sector employee unions now enjoy.   Of course, this was all paid for by the private sector workers who, if they ever got any of these bennies, don't have them anymore. 
The voters are not willing to pay more in taxes for these outsized benefit programs and they are also not willing to see essential public services cut to pay for rich retirement and other benefit programs

How serious is it?

Consider that the political columnist for the liberal Los Angeles Times recently wrote a column titled, "Democrats running for California governor need to stop talking about Trump and start talking about public pensions."

A liberal saying to stop talking about Trump and start talking about a real problem?

That is really, really serious.

Sunday, April 15, 2018

Tax Day Salute

As we find ourselves at the tax return filing deadline this week in the United States, it seems appropriate to recognize those individuals who are carrying the largest income tax burden.

Despite all that you hear and read that the rich do not pay their "fair share" of taxes, the truth is that they pay quite a bit.

I guess it depends on what your definition of "fair" is.

The Tax Policy Center recently updated its analysis of the distribution of income taxes by income groups so you can assess "fairness" more objectively.

It shows that the top 20% of taxpayers by income will pay 84% of the income tax burden in 2017.

After the Trump tax cuts, the top 20% of taxpayers will pay 87% of the tax burden in 2018.

It kinds of makes you wonder what the Democrats were talking about when they unanimously opposed the tax cuts last year that they said were a giveaway to the rich. Everyone else supposedly got mere "crumbs" according to Nancy Pelosi.

Note: Top .1% group is also included in Top 1% numbers above
Credit: Tax Policy Center via Wall Street Journal

For context, the top 20% derives 52% of the income but are bearing 87% of the tax burden in 2018.

Many argue that the top 1% are getting a outsized portion of the nation's income and should be paying a higher tax burden.

It is true that the top 1% is deriving 16% of all income. However, this group will be paying 43% of all individual income taxes in 2018 (up from 38% in 2017).

What about the bottom 80%?

They generate almost half of all income but will pay just 13% of the income tax burden in 2018.

Where do the 1% reside who are bearing such a large portion of the individual tax burden?

Bloomberg recently did an analysis of 2015 IRS data by zip code in order to answer that question.

It turns out that Fisher Island, which is an island just off of Miami Beach, Florida, had the highest average annual adjusted gross income of any zip code in the United States---$2.5 million.

The underlying data on the income of those rich people on Fisher Island also supports a point that I have made in these pages before. The income of the rich, by and large, does not come from their labor. Outside of entertainers and professional athletes, it is difficult to generate large amounts of income from the sweat of your brow. It has to come from either getting your money to work for you or being able to mobilize others to work for you in a business enterprise.

Average salary income on Fisher Island was $668,000 of the $2,543,000 of AGI----only 26%. Dividends, interest, capital gains and income from a business brought in most of the bacon.

I published this chart last year that shows the components of gross income based on Congressional Budget Office data on the distribution of household income and taxes by households in 2013.

I don't know that I have ever seen a better graphic to show where the jobs come from that pay the labor income, or the taxes that pay for the government transfers that the bottom 80% rely on to live on, than what you see above.

How about the redistribution of income? Consider that 38% of before-tax income of the lowest quintile of income earners is in the form of government transfers (Social Security, Medicare, Welfare) that involves taxing the rich to pay for these benefits.

The so-called 1% could also get their name from the amount of their income they are getting in the form of similar government transfers---a mere 1%.

What is also interesting is the degree to which the middle class in the 3rd and 4th quintiles are reliant on income from labor to support themselves--about 2/3 of their household income comes from labor income. Only 2%-3% of their income is coming from capital income and gains.

On the other hand, the Top 1% derives only 35% of their income from labor. Almost 2/3 of their income comes from business income (23%) and capital income and gains 38%).

It is consistent with what the Bloomberg analysis shows regarding the richest zip codes. Of the top 5 zip codes that had the highest AGI, salaries made up only 34% of total gross income. That is right in line with the CBO data from 2013.

If you want to live in an ultimate zip code some day, my advice is to save and invest so you can get your money working for you or create a business where others work for you and they share their productivity with you. This is what the people in these zip codes have done.

A few other interesting bits of information I picked up from the Bloomberg data.

Highest median home price---Atherton, CA (94207) $6.7 million

Highest average tax deductions---Palo Alto, CA (94301) $491,600 (high mortgage interest, property taxes, state income taxes)

Largest 5-yr increase in avg. AGI---Palo Alto CA (94301) +220.7%

Worst 5-yr increase in avg. AGI---New York City (10005) -16.6%

For additional perspective, here are the top 10 zip codes by adjusted gross income for each of the four major regions of the United States.





How about a tax day salute to the taxpayers in these zip codes who carry so much of the burden of paying for our government services? These same people are also responsible for providing many of the jobs that sustain so many American families.

They richly deserve it, don't you think?

Of course, I understand it still depends on what your definition of  "fair" is.


For those who might actually be interested in assessing "fairness' factually , pass this blog post along.

Thursday, April 12, 2018

Russa To The Rescue

There are no regions of the United States that are more liberal than the Far West and the Northeast.

2016 Presidential Election Results
Red= Trump  Blue= Clinton 

It necessarily follows that there are not any two regions of the country that are more anti-Trump and undoubtedly convinced that evil Russians somehow colluded to make Trump President.

The liberals in these states are also decidedly anti-fossil fuels. Their view is that anything that comes out of the ground should stay in the ground---coal, oil, natural gas or uranium.

That is why the promise of battery-powered cars are so important to the left. California already has a commitment to see to it that there are 1.5 million "zero emissions" vehicles by 2025. (There are 300,000 on the road today. This is about half of the total electric or hybrid vehicles in the USA.).

A California legislator wants to take it a step further and fully ban the sale of new cars powered by internal combustion engines by 2040.

Of course, Liberal Democrats tend to focus only on that which is "seen" while ignoring those things that are "unseen". It makes things easier. Unfortunately, life is not that simple.

The "unseen" issue is that as you are banning fossil fuel powered cars you need to power them with electricity for which our electrical grid is still dependent, and will continue to be dependent, on these fossil fuels for many years to come.  I wrote about all of this last October in "Electric Cars-Seen and Unseen".

Similarly, New Englanders are on the verge of running out of the necessary power to light and heat their homes due to the Liberal Democrats who control the levers of political power in the region,

It got so bad this winter that this anti-Trump region, who is undoubtedly sure that Russian collusion put Trump in The White House, had to turn to Russia for the natural gas to heat and power their homes this winter.

Yes, Russia!

Russian LNG delivered in Everett, MA

This is despite the fact that one of the largest natural gas fields in America (Marcellus) is only a few hundred miles away from the region and the United States is producing more natural gas than any other country in the world.

What makes all of this even more bizarre is that the natural gas that the Russians supplied is potentially subject to the sanctions that are supposed to be on Russia for interfering in the 2016 election and other matters.

How could this happen?

It is due to the fact that the radical left political power players in these states have blocked the construction of pipelines and other infrastructure to deliver natural gas to their region.

At the same time, many of the regions's aging coal and nuclear plants have been phased out.  This is beginning to put a real squeeze on New England's power resources as there is just not renewable and other "clean" energy options to fill the void.

The Washington Examiner recently outlined some of the problems facing New England in a story titled "New England faces "horror story" of expensive power".

New England is struggling to keep the lights on as it pursues aggressive clean energy goals, a dilemma that is so troublesome that the region’s power grid operator warns of blackouts if something doesn’t change.
"I am getting nervous in New England,” said Robert Powelson, a Republican commissioner of the Federal Energy Regulatory Commission, which oversees wholesale power markets, during a recent event hosted by the American Council on Renewable Energy. “It is almost like a horror story.”
The story is complicated, but its impact is not: Residents living in the six New England states face the highest electricity rates in the country, 56 percent above the national average.

The inability to get natural gas to the region during the extended cold period this winter resulted in not only the need to import Russian natural gas, but also required some dual-source power plants to switch back to carbon laden oil. Doing that not only meant more carbon emissions but much higher costs as well.

Of course, who does higher energy costs fall on most heavily? The poor. Those people that the liberal left always states is their first priority.

And what happens when business leaves the region due to high energy costs? Working men and women pay the price for that in lost jobs.

The environmental extremists who block the gas pipelines to protect the planet also don't seem to recognize that importing the natural gas from Russia on gigantic tankers comes at significant environmental cost.

Liberals really don't seem to be able to look beyond what is right in front of them to consider anything that is "unseen."

Even the very liberal Boston Globe does not understand the logic of its political policymakers in a recent editorial, "Our Russian 'pipeline' and its ugly toll."

To build the new $27 billion gas export plant on the Arctic Ocean that now keeps the lights on in Massachusetts, Russian firms bored wells into fragile permafrost; blasted a new international airport into a pristine landscape of reindeer, polar bears, and walrus; dredged the spawning grounds of the endangered Siberian sturgeon in the Gulf of Ob to accommodate large ships; and commissioned a fleet of 1,000-foot icebreaking tankers likely to kill seals and disrupt whale habitat as they shuttle cargoes of super-cooled gas bound for Asia, Europe, and Everett.
On the plus side, though, they didn’t offend Pittsfield or Winthrop, Danvers or Groton, with even an inch of pipeline.
The environmental movement needs a reset, and so does Massachusetts policy. The real-world result of pipeline absolutism in Massachusetts this winter has been to steer energy customers to dirtier fuels like coal and oil, increasing greenhouse gas emissions. And the state is now in the indefensible position of blocking infrastructure here, while its public policies create demand for overseas fossil fuel infrastructure like the Yamal LNG plant — a project likely to inflict far greater near and long-term harm to the planet.

How do you make sense of it all?

You can't.

I don't doubt that at some point the Leftists in the Northeast will be blaming Russia for destroying the permafrost and uprooting the polar bears.

All the while reading the latest issue of The New Republic in their warm home with their Sierra Club and "Feel the Bern" stickers on the bumper of their Prius tucked safely in their heated garage.


Tuesday, April 10, 2018

Deeply Disturbing

One of the core values that has always defined the United States of America is equal justice under the law.

The evidence we have seen over the last couple of years has raised substantial questions about that principle. What occurred in the last couple of days seems to have signaled that there are no questions about it anymore.

I thought that having the FBI exercise a search warrant on a high profile attorney was something we only saw when the Mafia was involved.

On Monday we saw it done on the personal attorney of the United States of America.

Perhaps Michael Cohen is rightfully suspected of some crime. However, are you telling me there is no other way of building a case against him than having the FBI raid his office, his home and his hotel room (he is staying there while his apartment is undergoing renovation)?

Does the attorney-client privilege mean anything any more?

What about the rights of President Trump?

Did the FBI raid the personal attorney of Hillary Clinton? No.

Did the FBI raid the personal attorney of Richard Nixon? No.

Can you imagine the outcry if the FBI had raided the office and home of Barack Obama's attorney?

Let's put this in further context.

It has already been established that Perkins Coie, the outside counsel for both the DNC and Clinton campaigns, paid for the Steele dossier that was used as the basis for the FISA warrants against Carter Page and the Trump campaign. This was almost clearly a violation of Federal Election Campaign financing laws in that it appears that the law firm was intentionally used to hide the involvement of the DNC and Clinton with Fusion GPS. By using the law firm to launder the payments, there was no evidence that the campaign or DNC was involved by looking at FEC filings.

Has the FBI conducted a morning raid on the offices of Perkins Coie?

Consider further that when the FBI interviewed Hillary Clinton about her secret email server and missing emails, it allowed her Chief of Staff Cheryl Mills to sit in on the interview even though Mills was a material witness in the case. More germane to the Cohen situation, even though Mills was serving as Hillary's Chief of Staff in the State Department, and not as an attorney, the FBI allowed all of her communications with Clinton to be protected by the attorney-client privilege.

Do you see a little discrepancy here?

Sharyl Attkisson is a former CBS news investigative correspondent who I have a lot of respect for as a journalist.

Sharyl Attkisson
Credit; Cspan

While she was at CBS her computer was hacked by an unauthorized, external, unknown party on multiple occasions. Attkisson believes that it was done by someone within the federal government during the Obama administration that was unhappy about her reporting.

This is what Attkisson said about the invasion of her privacy last September at

I have spent more than two years litigating against the Department of Justice for the computer intrusions. Forensics have revealed dates, times and methods of some of the illegal activities. The software used was proprietary to a federal intel agency. The intruders deployed a keystroke monitoring program, accessed the CBS News corporate computer system, listened in on my conversations by activating the computer’s microphone and used Skype to exfiltrate files.
Evidence continues to build. I recently filed new information unearthed through forensic exams. As one expert told the court, it was “not a mistake; it is not a random event; and it is not technically possible for these IP addresses to simply appear on her computer systems without activity by someone using them as part of the cyber-attack.”

Attkisson seems to have a real experience and perspective on what the overreach of the federal government and unequal justice under the law looks like.

Before the raid on Cohen's office Attkisson tweeted out a thread on what ground rules should apply to assure that any Trump meeting with the Special Counsel would be equivalent to the treatment that Hillary got with the FBI.

Attkisson did all of it in good fun, but when you read through the thread you really see how slanted the scales of justice seem to be.

Of course, it got much, much worse on Monday with the raid on Trump's personal attorney.

And the odds of Trump ever sitting down with Mueller in this investigation should have also gotten much, much worse.

It appears that there is nothing that the Deep State will stop at in order to attempt to unseat Donald J. Trump as President of the United States.

It is all deeply disturbing for anyone who believes in equal justice under the law.

Sunday, April 8, 2018

The Buffett Base

One of the topics I return to again and again in BeeLine is the power of compounding.

It is the most important factor in wealth accumulation.

It matters in life.

It is the biggest reason that anyone should be careful about taking on debt. If compounding is on your side, it is your greatest friend. If you are on the wrong side of compounding, it will bury you.

It is really true that there is no greater power on earth than compounding.

I recently came across a fantastic article on the power of compounding that was written by Morgan Housel entitled "The Freakishly Strong Base" who had some great observations on compounding.

Housel makes an important point that I had not considered before regarding Warren Buffett. Most consider Buffett to be the greatest investor of all time.

Warren Buffett

However, did you realize that 97.6% of Buffett's net worth of $81 billion today is attributable to what he had saved by the time he was age 30!

Without the base of assets he had accumulated by age 30 (and which he then produced compound returns on) his net worth today would only be $1.9 billion rather than the $81 billion he has. The fact that Buffett literally started investing as a teenager and saved up a $1 million by the time he was age 30 gave him a greater investment advantage than anything else he did in his entire life.

More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful.
But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child.
$80.7 billion of Warren Buffett’s $81 billion net worth was accumulated after his 50th birthday. Seventy-eight billion of the $81 billion came after he qualified for Social Security, in his mid-60s.

Did that sink in for you?

Buffett is 87 years old today but all but $300 million of his wealth was accumulated after he was age 50.

He has grown his net worth from $3 billion to $81 billion since he was age 65.

Those are impressive increases in his later years. However, more impressive is that if he did not have that $1 million base at age 30 (and instead had $24,000), and still did everything else the same over the remainder of his life, he would have only had $1.9 billion today.

$1.9 billion is nothing to sneeze at. However, if that is all that Buffett was worth today there is a good chance that you would have never heard of him. He also would likely have had about two books written about him rather than those 2,000 that attempted to detail his investing genius.

This is why I always stress to young people on how important it is to start early on their savings and investing. If you do that on thing and stick with continue doing it, it is almost impossible not to become wealthy due to the power of compound returns.

Housel makes the point that age 30 is a critical point in which you want to be able to differentiate yourself from your peers. Therefore, it makes it critical to begin saving and investing in your teens and 20's.

Thirty is an important age, a time when ambitious workers break free from entry-level jobs and can begin saving real money. The distribution of net worths isn’t particularly stratified for those in the teens and 20s, but starts to spread around age 30. An extra $100,000 of net worth can push someone in their 20s from the 50th to the 95th percentile. By age 30, you need an extra $390,000 of net worth to make that jump.

Of course, we know very few young people are doing this today or have done it in the past. Therefore, it is not surprising that very few people have much in the way of savings which will undoubtedly also be the same in the future.

It also goes without saying that a good number of people reading this blog post are beyond the age of 30.

Is there hope for you? The simple fact is that it is not going to be any easier tomorrow. Work on increasing the base you are compounding from today.

When is the best time to plant an oak tree?

There is no mistaking the fact that the best time to plant an oak tree was 30 years ago. However, the next best time is today.

The unassumingly strong base is rooted in the same thing: Compounding is not intuitive, so it’s systematically overlooked and underappreciated.
Michael Batnick once explained it. If I ask you to calculate 8+8+8+8+8+8+8+8+8 in your head, you can do it in a few seconds (it’s 72). If I ask you to calculate 8x8x8x8x8x8x8x8x8, your head will explode (it’s 134,217,728).
It is so easy to overlook how powerful it can be to take something small and hammer away at it, year after year, without stopping. Because it’s easy to overlook, we miss the key ingredients of what caused big things to get big. How can most of Buffett’s success be attributed to what he did as a teenager? It’s so crazy, so counterintuitive. And since it’s crazy and counterintuitive we overlook the right lessons. 
Physicist Albert Bartlett put it: “The greatest shortcoming of the human race is our inability to understand the exponential function.”

Read the entire article by Housel and pass these lessons along to someone you love.

To start accumulating a strong investment base you first need a strong base of knowledge. This is a good place to start.

Thursday, April 5, 2018

Spring Freeze

This Spring has been one of the coldest I can remember in Ohio. Instead of of having Spring Fever we have been in a Spring Freeze.

It has snowed three times since the middle of March and the forecast is for more snow this weekend.

The same has been true along the East Coast.

This is the snow that blanketed Washington, DC on March 21, 2018.

Credit: Evan Vucci, AP

This was the headline in the New York Daily News on Wednesday in an article written by Chris Sommerfeldt.

Record-breaking, 'ridiculous' April cold and snow set to hit northeastern U.S. this weekend 

Dreams of clear skies and mild weather will have to wait, as forecasters predicted Wednesday that a record-breaking Arctic blast is headed for the East Coast this weekend.
"Ridiculous late season arctic outbreak Fri/Sat," Weather Company meteorologist Michael Palmer tweeted.
Temperatures in the city are expected to drop as much as 20 degrees below the normal and a slushy snow-rain mix will likely start falling on Friday and continue well into Saturday, according to the National Weather Service.
The harshest weather is set to hit the north and central U.S., with temperatures dropping 30 degrees below normal.
Minneapolis is expected to experience the coldest April day ever recorded on Friday, with a high of only 21 degrees.
The Arctic blast will be cold enough to dump snow from Washington to Boston, according to forecasts.

Of course, all of these facts had to make a self-respecting liberal "journalist" a little nervous. Perhaps all of the reports of the harsh spring might make some people start to doubt the global warming narrative that they like to perpetuate.

Therefore, Mr. Sommerfeldt, not content to let the news speak for itself, had to add this to the end of the story.

Despite the unseasonably cold weather, temperatures across the northern hemisphere in general are slated to be far warmer than normal, signaling that this cold front in no way negates the overall warming of the planet.

Notice that Mr. Sommerfeldt states that they are "slated" to be far warmer. That seems to be a prediction that I could not find any basis for. I even reached out to Mr. Sommerfeldt on Twitter and asked him what his source for this claim was. I got no response.

Out of curiosity, I went to the NOAA website to see if they had any reports on average temperatures across the entire northern hemisphere this year.

The most recent Global Climate Report that the NOAA publishes is for February, 2018.

Here is what that report says about temperatures in the northern hemisphere.

February 2018 was characterized by near to cooler-than-average conditions across a large portion of the Northern Hemisphere land, while much of the Southern Hemisphere land had warmer- to much-warmer-than-average conditions. The most notable cool temperature departures from average were present across North America, where temperatures were 3.0°C (5.4°F) below average or lower for some locations. (my emphasis added).

Therefore, Sommerfeldt seems to want to "report" what he wants to happen rather than what actually has happened.

And journalists wonder why there are complaints about "fake news"?

I am not a climatologist or meteorologist. However, I consider myself a practical thinker who makes decisions by looking at facts. I have also learned that it is always important to look beyond the "facts". How are the facts packaged and what is the motivation of the messenger?

Over the years, I have listened to the claims about human created global warming. Without even spending a lot of time on the science, these claims never seemed to make sense to me. The planet is known to have warmed and cooled over the years. Even if the data shows it is warming, how do we know it is caused by man when you look at past history? We know there was an ice age. We also know the ice melted. How did it ice up? How did the ice melt?

I also can't help but be a little skeptical when I also see the changing explanations about the climate. In fact, it does not even seem to be global warming we are worried about any more, it is climate change.

We heard a few years ago that we would see far less snow because of global warming.  When we got more snow, we were then told this was caused by the warming. It is all very confusing for something that is supposed to be so settled in science.

I also remember in the late 1970's and 1980's all of the talk from scientists was concern that the planet was cooling. What happened?  That was only a few short years ago- a speck of time in the history of the earth.

When you consider past history you also quickly realize that God dwarfs anything that man can do. For example, the year 1816 was considered "The Year Without a Summer" after Mount Tambora erupted and the ash seemed to veil the sky across large swaths of earth.  Crops failed around the world and famine followed.  Riots and political unrest were not far behind.  People tend to get really angry when they are hungry. How much did the average global temperature fall that year? - only about 1 degree!

That story has always made me much more concerned about global cooling than warming. A rise in temperatures is actually beneficial for food production. It can extend the growing season further north (or south in the southern hemisphere). Cooler temperatures do the exact opposite.  Given a choice there is little doubt where I come down.

If given a choice between global warming and cooling---I will take warming every time. I don't say that just because I prefer golf and the beach over skiing. There are very significant geopolitical and economic reasons to prefer a warmer over a cooler climate.

Lord, please bless us with the warmth of the spring and summer sun to grow the crops necessary to feed the 7.5 billion people on this planet.

Out with the Spring Freeze. Bring on Spring Fever.

Tuesday, April 3, 2018

Is Time On Your Side?

A lot of what determines the arc of your life, your challenges and opportunities, depends on who you were parents were, where you were born and when you were born.

The reality is that we have no control over any of these three factors at the time of our births.

Much is made of the first factor---who your parents are. We hear terms like white privilege but you can say the same thing if you have two parents, or your parents have college educations or they are well off or they are not divorced or they do not have substance abuse issues or anger management issues. The list is endless.

However, disadvantages at birth do not preclude us from succeeding. They are not intractable. In fact, who your parents are is the easiest of the three factors to overcome.

For most people in the world, the country of their birth will be the most important factor in their success or failure in life. If you are lucky enough to born in the United States, as Warren Buffett likes to say, you have won the birth lottery. The opposite is true if you are born in North Korea, Venezuela or Somalia. It is even more difficult to overcome the place of your birth than to whom you were born in most places around the world .

The hardest of the three to overcome is the time in which you were born. For better or worse, we have no choice when we are born and little we can do about the big events that swirl around us.

For example, a young Jewish boy born in Poland in the 1930's was trapped by that time. It is not much different than that for the girl born in Afghanistan 25 years ago. We can escape many things in life, we cannot escape time.

Why do I bring this up?

If you consider the last 40 years in the United States, it has been perhaps the greatest 40 year span in history to accumulate wealth.

There is almost no excuse for any Baby Boomer to not be retiring with a substantial nest egg if they had saved and invested along the way. Almost all of the large investment asset categories did well with the exception of commodities. Of course, we know that many boomers did not save enough. 62% have less than $200,000 saved for retirement.

Bullion Vault prepared this chart to show investment returns, by year, for the last 40 years for all the major investment categories.

S&P 500 stocks (with dividends reinvested) were up 8,750% (11.8% annualized return).

Credit: Thomson Reuters and Hartford Funds

Long-term bonds increased by an annual annualized return of 8.5%.

Treasury bills, despite the lower interest rates over the last decade, averaged a 4.6% return for the 40 years.

Gold averaged a 5.2% return for the 40 years.

House prices have risen from a median price of $50,000 in 1978 to $210,000 today according to Zillow. That is a 4-fold increase but is only a 3.7% average annualized return. Most people think that their house is a great investment but the reality is that it has returned less than holding cash over the last 40 years.

The median house value increase in the Unites States was just slightly higher than the 3.5% inflation rate since 1978.

A big reason that the last 40 years have been so favorable is the declining interest rate environment we have had. This had the effect of lifting all asset prices, particularly the value of long-term bonds.

For example, an investor who invested in long-term bonds for the 40 years between 1942 and 1981 would have only averaged a 2.3% annualized return. Compare that to the 8.5% average annualized return over the last 40 years.

Let's put some numbers on those returns to show the difference.

$1,000 invested in long-term bonds in 1942 grew to $2,483 over 40 years.

$1,000 invested in long-term bonds over the last 40 years grew to $26,133!

When you are born can make a huge difference.

In addition, what you have saved when the timing of the markets turns in your favor also makes a huge difference.

Look at these charts that John Mauldin of Mauldin Economics recently referenced in his "Thoughts from the Frontline" newsletter.

Which age group has made out the best over the last few years as the value of financial assets soared?

It was those age 75 and over who undoubtedly had the most assets invested and benefited from the timing of those markets. This age group also benefited the most from the favorable asset class returns over the last 40 years.

Who fared the worst?

Those under age 35 who have little saved and invested and are burdened by student debt. They are paying off debt rather than saving for the future. Baby boomers from age 65-74 also saw their net worth actually fall between 2013-2016  but my guess is this is due to this age cohort hitting retirement and beginning to adjust to the drawdown of assets in retirement.

You also see how important timing is in this comparison of real median family net worth by age looking at 1983, 1995 and 2016.

Those 75 years and older have seen steadily increasing net worth over all three data points.

In 1983, the median net worth of those age 75+ was just about the same as those between the ages of 35-44. Today the older crowd has almost 5 times the net worth the 35-44 age cohort has. Consider as well that those 75+ today (the blue bar) were generally in the age 35-44 (gold bar) or the 45-54 (green bar) age cohort in 1983.

Notice that since 1995 it is only those that are age 55 and older thay have increased their net worths. And it has only been those age 65 and over that have seen a significant increase. Every age group below that age has seen their net worth (in real terms) contract .

Why is that?

A lot of it is timing.

If you are roughly age 60 or older you have had an investment return tailwind at your back for the last 40 years.

Other age groups have had the benefit but for less years and with less invested.

If the younger age groups are going to hope to see the net worth increases of their parents and grandparents, they will need another 20, 30 or 40 years like we have had the last 40 years.

Unfortunately, it is unlikely to happen.

You simply cannot replicate the bond returns we have had for the last 40 years. Interest rates cannot go down like that again causing a rise in bond values.

What about equities?

The last nine years has seen the S&P 500 advance at an annual return of 15.3%. That is better than the 11.8% over the last 40 years. However, the average for the last 100 years is 10.5%. It is unlikely that investment returns over the next 40 years will be as attractive as they have in the last 40 years.

One of the great advantages of being a young investor is being able to put time on your side. This allows compound returns to really work to your benefit. There is no better savings strategy than simply starting early and staying with it.

Many boomers did not save enough despite the significant rewards that would have come with it. Unfortunately, the future will probably mean higher savings requirements and lower returns that will make it even more difficult for people to see the value of saving.

The savings rates that today's successful retirees have used to get them where they need to be will have to increase in the future due to lower anticipated returns. Time will not be on the side of those retiring in the future. The wind was at the back for today's retirees. The young today will likely face headwinds.

David Blanchett, Michael Finke and Wade Pfau did an in-depth paper that was presented last year at the Pension Research Council Symposium outlining the target pre-tax savings rates required for retirement in a lower return environment.

Here is a chart of the results comparing historical savings rates with those expected to be required going forward for those just starting to save for retirement.

It generally shows that at most income levels and ages, an additional 5%-10% in annual savings for retirement will be required to be set aside compared to historical recommendations.

For example, a joint household of two 30-year olds just starting to save for retirement previously could rely on an annual retirement savings rate the of 8.5% per year given historical returns. Lower expected future returns means that target savings rate now needs to be in the range of 12%-14% per year.

Credit: David Blanchett, Michael Finke, Wade Pfau
Low Returns and Optimal Retirement Savings

When time is not on your side, make sure that your savings are.

How you spend the rest of the time in your life depends on it.