Tax Assessors Go Airborne

drone_tax_assessmentIt’s a plane! It’s a drone! It’s…..the property tax assessor? That’s right, as local governments start to look under the couch cushions for loose change, they have found a more high-tech and lucrative way to garner more tax revenue: use airplanes and high resolution aerial photos to detect property improvements. This method allows them to see improvements such as home additions, extensions, new garages and swimming pools that drive-by inspections could not observe before. They are also more likely to catch those giving false information on their tax assessment forms.

Local governments in the U.S. are now joining other international governments in using aerial and satellite imagery to find more taxable wealth. Already back in 2010 the Greek government was using Google Earth to find unreported swimming pools; they found in the suburbs there were not 324 pools as reported, but actually almost 17,000! The Irish Tax Commissioners also followed suit. Then in 2013, The Daily Mail reported that Officials at Her Majesty’s Revenue and Customs were using Google Earth and Google Streetview to find fancy cars, home additions and new construction in the UK to try to decide whether to investigate homeowners they suspected of paying too little tax. They even reported that tax officials would add extra details to their searches such as people bragging on Facebook about a new car or exotic vacation. The Long Island community of Riverhead also used Google Earth to find pools that were constructed without filling out the proper paperwork or paying the permit fees, bringing the town over $75,000 in fees.

It shouldn’t be surprising that even governments will eventually adopt the latest technology if it means more revenue for them. What is interesting is how these stories illustrate an embedded disadvantage to holding wealth in the form of real estate. Real estate, unlike other assets such as precious metals, almost always carry a real estate tax which is usually assessed annually based on its estimated value. So even if you fully own a piece of property or land, there will still be an annual cost to holding it. Further, if the perceived value of the land goes up, the tax will likely go up as well. Precious metals, held outright, do not have such a tax. Currently the only possible tax would be on the gain realized after selling it; but at least as the value of the metal appreciates, there is no annual tax also increasing.

The other variable with real estate is how the real estate tax or anticipated real estate tax can affect the property’s value. If it is believed real estate taxes are expected to increase significantly in an area, the value of the property will likely decline compared to other areas where the real estate tax is not expected to be as high. An interesting example of this we may see in the coming years could be in Chicago which has expected pension payments to spike in 2016. It is estimated that to fully fund these pension payments, Chicago would have to increase homeowner property taxes by approximately 50%! This isn’t to say real estate will not remain a good option for holding wealth, but it is important to note some of the advantages and disadvantages of location and other factors when comparing alternatives.

Chris Kuiper, CFA is currently a student and researcher at George Mason University pursuing a Master’s of Economics. His previous experience includes asset management, investing and banking.

Venezuela’s Currency Plunges…Again

The bolivar People exchange US dollars and Venezuelahas taken another sharp drop this past month, decreasing nearly 30% and falling as low as 423 bolivars per dollar, down from 279 at the start of the month as Bloomberg recently reported. The current exchange rate of nearly 400 bolivars means the currency has weakened 82% in the past year alone. This of course is the black market exchange rate, as the legal exchange rates still stand at 6.3, 12 and 199 bolivars per dollar (the government has instituted a three tier exchange system).

Unsurprisingly, Bloomberg noted inflation stood at 69% last December, but a recent report by investment bank Bank of America/Merrill Lynch indicates inflation may have reached just over 100% year-over-year this past April. Of course, the analyst of the report had to use both official and private sources to compile the data, as Venezuela’s central bank stopped publishing the consumer price index in December. Even more troubling is a recent analysis by the Cato Institute’s Steve Hanke who found that, using the principle of purchasing power parity, Venezuela’s year-over-year inflation will likely be 510%!

This is nothing new as the bolivar’s severe debasement has been going on since as early as 2011 (and even in the 80’s they were experiencing double-digit inflation already.) What is new according to the Bloomberg article is that the black-market rate is no longer tracking the so-called “implicit rate” which is the number of bolivars in circulation divided by foreign reserves. Starting last year, the black-market rate began to diverge sharply from the implicit rate and is now about three times higher.

Why? Venezuelans believe the debasement will continue far into the future, perhaps even at accelerating rates. As Bloomberg News notes, “To put it simply, it appears that Venezuelans have lost all faith in the bolivar and seem willing to pay whatever it costs for greenbacks.” Indeed, when the last vestige of faith disappears from paper currency, nobody wants to hold any of it at any price. Some people may wonder why you wouldn’t want to hold a currency that is “undervalued” compared to the reserves (such as gold) the country has in the bank to back the currency. Wouldn’t this be like buying a company that is trading for less than what it holds in cash? Yes, in a sense. But if a company is selling for less than the value of its assets or even the cash it holds, then the market is saying something – namely they expect the company to burn through most of that cash or assets, making it worth even less in the future. The same is true for Venezuela. Its citizens now believe its government will continue to print money and deplete any remaining reserves.

The bad news is this will continue to be a disaster for Venezuelans who have already been coping with food and essential goods shortages. But perhaps a silver lining is that the end appears to be near, which will hopefully bring about change and an end to their worthless paper money.

Chris Kuiper, CFA is currently a student and researcher at George Mason University pursuing a Master’s of Economics. His previous experience includes asset management, investing and banking.

Privacy in a Cashless Society

Denmark is quickly approaching the point where cash might no longer be necessary. Legislators recently proposed a law Mobile paymentthat would allow some retailers to only accept digital payments via a credit card or mobile device. If it passes, it’s likely that many brick-and-mortar shops will gladly free themselves from the burden of paper and metal money. Some citizens, on the other hand, are worried about the trackability of non-cash transactions.

This trend is not especially new. Already a third of Danes use MobilePay, an app created by the nation’s largest bank, for making transactions. One report even said that in 2012, 84% of Danish transactions took place with credit cards. Several other European countries have also expressed a desire to do away with cash. For example, in Sweden’s larger cities, the bus systems already restrict payments to digital forms like credit cards and prepaid passes.

Some people are worried about how their privacy will hold up in a cashless society. Right now, paper money is often used as a way to avoid tracking. Records are not essential for cash transactions because they involve the transfer of physical objects. With relative certainty, we can always know who owns the money because we can see who holds the actual paper bills.

Digital money, however, has to be treated differently. Banks and payment processors almost always attach an identity to artificial transactions. In our legacy financial system, that’s the only way to ensure that money doesn’t get lost, duplicated, or misdirected. Many argue that the authorities would have a field day with this kind of information. Electronic databases are extremely easy to search, analyze, and preserve, so the government could theoretically watch where all of our money goes.

Privacy is definitely a legitimate concern, but it’s important to remember that digital transactions do have some serious benefits for businesses.

close up of man counting money and making notesPhysical money is notoriously difficult and expensive (and even unhealthy) to handle, which I can illustrate with a personal anecdote. Like many others, I spent a decent portion of my teenage years working in a fast food restaurant and I remember muttering all the time about how annoying cash was. Without exaggerating, I can say that it often took five to ten times longer to sort bills and count change than it did to swipe a card. That’s a huge factor when you’re trying to serve 120 cars in an hour and it’s only a fraction of the full cost. The owner of the restaurant also had to pay the managers to count money drawers (and the entire safe) several times a day. Then there’s the cost of having bills and heavy change delivered and picked up by armored trucks, and how about touching dirty paper while serving food!

Daniel Brown is the editor-in-chief of You, Me, and BTC.  He’s also the “Everything Elf” at Liberty.me.

JPMorgan’s Physical Silver Stash Continues To Grow

S9sGEWmY_400x400Ted Butler, a highly regarded analyst in the precious metals sphere, recently suggested that JPMorgan Chase might own as much as 350 million ounces of physical silver. That’s a shocking number, and even though speculation is rife in Butler’s arguments, the official figure (around 55 million ounces) tells an interesting story. The bank’s bullish stance could bode well for the future of the silver price.

JPMorgan started collecting silver in April 2011, when the metal’s price was just beginning to fall from its high of nearly $50/oz. Before the spike, the bank had virtually zero ounces of physical silver bullion.

5y Silver

A year later, their stockpiles were up to around 15 million ounces and since then, they have more than tripled their stash to 55 million ounces. In a span of just 10 days during April 2015, they had more than 7 million ounces delivered; a huge amount for such a short period of time.

Some have argued that JPMorgan’s behavior in the paper/digital silver market has been malicious and unfair. In a lawsuit, rival investors claimed that the bank was manipulating the price downward to aid their physical purchases. But that lawsuit failed in 2013 and an appeal was struck down in 2014.

When it comes to the facts, however, JPMorgan’s intent is not especially important. The bottom line is that the bank has been amassing a great deal of silver bullion, and that could mean that they expect higher prices before long.

Two essential factors here are JPMorgan’s sheer size and influence. It’s the largest bank in the U.S., and it’s leaders clearly knows their way around Wall Street and the entire financial system. That certainly doesn’t make them immune to mistakes, but their outlook should still mean something to the average investor; if they expect a spike, maybe we should too.

And of course, this begs the question: Why? If JPMorgan is so large, so experienced, and has access to crucial and far-reaching market analysis, then what do they see that’s telling them to buy silver? It could be nothing more than the idea of profiting through manipulation, but there could be more legitimate reasons as well.

Some suspect that JPMorgan anticipates another financial crisis. The bank’s chairman and CEO, Jamie Dimon, even wrote to shareholders recently and noted that “there will be another crisis, and its impact will be felt by the financial market.” He further explained that the crisis could be triggered by any number of events. The cause could be geopolitical issues, rapidly rising interest rates, a commodities collapse, a real estate crisis, a bubble, or something else.

In my own opinion, that anticipation makes a lot of sense. The history of the world’s financial crises alone should indicate that problems will come. Every few decades (or less) we see interest rates go crazy, prices collapse (or spike), currencies evaporate, or entire industries go under. Throughout all of this, silver has certainly fluctuated, but for wise investors, it has never failed. Its reputation as a sound store of value has held strong. It appears that JPMorgan sees silver as security at the very least and as profit if things go well. We might be well-advised to follow suit.

Where is the Inflation?

Money_falling_from_sky_inflationLegendary investor Warren Buffett recently admitted that he was wrong on interest rates, noting at the Berkshire Hathaway annual shareholders meeting, “It is so hard for me to believe that you can drop money from a helicopter and not have inflation, but we haven’t.” Many like Mr. Buffet are wondering the same thing. After dire predictions of the coming inflationary tsunami from sound money advocates, where is inflation?

When most people talk about inflation, they mean a general rise in the level of prices, usually measured by the CPI. After bouncing between 1-2% for the last few years, the CPI has recently made a dramatic downturn and has even posted a small negative year-over-year rate for March. But as many of our readers know, the true definition of inflation is literally inflating the money supply – the general rise in prices is merely a symptom or consequence of this.

Using this definition, we see that the money supply is indeed being inflated by a number of measures. The M1 money supply (cash and checking) continues its march upward, still growing around 10% per year; M2 (M1 plus savings deposits) shows similar constant growth, but growing around 6% per year. But if we have established that the money supply is growing, why haven’t general consumer prices risen?

If consumers did receive a “helicopter drop” of money in their front yard, we probably would see an almost immediate increase in prices as they would go out and bid up goods and services with their new money. But the growth in the money supply we have seen is done through a different channel. When the Fed engages in things like QE, it doesn’t send regular citizens a check in the mail; rather, it buys government bonds and lowers interest rates.

So if newly created money is going to financial assets, we would expect to see increases in those assets as well as interest-ratePicasso_inflation sensitive assets, not in the prices of consumer goods and services that the CPI measures. Not surprisingly, this is exactly what we find. Publically traded stock valuations are at all time highs, private company valuations are ballooning, and bonds yields are at record lows with forty-five percent of the world’s government bonds yielding less than one-percent, and many even showing negative yields (which means their prices are at record highs.) When he was chairman, Bernanke noted that higher stock prices will create a “wealth effect” as consumers will be wealthier, helping to increase confidence and therefore spending. Unfortunately, only fifty-five percent of Americans own stocks. As stocks and bond valuations get frothy for the wealthy, we would then expect money to start flowing into other assets to preserve wealth. Art is one example of this, which has recently been on a tear; this past week a Picasso sold for $179 million, a new world record. Real estate is also seeing a boom and price surge in the ultra-luxury markets.

So to see where the inflation is, one only needs to look at where the newly created money is going. Yes, general consumer prices aren’t running away (except for healthcare and tuition expenses, but that’s another topic); however, prices of assets that are affected by QE and low interest rates certainly are. Remember, the CPI didn’t go to the moon during the last housing bubble either, staying around 3% even though house prices and the stock market were bid up.

Finally, it is also helpful to remember the true definition of inflation because today’s definition can mask a lot of small but constant inflation. For example, if entrepreneurs can find a way to deliver a product to consumers for five percent less than the current price, the consumer benefits. Yet if inflation causes the price to increase back to its former price, the CPI will register 0% inflation, yet there is indeed a loss of purchasing power here.

Keeping the true definition of inflation in mind reminds us how and why asset bubbles can form and also why inflation will continue to erode standards of living and the need for personal wealth preservation.

Chris Kuiper, CFA is currently a student and researcher at George Mason University pursuing a Master’s of Economics. His previous experience includes asset management, investing and banking.