Harry S. Dent Jr.'s Blog, page 13

Stock Breakout? With Flat GDP Q3 and Falling Earnings Projected Ahead?

Somehow the stock market is expecting growth to re-accelerate after a disappointing 2.0% GDP growth in Q2. The only sign of such growth in the stock market is central banks lowering rates and expanding their balance sheets again.

Q3 just came in at 1.9%, just below the 2.0% last quarter. And that covers over the bigger decline in consumer spending down from 3.03% in Q2 to 1.93% in Q3. Business investment continues to trickle down as did last quarter.

Don’t be Fooled by Stock Buybacks

As David Stockman and I both noted at our October IES conference, the tax cuts did not contribute to a higher rate of capital investment: only more stock buybacks. Nonresidential fixed investment surged briefly to 8.8% in Q1 2018, but has been falling ever since and was down 3% in Q3 2019. Companies don’t need more capacity after the greatest debt bubble and over expansion in history. They just keep putting their excess cash and/or cheap borrowing into buying back their overvalued stock, which will make them look like the dumbest money in history at this bubble.

And more important, a good leading index of corporate earnings is the ISM. That has been declining since Q2 2018 and suggest earnings that have been falling since Q3 2018 will continue to decline ahead and potentially go negative .

What’s in Store for Stocks?

So, how are stocks going to break up and out to major new highs? Looks unlikely unless we get stronger signs of stimulus from the Fed, or a more substantial trade agreement with the Chinese.

If we don’t see a break up in the coming weeks, then a sharper breakdown like late 2018 is the more likely course . That could wake up the Fed and get a balls-out stimulus program that will ignite a final, failing rally…

As the truth is that you can only overstimulate, an already overstimulated economy so long before no one needs a bigger house or factory or car – or another refinance!

Is Market Sanity Around the Corner?

I never understood WeWork. The company either purchased or took long-term leases on commercial properties. It dressed them up with Millennial-friendly details like beer taps and cool art, and then re-leased the space in very small increments for a higher price.

Leave out the cosmetics, and you’ve got a traditional commercial leasing company that tries to control space at one price and lease it at a higher price.

WeWork blended in things like a mission to “elevate the world’s consciousness” and have people arrive as individuals but leave as part of a group. That’s nice, but as the old saying goes, the stars might lie but the numbers never do. WeWork counted on some emotional buy-in that would tether people to the leases even when it makes sense to go elsewhere.

Call me skeptical…

A Necessary Correction

WeWork came crashing down just before it went public. It perhaps saved millions of investors from an idiotic investment built on a house of cards. Is this the beginning of sanity returning to the markets?

Peloton, the gym equipment and membership company dressed up as a tech offering, is trading around $22, almost 30% off of its IPO price, and Uber, the no-profit, “don’t-call-us-a-cab” company is crossing the tape at $33.25, more than 25% off of its IPO price. When Amazon reported much lower earnings than expected last week, investors sent the shares down 6%… and that company actually earns money!

It looks like investors are migrating from growth stories to profits, and it’s about time.

Equity markets are facing a number of threats as we close out 2019, including trouble on the political front and problems in the boardroom.

You can love President Trump or hate him, but there’s no question that he’s helped propel equities to record levels. Lower regulations and falling corporate taxes filled corporate coffers, which enriched shareholders. As the impeachment drums beat louder, investors will take note and begin preparing for a regime change. This doesn’t mean it will happen, but we’d be remiss if we didn’t think about how to protect our investments if we see greater regulation, increased taxes, and more pressure on companies to be socially responsible on the horizon.

In the boardroom, companies are spending less to buy back their own stock. Goldman Sachs reports that stock buybacks fell 18% in the second quarter and appeared to dwindle in the third quarter, as well. Overall corporate spending could fall as much as 6% as the cash flood from tax reform recedes.

Declining stock buybacks could hit the equity markets particularly hard because it takes out of the market a buyer who is price insensitive, which makes stocks more vulnerable to selloffs.

Add these risks to the global economic slowdown and domestic economic troubles in China as well as the EU and you get a brewing equity storm.

On the Bright Side

There are a couple of bright spots, even if they’re transitory. The U.S. and China are still reporting progress in trade talks. Any deal should give us a quick boost. And I think shoppers will open their pocketbooks a little wider than expected this year. Unemployment is the variable most negatively correlated to consumer spending, so very low unemployment would mean higher spending.

And there can always be another mania, which Tesla proved when it announced earnings last week.

The company surprised the street by delivering just over 100,000 cars and banking a profit, which sent the company stock up 25% over the next two days. Investors were thrilled that Tesla might deliver 360,000 cars this year.

I consider it a “mania” because the higher stock price values Tesla at $56 billion, which happens to be the same valuation as General Motors, which plunked out 10 million cars last year.

It might be fun to watch Tesla’s stock, but at this point in the markets I wouldn’t want to own it and get taken for a ride.

Gold: The Great Diversifier

It’s no secret to you that I am still more bearish on gold than bullish. And it’s no secret to me that a lot of our subscribers still like gold and feel that it is still a safe haven and a good store of value long term.

Despite having argued that gold was one of the largest bubbles and a part of the larger 30-Year Commodity Cycle bubble and crash, I’ve also noted that both it and Bitcoin have weathered the crash much better than other commodities. And by the way, it has been the commodity sector that thus far has proven my view that bubbles don’t have soft landings when they finally burst .

Look at this chart of the CRB broad commodity index vs. gold.

The CRB has already fallen as much as 70% at its last lows in early 2016. The most volatile like oil and iron ore have been down just over 80% at worst. First note that gold both peaked higher and later than the CRB. Second, that it has held up much better: Down only 46% at its low in December 2015.

For Zero Hour, I did an analysis of risk-adjusted returns for commodities in the last bubble. Gold was in the top 1/3 at a killer 34.5%. Despite nominal returns 56% higher for silver, it’s risk-adjusted return was lower at 29.5%.

The Pros…

So, here are the pros of having some gold in your portfolio, outside of when the commodity cycle favors it longer-term, like 2001-11, and ahead, around 2023-38/40:

Gold does have better risk-adjusted returns than most commodities.
It is easy to buy, especially with the GLD ETF that is not subject to “contango,” as it is not based on futures, but purchases of physical gold. It is also not hard to store due to its high value to weight.
It has lower volatility.
It is a proven store of value, especially in inflationary times.
It is highly liquid due to broad interest and high trading volume.
Most of all, it is a more effective diversifier. It doesn’t even correlate with commodities as much as others, and it definitely has low correlation with the stock market.

This diversification quality is the most important. Presently gold, is trading largely opposite to stocks.

The Cons…

Now, the truth on the other side: Gold correlates very highly with inflation, and thus is a great inflation hedge in times like the 1970s recessionary inflation season…

But, gold long-term has a zero return, adjusted for inflation – and you can’t rent it out like real estate that also correlates with inflation.

We are in a deflationary season since 2008, but central banks are fighting that with fire hoses of QE and financial asset inflation/bubbles. Gold bubbled big time into 2011 with that massive money printing – but collapsed in 2013 forward when it saw no inflation as a result!

Gold Will Fall in Upcoming Recession 

Near term, gold still has potential to move towards the highs but not exceed them. It is also a great diversifier until stocks get clear in their bubble burst – which looks very likely for some time in 2020, and most likely by June.

Until then gold looks good with diversification impacts. When the crash begins it will very likely crash to new lows between $700 and $1,000 – still holding up much better than the CRB and most commodities. Hence, I recommend lightening up when stocks look like they are peaking.

In the next commodity boom, I see it as the easiest commodity to buy and the best for portfolio diversification. However, in the next crash I would expect silver to get pummeled much more and be a better buy in the early stages of the next commodity boom and bubble that will last until at least 2038 and perhaps as late as 2040.

Gold will ride again… but it is still disfavored overall until the commodity and economic cycles bottom around 2022-23 or so.

China, Hong Kong, Government Power, and the Markets

Yesterday morning, I hopped on the line with Dent Senior Research Analyst Dave Okenquist to catch up on all the goings on around the world at present moment.

First on our agenda was China, who’s shown itself to be quite fragile lately, with big decisions being made in the wrong ways for the wrong reasons. The country needs a revolution, frankly, with a people-controlled government. A democracy. That’s the only way for the Chinese people to reach the sort of economic heights the country’s capable of.

If not, then it’s going to be trouble for the entire country. The Chinese government has expanded well beyond their means, and when a downturn comes, they’re going to reap what they have sowed. Trust me on that. We’ve already seen examples of this sort of top-down overbuilding in Asian countries, but at this point, it’s gone too far. The country’s far too urban to be running a government the way they are. The very pernicious Hong Kong riots are a great step in the right direction!

But we also had to talk about the markets for a bit. And frankly, I’m getting a bit annoyed with how sideways things have been. When are we going to see a breakout? In either direction!

This has been happening since January of 2018, mind you, thanks to government stimulus and the propping up of the Fed. But with each correction we’re seeing a deeper dive, with is troubling and doesn’t bode well for the future. But it’s hard to tell exactly what “the future” means right now. We’ve been in purgatory for quite some time. I still lean towards the downside resolution near term.

Harry Dent: China Needs a Revolution

Over-built, over-speculation, over-controlled. China is using all the wrong tactics when it comes to Hong Kong, says Harry Dent. Watch his latest interview with Dave Okensquist to get his take on the international state of affairs, and how economic trouble is brewing in our own country as we inch closer to the 2020 election. Sign up for Boom & Bust here: https://pro.dentresearch.com/m/1051908

Posted by Economy and Markets on Friday, October 25, 2019

Impeach, Impeach, Impeach… Healthcare

Many Democrats really want to impeach President Trump. According to a Pew Research poll conducted after the latest round of Democratic debates, 40% of Democratic respondents said that beating Donald Trump was the number one issue in the upcoming election. It’s not domestic policies, not foreign policy, not protecting any class of people, but simply making sure that, come January 2021, his name is not on the White House door.

Obviously, this goes far beyond wanting one’s political party to win. I’m not going to list out reasons why. We’re all well-versed in the current political battles. But focusing on removing him from office either before or during the election leaves precious little time to discuss national issues.

Healthcare Is Number Two

Whether the next president is Donald Trump or someone else, the sun will still rise, as the earth will still rotate. And we’ll still face a host of problems that we can’t outrun or outgrow. On the financial front, healthcare is at the top of the list.

While almost half of Democrats listed booting Trump as number one on their hit list, healthcare came in second. And it was the most important issue to all voters in exit polls after the 2018 elections. It’s easy to see why.

The federal government just announced that Affordable Care Act premiums for 2020 will fall an average of 5%, after dropping a modest 1% last year. That’s great, but it comes after premiums shot up 78% from 2013 through 2018.

The Kaiser Foundation reports that overall health insurance premiums have increased 54% since 2009, and now stand at $7,188 for single coverage and $20,576 for family coverage.

That’s a lot of money, and explains why a single-payer system (Medicare for All, or some variant) has gained support over the last few years.

So, What’s the Plan?

Just over 50% of voters say that it’s the government’s responsibility to make sure everyone has health coverage, but there’s not much consensus on how to pay for it.

Elizabeth Warren took heat in the last debate for not having a detailed proposal to provide coverage to everyone in the nation. Bernie Sanders clearly tells people that his plan will include a tax hike for almost everyone, while Warren claims she won’t do anything that raises costs for middle-income families.

She later issued a statement that her campaign is working diligently to draft a proposal. That’s probably political speak for “it’s going to be so incredibly expensive that I haven’t figured out how to sell it yet.” Sanders estimates Medicare-for-All will cost an additional $13 trillion over 10 years after accounting for savings elsewhere. Others have estimated the cost as high as $36 trillion.

But all these estimates have one thing in common: They assume that if the government provides healthcare coverage directly to consumers, then companies will immediately shift their health spending dollars to wages. If a company pays $3.50 per hour for a worker’s healthcare insurance, the company will immediately raise that worker’s compensation by $3.50 if it no longer has to pay for healthcare. This is why Warren and others talk about net costs to consumers: They balance out increased taxes with higher incomes.

Call me Skeptical

Most workers pay at least part of their healthcare premium, so their potential pay bump wouldn’t be equal to the full tax hike if the two numbers were equal. And how do you demand that a company comply at all? Peer pressure or shame might work for large companies in the public eye, but small firms? Do employees threaten to quit en masse if they don’t get a commensurate pay hike? And what about employees who choose different levels of coverage? Do they all get an “average” pay bump that rewards some but punishes others?

And what about year two?

It’s likely that healthcare costs will jump in subsequent years because so many more people would be covered with almost zero deductibles, which will drive up use of the system and strain healthcare resources. Our healthcare tax, or whatever mechanism is used to collect the funds to pay for it, will increase, and there won’t be a company standing around ready to take the fall for higher prices.

None of this supplies an answer, but it raises a lot of questions that we should be debating in the public square ahead of the next election. Boomers are getting older. Healthcare costs are taking up bigger chunks of the paychecks of Millennials, who then can’t afford to reach milestones in life. We need to figure this out before healthcare crowds out more spending from our national budget and our personal pocketbooks.

Only 8% Regret Buying a Home… That Will Change Faster Than Ever!

There’s one thing that is always true: Most people are not good investors. They buy the most near a long-term top and they sell the most near the bottoms that follow.

We have lived in a rare period since World War II wherein housing was first boosted by the first middle class generation (The Bob Hope) who could more broadly afford homes and mortgages, and then by the unprecedented and massive Baby Boom generation’s demand.

Real Estate Is Going Under 

These two trends will not repeat and real estate is the greatest bubble in all of history – and globally. Hence, there will be a larger and more global reset than in the 2008-09 recession that saw a nine-year decline of 34% in U.S. housing prices – worse than the 26% decline in the Great Depression.

Zillow just did a survey that showed that 55% of buyers now have to make a substantial financial sacrifice to buy a home at these bubble prices. The top four are:

1) 25% reducing spending on entertainment

2) 18% picking up additional work

3) 16% postponing or cancelling vacation plans, and

4) 13% reduced or eliminated saving for retirement

These burdens fall most on younger new households.

Take A Look at the Data 

Since housing has gone up seemingly forever, only 8% regret buying over renting. Only 25% say they would buy a different home, with 86% of the oldest saying they would buy the same house.

I would like to see Zillow do such a survey in Japan after their “Great Reset” in the 90s. Home prices have hardly even bounced from a 60%+ crash two-and-a-half decades later, despite the rise of its Millennial generation that is already peaking in 2020 in their spending. So, it only gets worse.

My “Net Demand” model that subtracts die-ers from buyers shows real estate is 40% overvalued today vs. 20% in 2006, and projects a slowing market until 2039 in the U.S. Real estate is as high now as it will be for many decades and due for as much as a 50% overall decline in the next several years. After being overvalued 20% last time, the actual crash was 34% as such crashes always overcompensate. So, a 50% crash with overvaluation of 40% would be totally in line.

After This Great Reset…

Real estate “will never be the same.”  It will return historically to going up on average at the rate of inflation (replacement costs), and hence deliver a zero real return. It will still generate rents and saved rents. No longer will it be the number one path to building wealth.

People will learn the hard way that everything goes in cycles – even real estate! That 8% no regret reply will skyrocket by 2023…

A 75-year bull market in real estate since World War II will come to an end – 87 years if you go back to the bottom in 1933 – during the last 90-Year Super Bubble and Great Reset Cycle.

Learning from a Million-Dollar Bet on the Astros

My family moved a lot when I was a kid. In our travels, we spent a couple of years near where I live now, on the Texas coast south of Houston. Back then, we lived on the beach where cable was something you could only dream of. We spent this part of our youth flipping through the three broadcast channels, repeatedly watching local ads that included ones for Gallery Furniture.

Every major market has a company like this, with an owner-pitchman who’s a bit outrageous, screams too much, and becomes a fixture. Gallery Furniture had Jim “Mattress Mack” McIngvale. At the end of his loud commercials, he would jump in the air while pulling cash out of his pocket and yell that Gallery Furniture “Saves You Money!”

When I moved back to the area more than 30 years later, I was surprised to see Mattress Mack still on television. Although, albeit older and a bit more sedate. But he’s grown into a larger-than-life character in Houston, supporting all sorts of charities and sports teams, and generally being a great guy.

Now he’s made headlines again, but in a different way. This year, Mattress Mack made $3.5 million bet on the Astros to win the World Series.

Protect Your Neck

He might be a big fan, but the bet wasn’t about making cash. Rather, it was to protect a promotion he ran over the past year. Just as he’s done for the last two baseball seasons, Mattress Mack promised that if you bought more than $3,000 worth of bedding and the Astros won it all, he’d send you a full refund.

In 2017, he had to pay up when the Astros won the series. Last year, they got bounced by the Red Sox in the American League Championship Series. Tonight, the ‘stros play game 1 of the World Series. And they clearly have a shot at reclaiming the championship.

When the Astros won in 2017, Mattress Mack had to pay out $11 million. If they win this year, it could cost him $15 million. So he found a novel and publicity-rich way to lay off some of the financial pain. The Astros opened the season at 2.2 to 1 odds, so if they win, Mattress Mack will take home $11.2 million, which includes his $3.5 million original bet plus $7.7 million in winnings.

By his own estimate, Gallery Furniture brings in between $150 million and $200 million every year, so if the Astros win it won’t be terribly painful either way. But the bet shows that with a little ingenuity you can find interesting ways to lower risk or generate returns.

Off the Beaten Path

Maybe you can’t, or don’t want to, place a multi-million dollar bet to cover a marketing campaign. But perhaps you’re trying to figure out how to navigate a near-negative interest rate world and still earn a bit of cash without taking a ton of risk.

It’s possible, you just have to consider unconventional avenues.

Recently we added a stock to our Boom & Bust portfolio that’s taken a beating over the last year. The stock price is more than 40% off its 52-week highs as investors worry about the product mix. But if you look under the hood, the company consistently generates great cash flow. It has a 5% dividend and an opportunity to grow in the upcoming holiday season. I think Tapestry (NYSE: TPR), which includes Coach, Stuart Weitzman, and Kate Spade, can keep its dividend and potentially offer capital gains to boot.

Closer to the fixed income world, take a look at Charles’ Peak Income. There, he commonly buys pipelines, REITs, and closed-end funds that hold anything from dividend stocks to municipal bonds. The beauty of the closed-end world is that they borrow money to supercharge their investments, so they can super-size returns. As short-term interest rates fall, these funds pay less for financing, which means they have more money to return to shareholders. Not a bad strategy in a declining rate environment.

For investors comfortable with options, consider Lee’s instant income approach, where he sells put options on great companies well below their current stock price. This allows Lee and his subscribers to earn consistent cash as they keep the options premium. And in the off chance that they take delivery of the stock, they’ve picked up great names at discounted prices.

It’s highly unlikely that any of these approaches will land you on the pages of USA Today like Mattress Mack, but they might make the pain of ultra-low interest rates a little easier to take. In that way, you can be a winner just like (hopefully) the Astros.

What Higher Debts Do to Bond Rates

The only Phd economist I allow to speak each year at the Irrational Economic Summit is Dr. Lacy Hunt. (You can watch his presentation from this year’s conference here.) Lacy can take that complex science and still see the forest for the trees. He can still find reality from all of that great theory to real-life outcomes.

It also helps that he advises a $4 billion bond fund at Housington Management and has to get the reality of bond interest rates right or face the consequences – which he has for this entire boom!

High Debt Doesn’t Equal Higher Rates

At IES, Lacy started off breaking one natural assumption of investors in his first slide. You would think that rising government debt levels would lead to higher bond interest rates. Higher debt means higher growth. Higher growth tends to cause higher inflation, and that in turn causes higher short and longer-term rates to compensate. Oh, and to sell more debt you have to raise the rates to attract investors to absorb it all.

This chart pretty much proves these natural assumptions are false! 

Here’s What Happens Instead…

The U.S. accelerated debt as a percent of GDP from 2007 through 2014, and T-bond yields fell from 5% down to 2.5% into 2016 on a two-year lag. Similar for the Eurozone with bond rates falling from 4.5% to 1.0%. Japan has been goosing debt the most from 1998 into 2013 and its bond rates fell from 3.0% to o.7% by 2016 on a 3-year lag. The U.K. was the most extreme in rising debt from 2007 into 2016 with falling rates from 5% down to 0.5% currently.

Here’s what tends to happen instead. Higher government debt tends to lead to “diminishing returns,” or falling ratios of GDP created per dollar of debt, which Lacy later shows has clearly been the case. So, like any drug, it takes more and more to create less effect. Higher debt becomes a greater burden through rising interest and servicing costs – and that slows economic growth.

It also encourages businesses and consumers to over-invest and that excess capacity lowers prices and inflation.

Voila: Another simple insight in a seemingly complex economy. And why I love Lacy!

Markets Sitting Sideways

The week’s gone by and markets are still doing just what I predicted: bounding forward sideways until something breaks up or down.

My Money Is on down

Partially because of Bitcoin and partly because of politics. What’s happening in Washington cannot be good for your money right now – between the Trump administration’s dealings with China, the Middle East, and even Ukraine. This impeachment deal is going to be trouble for Trump, and further erode stability, especially in the markets.

Have you noticed also that the inquiry’s running on a 45-Year cycle with the Nixon impeachment? Remember, we saw the market react very rapidly in late 1974. When did Nixon resign? You betcha.

Prepare for Volatility 

Expect the markets to be very volatile over the next month or two. It’s a good time to be selling stocks near the top, because I don’t see things getting much higher. We may make a new top in Nasdaq, but probably not the Dow or S&P. That means we don’t have the same upside we hoped, and we’ll still face the short-term downside we feared if we can’t make new highs in the next week or two.

As we’ve been saying, hold on to your hats.

It’s That 70’s…Cycle?

Harry Dent wraps up this week with an economic forecast showing how history is set to repeat itself in the form of an impeachment. Expect to see one last cresting wave before the market’s downturn, he says. Why down & not up? Two words: Bitcoin and politics. Sign up for Boom & Bust here: https://pro.dentresearch.com/m/1051908

Posted by Economy and Markets on Friday, October 18, 2019

Using Fake Numbers to Wage a War on Wealth

I’m stupid about the cost of a lot of things. I don’t mean uneducated, or lacking knowledge. I’m talking about downright dumb as a stump. Thank goodness the Bureau of Labor Statistics (BLS) is around to set me straight.

Take my television, for instance.

Thank Goodness for BLS

I have a 46” flat screen TV, connected to cable. It cost me around $700 several years ago. I use it to watch a few shows and maybe a game or two. I think televisions cost more than they used to. But the BLS tells me that I actually got a price break, not because I spent less at the register, but because the new unit has better features than the old one.

Using this method of hedonic adjustment, the BLS estimates that thousands of products cost less even as we shell out more real-world bucks to buy them. This is one way that we get inflation on paper that doesn’t match what we experience in our checkbooks .

Now authors Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley, are using some of the same techniques to explain how we make a lot more than we think we do. And how we pay a lot less in taxes than we see on our tax returns.

You might not know this financial dynamic duo, but their work is the basis of tax-the-rich proposals championed by Democratic presidential hopeful Elizabeth Warren and others. So, it’s worth understanding how they arrived at the numbers that will be used to beat you into submission to giving the government more of what you have.

About Their New Book…

The book is titled “The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay.” In it, they twist income and tax payments at both ends of the income scale to show that the poor pay a lot more and the rich pay a lot less. Both claims are dubious.

For everyone, Saez and Zucman include federal, state, and local income taxes, and then add sales tax as well as payroll taxes. Income taxes at all levels make sense. But sales taxes are questionable because they involve voluntary purchases. And payroll taxes technically give you a claim on benefits later in life.

When it comes to Social Security taxes, lower-income workers are paid a higher replacement rate when they start collecting benefits than those at the top of the scale. I didn’t see where Saez and Zucman included that adjustment.

Funny Figures

For taxes paid, the pair ignored the Earned Income Tax Credit, which sends money back to low-income workers. I’d think this tax rebate would count as lowering your tax payment, but not in their view. And it doesn’t count as income either. The tax credits are part of an entirely separate program of government transfers. Even though these are real dollars that flow into bank accounts and can be used to buy stuff.

At the other end of the scale, the adjustments get really questionable.

Saez and Zucman argue that all earnings and taxes eventually flow to people. So, corporate retained earnings and corporate taxes should be assigned to their eventual owners, shareholders. Because high income families overwhelmingly hold the most financial assets, the authors assign them their “share” of retained earnings and corporate tax payments.

The 2017 Tax Reform Act dramatically lowered the corporate tax rate, which conversely pushed up corporate profits. Including these figures, Saez and Zucman found that the richest 400 households “suddenly” pay less tax on their income than the poorest Americans.

Hmm.

I can’t touch or spend the retained earnings held by companies in which I own shares, and their tax payments didn’t come out of my bank account, yet these two figures are assigned to me when figuring out who pays what.

There’s a word for that… fantasy.

Companies often squander retained earnings on stupid stuff, never returning the cash to shareholders, so claiming that I somehow “earned” that money makes no sense. The same goes for their taxes. I didn’t pay.

Go with the Truth

Saez and Zucman use their made-up world to justify the ends, which is a much higher tax rate on high earners and those who hold wealth.

But the exercise isn’t necessary – and worse, it’s unwanted and harmful.

Instead of spending hundreds of pages torturing statistics and then helping political candidates do the same, they could simply go with the truth. Our economic system has helped raise billions of people around the world out of poverty and make the U.S. an economic superpower. It also allows for unequal outcomes, which can become extreme. Twisting the data allows opponents to poke holes in the logic even when the overriding issue of inequality remains. It’s a distraction.

Through electing political leaders and voting on state and local programs, voters decide how much of the inequality should be addressed through income redistribution. As the 2020 election gets closer, we get to decide for ourselves which approaches make sense. It would be easier to figure out if we were given clear numbers without a lot of obfuscation meant to lead us one direction or the other, but that’s probably too much to ask.