Some Common Cents for December 1, 2017

Section I:

Last night, I made an economic presentation to the Tuscaloosa Estate Planning Council at the Indian Hills Country Club. This group has asked me to speak 3 or 4 times over the last decade, and it always, and I repeat always, serves filet mignon. What’s more, it has the club serve me first, which obviously allows me to enjoy said steak. Frankly, this is wonderful, and kind of, if not exceedingly, rare.

You see, there normally isn’t a meaningful honorarium at these types of events, if one at all. No worries, as I typically view dinner talks like the one last evening as marketing for the company. After all, there are normally any number of so-called ‘centers of influence’ and/or potential prospects in attendance. Out of town conferences which people pay to attend? That is a completely different story.

In any event, most groups don’t serve steak, let alone filet. The protein is almost always some form of inoffensive baked chicken. They also don’t make a decent allowance, if any and if you will, for the speaker to eat. This isn’t that big of a deal at lunch, but it can be at dinner.

As I told the group with which I was sitting: “it is not that unusual for them to serve me after I am already at the microphone, and remove my plate before I sit back down. That happens all the time. Fortunately, the meals typically aren’t as good as this one, if they ever are.” Trust me on that.

I tell you this for a reason: if it is approaching 8:00, or later, and I haven’t eaten (which has happened, happens, and will happen), I will shorten the Q&A with something along the lines of: “I see [Steve] is getting ready to pull out the shepherd’s crook, so I think there is only time for one more question.” I sincerely doubt I am the only speaker who does this.

As you can imagine from what I have written thus far, we had an extended Q&A session last night, which was a lot of fun for me.

Not surprisingly, the group had more than a passing interest in the tax reform legislation on Capitol Hill. Specifically, what would doubling the personal exemption on the estate tax mean for the estate planning industry? Intuitively, it wouldn’t be a good thing, right? Well, yes and no.

If there has to be an estate tax, the current personal exemption, which is portable to the surviving spouse, is $5.49 million. Obviously, this means it is $10.98 million per couple, which is a lot of money and very few people, in a relative sense, are subject to this tax. So few, I asked those in attendance: how many of your current clients are actually subject to estate taxes as they are now?

The mode for the responses I heard would have been: not all that many. What’s more, quite literally everyone (that I could see or noticed) had a ‘he has a point’ look on their face when I followed that question with: “are people really just going to turn over $20 million to their kids without any stipulations or restrictions just because they don’t have to pay Federal estate taxes on that amount? Really? I find that extremely hard to believe.”

Given what I/we do for a living, perhaps that is so much wishful thinking. Perhaps NO ONE will do any sort of estate planning any longer, and money will flow from generation to generation completely unencumbered. What then buddy?

Let me take a step sort of backwards and tell you: the estate tax is terribly ironic. Intuitively, you might think it is an effective way of redistributing wealth, and, in truth, it might be….in theory. In practice, it inhibits the free flow of capital between generations, thereby keeping it ‘tied up’ in a family for perhaps longer than it would be otherwise.

I mean the first generation of wealth didn’t work as hard as it did to pay upwards of 45% to the Federal government, did it? Trust me, an army of attorneys, CPAs, and other estate planning professionals have kept families wealthier for far longer than they would have been but for well, the estate plan. There is no shortage of people who have paid a small fortune to avoid paying an even larger one in taxes.

As a result, the government doesn’t get ‘its’ money and the wealth isn’t redistributed into the larger economy, at least not as much as envisioned or desired. As a result, I would argue, it is a form of indirect capital control, as it keeps it from flowing to its highest and best use. Basically, the estate tax is an impediment to economic activity and, therefore, economic growth….as all capital controls ultimately are. So, weakening policies which negatively impact overall economic activity (in the long run) should have a positive impact on society, should.

But a doubling of the personal exemption for estate taxes? At worst, it will cause a somewhat temporary disruption in the estate planning industry (but not as great as feared). This will ease once more wealthy families realize a solid estate plan is good for long-term familial wealth (taxes be darned), and you don’t need to have a $20+ million estate to have one. In so many words, people who have, say, a $10 million estate are going to have some kind of plan in place for future generations, even if they don’t HAVE to pay a dime in tax. That it just too much money to say “I don’t care what my kids do with it after I die. They can flush it down the toilet. So what?” At least I think it is, and I have been doing this a long time.

In the end: weaker capital constraints should lead to greater economic activity. Greater economic activity should result in higher rates of growth. Higher economic growth rates should engender greater wealth creation. Greater wealth creation means more people who have significant assets to pass on to future generations upon their death. More people with more wealth means more money to tax at some level.

This isn’t a zero sum game, no matter what so many people believe. What’s more, to share a response to another question I received last night, and I am going to quote myself: “So-called trickle-down economics might not work as well or as quickly as everyone would like, and I won’t argue that it does. However, it seems to work much better than trickle-up economics, since that doesn’t work at all.”

Whew. Tax reform and its impact on estate planning? Brother, it is a good thing I am already married.


Section II:

Of course, everyone last night was interested about other potential ramifications of the tax reform proposals. Let me give you a few of my comments from throughout the evening (which I have altered a little in order for them to make sense in this newsletter AND to fit with a friend’s article she is writing). Here we go:

  • The US tax code is outrageously complex. Even the IRS estimates it costs the US economy upwards of $400 billion just to comply with it. If this is true, any sort of simplification and reform would almost have to be good for long-term economic growth.
  • Economic growth and interest rates are positively correlated, just not as much as you might imagine. Think about it: interest rates are much lower now than they were in 1980, and the economy has grown quite a bit since that time.
  • Right now, the supply of money dwarfs the demand for it. That is why borrowing costs are as low as they are. The demand for credit would have to accelerate pretty dramatically for money to become tight, leading to significantly higher interest rates.
  • Trust me, if the long end of the yield curve goes up too much, the Fed will be pretty quick to raise the overnight rate to keep things in check.
  • I doubt the folks on the FOMC are as concerned with economic dots, and what have you, than what the markets are saying with the slope of the yield curve. If they are, they need to stop.
  • If the Federal Reserve can create money out of thin air like it did with the various quantitative easing programs and have interest rates actually fall, it is unlikely some modifications to our ridiculous tax code will cause them to spike in a meaningful way.
  • As we sit here today, the biggest threats to the long-end of the yield curve, and I mean Paul Volcker era interest rates, are: 1) the printing press, and I mean the actual, physical printing and delivery of money, and; 2) a shock to the global financial system stemming from the default of US Treasury debt, which isn’t going to happen.
  • Everyone is worried about a stock market crash. If that happens, what do you think will happen with interest rates? If history serves as a guide, they will fall through the floor.
  • We are worried about interest rates going up; worried about stock market crashes; worried about interest rates going down; worried about North Koreans; Worried about Washington, and worried about who knows what else. You know, perhaps we worry too much AND about the wrong things.


Section III:

I couldn’t sign off without sharing what I sent to the Montgomery Advertiser for next week. Read it only if you care about Bitcoin.

Folks have been quick to point out my perceived ignorance whenever I mention anything related to Bitcoin. It seems I don’t understand the math, technology, or what have you. Perhaps similarly, while I grasp the concepts of lift, thrust, drag, and weight, an Airbus A380? Really?

Those of us of a certain age remember the brouhaha surrounding the Internet back in the mid to late 1990s. You could have sold cow manure, and it wouldn’t have mattered to investors. All you needed was a dot com in your company’s name, and, voila, you were cutting edge and an instant millionaire.

To be sure, we all understood the Internet was going to fundamentally change our lives and how we conduct business. Our imaginations were the only constraint to the possibilities. However, hindsight suggests investors put the proverbial cart in front of the horse, particularly when it came to valuations.

“Et tu, Bitcoin?”

Cryptocurrencies are really cool stuff, which is a decidedly pedestrian understatement. I can’t even attempt to explain the math behind it all, but, holy smoke, the people who designed and can design such things? Trust me, they can’t carry on a simple conversation with the likes of us.

That Bitcoin could fundamentally change how we live our lives and conduct business is beyond argument. But the current valuation? Particularly given some of the very real limitations, which have almost nothing to do with the technology itself?

You see, Bitcoin is currently a store of value first, and a medium of exchange second. Proponents would argue it is an effective hedge, tool, alternative, or replacement for the intrinsically worthless ‘paper’ currencies we use today. After all, there isn’t anything truly backing the US dollar. Further, there isn’t any real limitation on how many of the things there can be. Seriously, when the folks with the big guns are the same ones in control of the money supply, I think you get the picture.

The same holds true in places like Venezuela, Libya, Iraq, Iran, Zimbabwe, and various other countries which lack the rule of law and/or control the flow of capital in their economies. Cryptocurrencies are a wonderful way to get out of the local, bankrupt financial system, and much easier to maintain, let alone hide or even obtain, than gold bars and coins.

As for a medium of exchange, each Bitcoin is currently divisible down to the one hundred millionth, or Satoshi. If my math is correct, this works out to be a little over 2 quadrillion transaction units, which should be able to provide the necessary liquidity. So, on that end, it is a question of time and consumer behavior, namely the end consumer’s willingness to maintain some measure of their purchasing power in a virtual wallet, as opposed to a real one in their hip pocket.

With this in mind, if enough people around the world replace fiat national currencies with Bitcoin, $10,000 per unit is a bargain. I get that too. So, I understand the recent furor surrounding all things Bitcoin in nature.

What I also understand is authorities like the Federal Reserve, ECB, Bank of Japan, and Bank of England will eventually want to regulate the Bitcoin market in some or fashion. Having worked in the financial industry and dealt with regulators my entire career, I don’t think this is a question of if as much as one of when and how much.

So, will these current valuations hold when that happens? Now, THAT I don’t understand.


Seriously, I don’t.


I hope all have a safe and happy weekend.


John Norris