Market Musings Blog

How To Stay Safe Online

Today’s topic is an updated version of our previous posts about online safety. As cybercrime evolves, so do user tactics; we’re here to bring new ideas to your online protection strategies. So let’s dive in:

  1. Think of email as a newspaper. You should assume it is neither confidential nor private. Never put in an email anything that you wouldn’t feel comfortable publicizing to the general public.
  2. Clean out your email inbox and trash regularly. Leaving old emails that you do not recognize in your system can open the door to hackers. If you have time, eliminate contacts you don’t recognize. Keep your system clean – it will work better, too.
  3. When you create a password for your email, use a nonsensical phrase – research has shown that’s more effective than almost any other form of password. Here’s an example: for!blendmychanges8. The good news is that if you use a phrase, you don’t have to change your passwords as often – every few months will do.
  4. Don’t use the same password for your bank and brokerage accounts as you use for buying stuff at Nordstrom.com. In fact, try not to repeat passwords at all.
  5. Another option is to use a password manager. That will take care of more than just your email password. Examples include LastPass and Bitwarden.
  6. Use two-factor authorization every chance you can. Some services are not set up for 2FA; if they should be, write to them and tell them so!
  7. Remember your in-home internet. Make sure you use a robust password for access to your own system. My home internet didn’t allow password customization, so I changed out the modem for one that did. Do not give out your home internet password without changing it immediately afterward.
  8. Never, ever send confidential information via email without either using a password on the file, truncating account numbers and/or SS numbers, or redacting brokerage company names, etc. A safer way to deliver documents is via a secure portal.
  9. If your advisors – accountants, lawyers, recordkeepers, etc – do not provide secure portals, insist that they set one up.
  10. I don’t use social media, but it goes without saying – keep those accounts as private as you can, Don’t post information you wouldn’t be comfortable giving out to your whole neighborhood.
  11. Always log out of services you are not using. Do not just close the browser window, because this can leave you logged in to your bank account, email account, and so forth.
  12. Never use a public internet connection to perform any confidential task. You can mitigate the dangers of a public connection by using a virtual private network, but some services may not work with a VPN. It’s best to keep personal business on your own internet connection.
  13. Keep your computer and phone locked down – requiring a password or biometrics to open them, and physically, too, especially when traveling. Don’t leave a device near a window, on a car seat, or any other place that might tempt a thief.
  14. Recycle old hardware – printers, tablets, phones, computers – with a reputable firm. Do not keep these around if they’re not in use. Many older bits of hardware utilize unsupported versions of software that offer an easy entree to a hacker. And of course, always update your software on the machines you do use. Never use outdated software!
  15. “Claim” any online accounts that you have been provided. Social Security has encouraged participants to manage their accounts online. If you do not set up a username/password for your own SS account, then anyone who finds your SSN can “claim” your online account and re-route, stop, or start payments. Ditto with your bank and brokerage online accounts. Set them up, even if you don’t plan to use them.

Believe it or not, these fifteen tips are barely scratching the surface of “best practices”. If some of these items seem too technical, it might be time to find someone to help with your home technology. A safe system will perform better, and you might just sleep better at night.

We Want EV’s, But….

The nascent trend toward ownership of electric vehicles in the U.S. is skating along on a series of subsidies in the form of tax credits and fiscal stimulus to both consumers and corporations. These include a dizzying array of tax-payer-funded initiatives encouraging the purchase of electric cars, the buildout of charging stations, the construction of battery plants and EV manufacturing facilities.

But there’s one inconvenient fact about all of this that has received almost zero media attention: China is far ahead of us, building sophisticated vehicles saturated with technology and enjoying long ranges at very low prices – but we eliminate their participation in our market by slapping a 27.5% tariff on Chinese EV imports. So while we want to accelerate our response to climate change, we have eliminated one of the shortest routes to that end, which would be to encourage, rather than discourage, the importation of Chinese EVs. Instead, we have chosen market protection as a first priority. Not even Europe has been this harsh with Chinese car imports – and it has Germany to protect.

While politics has always interfered with economics, it’s disappointing that our leaders are not honest with the public on this matter.

Meanwhile, for a taste of what we are missing, check out this article on ten great Chinese EVs, including several snazzy sports cars. My personal favorite is the YangWangU9, seen above. What’s yours?

Taxes and Deficits, Oh My!

No matter who we tax, or how high or low we set tax rates, federal tax receipts barely budge when measured against the entire economy. This fact flies in the face of political arguments about tax rates: who should pay their fair share, whether corporate taxes are too high or too low, or how to handle federal deficits. This chart shows federal tax receipts as a percent of the US’s gross domestic product – which is our entire economic output.

For tax historians, a few facts stand out:

  1. The Trump administration passed a tax package in 2017; rates have not changed since then. This was widely perceived to be a tax cut. Yet tax receipts have reached the very highest edge of the long-term range since the 1940s.
  2. In the 1970s, the top marginal rate was 70%. Did that help? No. Tax receipts as a percent of GDP were never more than 18% that decade and were frequently lower.
  3. Tax rates declined in 1982. The marginal rate dropped to 50%. (For reference, today’s top federal rate is 39.6%.) Tax receipts hugged the 17% line all decade.
  4. In the mid to late 1940s, the highest marginal rate was over 90%, and the federal government had changed income brackets so that rate kicked in at $200k, instead of $2 million. The economy peaked right around 1945, and from then on, “tax the rich, more” resulted in an ever-decreasing take as a percent of GDP – despite the end of WWII.
  5. The shaded grey vertical lines represent recessions. Around nearly every recession – no matter what the tax rate – the Fed’s take declines. One of the worst outcomes ever for tax receipts was the recession of 2008-2009. Throughout that period, the highest marginal rate was 35% – it never changed.
  6. Below, tax receipts are compared to budget deficits. This chart speaks for itself. Despite the highest receipts ever, our budget deficits are also higher than ever.

Lessons are two-fold: first, we haven’t found an optimal tax rate yet, in all these years of trying. Second, recessions matter – far more than tax rates.

It is Not True that the US Treasury has Never Defaulted

Most recently, market chatter has revolved around the debt ceiling, with finger-pointing all around. Investors, business owners, heck – all citizens, are worried that Congress will not come to an agreement around raising the debt ceiling. But is it true, like politicians and the media like to say, that the US has never defaulted?

In a word, NO, that is not true.

In 1979, the Treasury neglected to pay investors in its bills. Here is a description of the event:

Investors in T-bills maturing April 26, 1979, were told that the U.S. Treasury could not make its payments on maturing securities to individual investors. The Treasury was also late in redeeming T-bills which become due on May 3 and May 10, 1979. The Treasury blamed this delay on an unprecedented volume of participation by small investors, on failure of Congress to act in a timely fashion on the debt ceiling legislation in April, and on an unanticipated failure of word processing equipment used to prepare check schedules.

There is no question that this constituted default. Furthermore, Treasury was reluctant to pay interest to “catch up” investors given that they’d been out payments for some time. Two researchers, Terry Zivney and Richard Marcus, found that the default resulted in higher interest rates, by a substantial margin, for several months and likely longer after the default occurred. Of course, it’s completely rational for investors to demand higher rates from issuers that default.

That said, this event has obviously faded so far into the past that no one even brings it up, despite the fact that it does amount to a US default, and the fact that against the background of considering whether the US will default now, it seems important. Obviously, the US lived to borrow another day and for a very long time at very low interest rates, despite neglecting to pay its borrowers for a time in 1979. Food for thought.

Silicon Valley Bank: Update!

We wrote this blog a few days ago, but already a lot has happened. SVB as everyone knows went into dissolution. Along with it went Signature Bank, and now First Republic has accepted capital infusions and loans to stay afloat. There will likely be others.

While SVB was dissolved, with its parts being sold off and the cash being used to cover deposits, the Fed also established a line of credit so banks could borrow against their securities to pay depositors even if those depositors had uninsured funds at SVB. The loans are good for one year. The funds do not come from taxpayers; they come from a fund established via the Dodd-Frank legislation, paid into by banks, to rescue their own. It’s a “bail-in” rather than a “bail-out”. Still, the money complicates the issue of inflation. Now that banks are failing, the Fed must inject money into the system that was previously NOT in the system, and while the loans do have to be paid back, there are questions about whether that can happen. Other questions include:

  • Will the “bail-in” funds be enough to cover all the non-insured depositors that might end up in trouble?
  • Which banks are next?
  • Will the funds have to be paid back if a recession hits, and banks’ results are depressed anyway because of that?
  • Where does the backstop of depositors stop?
  • Why do we have deposit insurance limits if we are going to rescue depositors anyway?
  • What happens to the Fed’s inflation-fighting interest rate path now?

We should know the answers to a couple of these questions in a few weeks. In the meantime, be sure your bank deposits are close to or below the insured limit, on the theory that it’s better to be safe than sorry. Funds can be stashed in brokerage money market funds, used to buy Treasury bills, or scattered among several banks.

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Over the last two days, Silicon Valley Bank experienced steep withdrawals and booked losses on securities it had to sell, resulting in a takeover by its regulator, the FDIC. Registering as the 18th largest bank in the US and the second largest bank failure ever, SVB largely provided services to startup technology companies. Those companies deposited a lot of cash – a good thing – but SVB used the money to buy Treasury securities which are now at steep losses thanks to higher interest rates.

When the bank needed to pay higher interest rates to depositors to keep them from moving their deposits to higher-rate alternatives, it sold some of those securities at a loss to raise the cash to do so. That, in turn, spooked the market, leaving SVB bereft of cash.

Many other bank stocks reacted negatively to this event, as did the market in general. We are entering a period of fragility when we will witness breakage in the economy as a result of the Fed’s interest rate hikes. It’s difficult to know at this point whether this event will be contagious, or not. As a practical matter, if you hold significant deposits in excess of insured amounts at a single bank, you should endeavor to scatter your funds among differently-named accounts or other institutions to come inside the insurance limits. As always, let us know if you have any questions.