Market Musings Blog

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.


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.

Tax Laws, Sunsets, and Opportunities

We will admit up front that this article will cover “too much”: that’s a by-product of Congress’ propensity to complicate tax laws and our own desire to give you a compact reference for future use. Of course, we are not tax experts, so please rely on your own accountant before making major moves on the tax front. First off, we will discuss high points of the new SECURE 2.0 retirement act, which expands on SECURE 1.0. Keep in mind that SECURE 1.0 had eight provisions; 2.0 has over 100 provisions. You’ll need an accountant’s help to take full advantage of this new legislation. Next, we’re going to touch on some laws that are set to revert to previous versions if Congress does not intervene.


The first version of this act is best known for extending the age at which IRA holders must take required minimum distributions, for age 70 ½ to age 72. SECURE 2.0 bumps that once again, this year, to age 73. So if you are 72 this year, you have another year. In 2033, the age extends again, to 75. Other provisions include:

  • Reduced penalties if you miss an RMD
  • Increased catch up contributions starting in 2025 for participants aged 60-63.
  • Also starting in 2025, catch up contributions for savers of all ages who make more than $145,000 per year will need to be made in after tax dollars into a ROTH plan.
  • Under previous tax law, participants in ROTH 401ks had to take RMDs, while owners of ROTH IRAs did not. That has been changed to eliminate RMDs for the ROTH 401k starting in 2024.
  • Starting this year, IRA owners who use the Qualified Charitable Distribution tactic to direct their RMDs to charities can have a one-time, up to $50,000 per person opportunity to form a charitable trust with that money instead. So a couple could contribute $100,000 to a charitable trust, from which giving could extend for years. One note: the funds must be kept separate from any other charitable trust you already own. This one is tricky – so consult your estate attorney!
  • Excess 529 plan funds can, if you comply with several Byzantine rules, be rolled into a ROTH IRA for the beneficiary. Here, the rules are subject to some interpretation, so be sure to consult your accountant before attempting this one.
  • Multiple opportunities to withdraw penalty-free from IRA accounts for various sorts of emergencies.
  • Several employer-centric provisions including matching for ROTH 401ks, emergency savings ‘sidecar’ accounts to be offered alongside retirement plans, student loan payment matching, and several others. These provisions will not appear in employer plans overnight, and some may never appear, so stay tuned to your benefits manager at work.

Next up, the impending sunsets for important provisions of the 2018 tax act. This isn’t a call to action – rather, it’s a heads-up to keep track of the news around these laws, because if Congress does allow these provisions to sunset, everyone will be affected. The sunset occurs at the end of 2025. The most important items to track are:

  • Income tax brackets will rise at every level to the old brackets; the standard deduction, which was effectively doubled, will revert to half the current level; deduction formulas will change, including for home mortgage interest; and the child tax credit will revert to the less generous formula pre-2018.
  • The big one: the estate and gift tax exemption, now set at just over $12 million per individual and $24 million per couple, will re-set to the old limits, expected to be adjusted for inflation, of around $6.5 million per person. Should this re-set occur, we expect appointments with estate planning attorneys will be difficult to arrange due to the crush of trust restatements.

This brief is by no means a complete review of these important topics. We view ourselves as investment managers first, but secondarily, responsible for knowing just enough about changes in the law to alert you, so that you can consult with your own experts. Hopefully this piece has fulfilled that function.