The Investor May 2021

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ShareFinder’s prediction for Wall Street for the next 7 months:

Living with Capital Gains Tax

By Richard Cluver

Over-taxed though we are by a substantial measure above world averages, South Africans can nevertheless thank their lucky stars that they have not just inherited a Democratic Party president who is planning to tax his people to economic death!

US Citizens are just getting used to the Joe Biden proposal to raise corporate taxes from 21 to 28 percent: which investment analysts calculate will clip something like nine percent off the dividend payments that retired folk depend upon to supplement their endangered pensions. Here, in an aside, because the US Federal Reserve has forced bond yields to less than zero once tax and inflation are factored into the equation; few American retirees are actually able to give up work because their pensions are so badly underfunded that they are rapidly becoming worthless.

The root cause of it all is the massive debt that governments have racked up in pursuit of unsustainable Welfare State policies. In order to avoid the technical bankruptcy of a large number of major world governments whose collective debt has now climbed to an incredible 356 percent of global Gross Domestic Product, central banks have printed so much money that it has become a virtually worthless commodity that accordingly attracts negative sovereign debt interest rates.

Now, President Joe Biden’s ‘American Family Plan’ will likely include a large increase in the top federal tax rate on long-term capital gains and qualified dividends, from 23.8 percent today to 39.6 percent for higher earners. Including the net investment income tax, the top federal rate on capital gains would be 43.4 percent. Furthermore, rates would be even higher in many U.S. states due to state and local capital gains taxes, leading to a combined average rate of 48 percent compared to about 29 percent under current law.

Most US states levy their individual income tax rates on long-term capital gains and qualified dividends and nine states provide general exclusions or deductions for long-term capital gains. However, the average top tax rate on capital gains at the state level is about 5.2 percent, for a combined average rate of 29 percent under current law. If the top federal capital gains rate rises to 43.4 percent, this would raise the combined tax rate on long-term capital gains to 48.4 percent.

It gets worse for folk living in California where the combined effect will take the top capital gains rate to 56.7 percent, in New York where it will raise to 54.3 percent, Washington where it will rise to 52.4, in Vermont to 52.2 and Minnesota to 53.3. New York City levies a local capital gains rate of 3.876 percent, which means an investor would pay an all-in rate of nearly 58.2 percent. Residents of Portland, Oregon would face a top capital gains rate of 57.3 percent.

Compare that to the 33.8 percent average rate of total tax revenue collected by all Organisation for Economic Development (OECD) countries expressed as a percentage of average GDP made up of the table below:

Gross Domestic Product (GDP)


Gross National Product (GNP)


Capital Stock


Wage Rate


Full-Time Equivalent Jobs


Conventional 10-Year Revenue, 2022 to 2031


Dynamic 10-Year Revenue, 2022 to 2031


Source: Tax Foundation General Equilibrium Model, March 2021.

Economic and Revenue Impact of Raising the Top Capital Gains Rate to 39.6 Percent for Those Earning over $1 Million 

The US-based Tax Foundation has developed a ‘General Equilibrium Model’ which takes into account the well-known Lasser Curve to determine that the inevitable tax avoidance measures US citizens can be expected to adopt will reduce long-run GDP by about 0.1 percent and reduce federal revenue by about $124 billion over 10 years.

South Africa, which imposes some of the world’s most punitive taxes upon its wealthy, might well serve as an object lesson for Mr Biden. Faced with a 45 percent income tax rate which is only lower than a handful of nations, which in return provide their citizens with a wider range of services than the average South African can only dream of, more than 4,400 of South Africa’s high net worth individuals have left the country in the last ten years according to the latest figures from AfrAsia Bank.

As of December 2020, there are approximately 38,400 dollar millionaires living in the country – down by 800 from the number recorded in 2019. In New World Wealth’s previous report, there were 39,200 millionaires recorded, which was down significantly – a loss of 4,400 millionaires – from the year before that.

The latest figures were done for the AfrAsia Bank and the New World Wealth 2020 Global Wealth Migration Review. Published annually since 2018, the report examines recent worldwide migration trends and analyses the potential impact of the Covid-19 outbreak on wealth migration going forward.

Wealth migration figures are a gauge of the health of an economy, said AfrAsia Bank. The group specifically focused on high net-worth individuals (HNWIs) with wealth of $1 million or more.

“For instance, if a country is losing a large number of HNWIs to migration, it is probably due to serious problems in that country such as crime, lack of business opportunities etc.

“It can also be a sign of bad things to come as HNWIs are often the first people to leave; Unlike middle-class citizens, they have the means to leave. If one looks at any major country collapse in history, it is normally preceded by a migration of wealthy people away from that country.”

Global citizenship company Henley & Partners has reported a sharp increase in South African enquiries in the third quarter compared to Q1 2020, with a nearly 50% increase in enquiries overall as the pandemic coursed around the globe.

Living with Capital Gains

South Africans could, meanwhile, teach their American cousins a useful thing or two about living with high capital gains taxation. Plainly the easiest (or hardest) way is to emigrate to a lower tax environment. That does not necessarily mean leaving the country permanently as many wealthy folk have learned. You only have to change residency! Not so US Citizens.

So, South Africans can count themselves luck on that score. Many have accordingly bought a home in Mauritius, where there is NO capital gains taxation and personal tax is a flat 15 percent They then list that as their permanent address for tax purposes and all they need to do to comply with South Africa’s tax rules is to spend more than six months of every year outside the borders of South Africa.

That’s not so easy for US citizens since US federal taxes rely upon a citizenship-based system and so, unless you give up your citizenship, you pay US taxes regardless of where you live in the world. Even those merely holding Green Cards are expected to pay US taxes. Accordingly, Americans choosing to live in a lower tax environment would only see their state-based taxes dropping away. That is why so many wealthy Americans use trusts that are registered elsewhere in the world to hold their investments, and even then it gets complicated.

Someone choosing to make Mauritius his permanent home would need to spend more than 6 months of the tax year in Mauritius or have a combined presence of at least 270 days in that and the 2 preceding tax years.

Beyond Mauritius, those prepared to travel further abroad might ideally chose somewhere like the Bahamas of the Cayman Islands. In addition to having no corporate tax, the Cayman Islands impose no direct taxes whatsoever on residents. They have no income tax, no property taxes, no capital gains taxes, no payroll taxes, and no withholding tax. They are therefore considered tax neutral.

In the Bahamas there are no income, capital gains, wealth, inheritance, succession, or gift taxes. Tax revenue in the Bahamas is derived primarily from VAT, import duties, stamp duties, real property tax, casino taxes and license fees.

What if I choose to stay?

For the majority who chose not to leave the country, and particularly those who long ago took the recommended route of tying up their savings nest egg in a family trust, South Africa is particularly onerous – though not as onerous as the US is likely to soon become. When a capital gain is realised within a trust, 66.6 percent of that gain has to be included for income tax purposes and it is taxed at a rate of 40 percent, effectively meaning that a trust’s CGT is 26.7 percent.

Importantly, however, trusts are able to “trickle down” capital gains to their beneficiaries who, as individual taxpayers are able to exclude R30 000 of any gains in a year (or R300 000 in the year of death) and include 33.3% of the remaining gain for income tax purposes at their own marginal tax rate. The balance of the gain will then be taxed at their specific marginal rate of between 18% and 40%. This effectively means that an individual will have a maximum CGT rate of 13.3%.

To consider a practical example of what this means for South African investors, let us take the case of the many investors who subscribe to my Prospects Newsletter and accordingly match their own share buying and selling to transactions with those I make within the Prospects Portfolio. The newsletter has a considerable following because, as the following graph illustrates, it has delivered compound annual average growth of 17.7 percent every year since inception, together with an average dividend yield of 3 percent, which adds up to a total annual rate of nearly 21 percent since I started it in January 2011.

They might, accordingly have bought 280 Naspers shares at R357.14 back in March 2011 together with 562 Capitec shares at R178 each for a total investment of R200 000. This month Naspers shares were selling at R3 550 each and Capitec at R1 401.22.

Each purchase of R100 000 has thus risen, in the case of Naspers to R994 000 and Capitec to R787 486. Thus the value increase in the case of Naspers has been R894 000 and Capitec R687 486 and, if sold from within a trust, the Naspers holding would attract CGT of R238 376 while the Capitec holding would attract CGT of R183 311.

The consequence of Capital Gains Taxation is that instead of realising R1 781 486 with which to seek another suitable investment, your fair weather partner in the transaction, the Receiver of Revenue, would thus cream off R421 687 leaving you with just R1 359 689 to re-invest.

So Capital Gains taxation is obviously a severe deterrent for the average investor and it has also been a major contributor to the decline of the Johannesburg Stock Exchange which listed 668 companies 20 years ago and is now home to only 336. It is also why an increasing number of local companies have sought offshore listings where their operations are beyond the avaricious reach of the South African government.

There are of course, as they say, more ways of skinning a cat. The smart approach would be to sell off sufficient shares each year so as to realise a capital gain of just R30 000 per beneficiary of your trust. Thus, assuming you had a spouse and two children you could realise R120 000 in capital gains annually in the hands of each recipient without attracting any CGT….and a lot more besides if the beneficiaries do not have significant other sources of income.

And, of course, you could use that realised sum to re-invest in another long-term top performer. Followers of the Prospects portfolio would, for example, have bought 1 700 Clicks shares at R59.60 each back in November 2011 at a total cost of R101 320 and, at this month’s value of R256 17 that investment would be worth R435 489. That represents a capital gain of 430 percent.

And it is possible to have your cake and eat it

 Had our smart investor created a portfolio which, at retirement, had been producing a dividend income two or three times greater than his annual living cost average, he might have used that surplus to regularly buy MORE Clicks shares whenever they reached cyclic price lows. To do so all he would need would be my ShareFinder Professional programme which produced the following graph:

To understand it, this is a graph of the daily closing price of Clicks shares displayed on a logarithmic scale which removes the upward curvature that is the inevitable result of something called exponentiation that occurs with respect to all growth securities. Thereafter, I have imposed a “least squares fit” trend line which the programme also calculates. This latter is effectively an arithmetic price mean which provides the user with the most valuable of all trading strategies.

Simply stated, if the graph price is above that mean line it is expensive and if below it is cheap. So, say I had an annual surplus of R100 000 and I wanted to use it to buy Clicks shares, I would have used ShareFinder’s other analytical tools to determine with better than 90 percent accuracy the annual upper and lower turning points of the Clicks graph that I have displayed and, each year I would have invested R100 000 to buy Clicks shares at the lowest possible prices.

The results of such transactions are displayed in the following table:

So you can see that by using this method I would by now be the owner of 13 409 Clicks shares at a total cost of R1 101 365 or R82.14 per share. At this month’s value of R256 17 this investment would be worth R3 434 984 and the gain overall would be R2 333 619 which, if sold off in one year within a trust would attract CGT of only R622 236.

The effect is the CGT thus works out at a cost of only R46.40 per share compared with a CGT cost of R52.41 per share had you simply held the original purchase of 1 700 shares since the inception of the portfolio…. and of course, you could have used the trickle-down method to minimise such transactions over time!

Spreading the burden thinly!

By Richard Cluver

The Biden tax proposals have probably done more to focus attention upon the earnings of the wealthy than any other event in recent history, roiling Wall Street share prices when a major sell-off seemed the inevitable consequence. But in South Africa a crisis is unfolding!

Responding to an uproar of public opinion in the US, Treasury Secretary Janet Yellen was quick to make it clear that the tax increase, from a present 23.8 percent to 58.2 percent in the most highly taxed states, would only apply to the top 1.4-million taxpayers – out of a total of 144.3-million altogether – there seemed to be a universal sigh of relief and markets once again moved into the boom mode that Biden’s proposed spending has inspired.

But the sub-text to the issue is just how skewed American wealth has become in the land where capitalism reigns supreme. In 2018 – the latest year for which statistics exist – the bottom 50 percent of taxpayers (those with gross income of less than $43,614 a year earned just 11.6 percent of total US salaries and wages; what the IRS calls Total Adjusted Gross Income or AGI. This group of taxpayers paid $45.1 billion in taxes, or just 3 percent of all federal individual income taxes in 2018.

The following table explains it all, and arguably why the US system spreads the burden fairly: so that those who can most afford it pay the most while the poor are comparatively lightly taxed.

In contrast, the top 1 percent of all taxpayers (taxpayers with AGI of $540,009 and above) earned 20.9 percent of all AGI in 2018 and paid 40.1 percent of all federal income taxes.

In 2018, the top 1 percent of taxpayers accounted for more income taxes paid than the bottom 90 percent combined. The top 1 percent of taxpayers paid roughly $615 billion, or 40.1 percent of all income taxes, while the bottom 90 percent paid about $440 billion, or 28.6 percent of all income taxes.

All of which takes me to South Africa and one of my own earliest encounters with great wealth. A family friend, who was at that time widely acknowledged as one of South Africa’s wealthiest citizens, explained to me his fundamental belief that those with the most should give the most. “My Boy,” he said, “You can only sleep in one bed and you can only drive one car at a time but if your neighbour does not even own a bed you won’t sleep in yours for long!”

That view clearly lies at the very heart of growing public support, most vocally from some of America’s wealthiest people, for a new approach to a system which is demonstrably already heavily skewed towards the view that the wealthiest should bear the greater share of the costs of running the nation. Quite understandably, the very wealthy understand that if they do not bear the heaviest load the weight of public opinion might very quickly swing towards a new dispensation in terms of which wealth taxes might eventually strip them of much of what they currently own.

When US presidential hopeful Elizabeth Warren last year proposed a wealth tax which would demand a regular portion of what people owned rather than on their incomes, Microsoft founder Bill Gates spoke on the issue at a New York Times conference expressing consternation that Warren’s proposals might go too far for many deep-pocketed Americans worried about those taxes eroding their fortunes: ‘I’ve paid over $10 billion in taxes. … I’ve paid more than anyone in taxes, but I’m glad to — if I’d had to pay $20 billion, it’s fine. But when you say I should pay $100 billion, then I’m starting to do a little math about what I have left over. … I’m just kidding.’

Much attention has been focused this past month upon Bill Gates whose reputed $145-billion fortune is being divided with his departing wife Melinda. Consider what that number means. If $145-billion were invested on the JSE at its long-term dividend yield average of three percent it would offer Mr Gates a weekly income of R1.2-billion and nearly three times that if he were to place it in South African sovereign bonds.

So, even if his lifestyle dictates that he owns an 18-passenger private jet, many valuable artworks, an island in the Bahamas and a few other comfortable homes in the USA and is forced to employ some very expensive security to ensure that he and his loved ones are never kidnapped for ransom, it must be clear that it would still be very difficult to spend that kind of income in any meaningful way. That is obviously why he and most other extremely wealthy people are giving their money away on a monumental scale: at least $50 billion at the last count.

So how fairly is the South African tax burden spread? Well we might start, considering the table on the right, with the observation that the top 5.8 percent currently pay 92 percent of all personal taxes. In the 2018 tax year just 4 917 029 South Africans were assessed for tax and, of them, one sixth paid two thirds of all personal taxes.

In total, 1.533-million individuals paid a collective R29.622-billion in personal tax which made up 83.2 percent of all personal taxes collected. Meanwhile, in the middle, just 3.256-million taxpayers contributed R59.977-million or 16.8 percent while at the bottom end a total of 52.941-million paid nothing.

But that was in the ‘Good old days before Covid. There has been a catastrophic collapse in taxpayer numbers since then. According to Jean du Toit, Head of tax technical at Tax Consulting SA, a recent study by the University of Cape which detailed the number of adults living in households by income band. “If we look at the three upper bands, which comprise the middle class and above, the statistics are almost unthinkable,” he said

“Between 2017 and June this year, this segment of the adult population declined from 6,100,000 to 2,700,000 individuals, translating to a 55.73% reduction.

“In a three-year period, our personal income tax base appears to have more or less halved and it is likely that a large chunk of that reduction occurred after February 2020.”

Du Toit attributed the decline to, “…the brain drain of South Africans leaving the country which has been exacerbated by the lockdown.”

Billionaires lead massive stock sales

By Hank Tucker

Forbes Magazine

It’s been an incredible run for U.S. stocks over the past six months. The S&P 500 has surged 28% in that time, setting new record highs every month, with investors optimistic about the return to normalcy as more Americans get the Covid-19 vaccine. Such exuberance helped billionaires’ worldwide wealth grow by an astonishing $5 trillion since the early days of the pandemic in March 2020.

But is it the beginning of the end? An E-Trade survey of 957 active investors earlier this month revealed that 69% of the respondents thought the market was in a bubble. 

Certainly plenty of investors have been cashing in, including some of the nation’s richest. Based on an analysis by Forbes, the biggest billionaire seller in recent months is Ernest Garcia II, the largest individual shareholder of used car e-commerce company Carvana. Garcia, who was convicted of criminal fraud in 1990 stemming from his small role in Charles Keating’s Lincoln Savings & Loan scandal, trimmed his stake every day for 73 trading days straight and unloaded $1.8 billion worth of shares since November.

As a percentage of their fortunes, venture capitalist and financier Chamath Palihapitiya is the largest liquidator since November after divesting his entire personal stake in Virgin Galactic for pre-tax proceeds of $311 million, about one-fourth of his $1.2 billion net worth.

Garcia and Palihapitiya are among 20 U.S. billionaires who sold a combined $8.7 billion in stock in the last six months. Some have sold as part of Rule 10b5-1 trading plans, which allow insiders to sell shares in companies on a predetermined schedule. Others have simply offloaded huge chunks of their stock on the open market. All of them sold at least $100 million worth of stock (pre-tax) between November 1, 2020 and April 22, 2021; three have sold more than $1 billion worth apiece. Net worths are as of April 28. Forbes reached out to representatives for each of these billionaires for comment.

1. Ernest Garcia II

Net worth: $17.4 billion

Sales since November: $1.80 billion

Garcia is the biggest shareholder of Carvana, the used car business founded by his son Ernest Garcia III. Its shares have ballooned tenfold since March 2020, helping the elder Garcia’s fortune rise from $2.4 billion to $15.9 billion in one year. He has sold shares almost every day for the last six months in accordance with a trading plan he established with his wife on June 15, 2020, after shares had already quadrupled in a three-month span. Garcia II, who’s 64, does not work at Carvana or hold a board seat; he currently owns about 30% of Carvana shares.

2. Mark Zuckerberg

Net worth: $111 billion

Sales since November: $1.63 billion

Facebook’s founder regularly sells shares that he’s transferred to the Chan Zuckerberg Initiative, an advocacy, investment and philanthropic organization he and his wife Priscilla Chan founded in 2015 to support  causes such as education and science worldwide. Most of the $1.6 billion in sales of Facebook shares since November 2020 have been by the Chan Zuckerberg Initiative. 

3. Leonard Lauder

Net worth: $26.9 billion

Sales since November: $1.05 billion

LAL Family Partners L.P., owned by the family of the longtime former chairman and CEO of cosmetics giant Estée Lauder, sold two batches of two million shares each in November 2020 and March 2021. Estée Lauder stock has more than doubled since March 2020, and the sales make up a small piece of Leonard Lauder’s $24 billion stake in the company. His younger brother Ronald Lauder separately sold $108 million of his own stock in the same time period.

4. Jack Dorsey

Net worth: $14.2 billion

Sales since November: $529 million

Dorsey is the cofounder and CEO of two large public companies, Twitter and Square, though his Square stock makes up the majority of his fortune. He has been selling 100,000 shares of payments firm Square every week (a small sliver of his 49.2 million shares) but does not touch his Twitter stake. He now owns an 11% stake in Square.

5. Anthony Wood

Net worth: $7.2 billion

Sales since November: $342 million

Shares of Roku, the video streaming service Wood founded in 2002, have surged almost 400% since March 2020, with viewers spending more time at home in front of the TV during the pandemic. Wood regularly exercises stock options given as part of his CEO compensation that are set to expire in July 2022 and then sells them at a profit—his cost of exercising the options is not included in the $342 million in pretax proceeds from his sales since November. Wood still owns a 15% stake in Roku.

Rising C.E.O. pay during the pandemic

The Times’s David Gelles gave DealBook the backstory to his recent front-page

Companies battered by the pandemic are handing out enormous pay packages to their C.E.O.s, highlighting the sharp divides in a nation on the precipice of an economic boom, but still wracked by steep income inequality.

Executive compensation has, of course, been soaring for decades now. Chief executives of big companies in the U.S. now make, on average, 320 times as much as the typical worker. In 1989, that ratio was 61 to 1.

In years when the profits are flowing and unemployment is low, such disparities are often explained away. But in this pandemic year, corporate P.R. teams are bending over backward to justify their bosses’ big paydays.

When I reached out to the companies mentioned in my article for comment, they responded with infographics, statements from board members and urgent requests for off-the-record phone calls. Here are three of the common tactics they employed:

Don’t believe your eyes:

    • A Hilton spokesman stressed that the figure in its latest proxy filing did not represent take-home pay for Chris Nassetta, because the company restructured several stock awards. “Said directly, Chris did not take home $55.9 million in 2020,” the spokesman said. “Chris’s actual pay was closer to $20.1 million.” Hilton lost $720 million last year.
    • An AT&T spokesman emphasized that while John Stankey was awarded compensation worth some $21 million, that wasn’t what he was “paid,” noting that this includes stock awards that may not be realized. Stankey’s actual take-home pay, the spokesman added, was closer to $10.4 million. AT&T lost $5.4 billion last year.

It could’ve been even more:

    • Boeing wanted to make clear how much money Dave Calhoun “voluntarily elected to forgo to support the company through the Covid-19 pandemic” — some $3.6 million, according to a spokesman. Nonetheless, Calhoun was awarded $21.1 million last year, while Boeing lost $12 billion.
    • Disney stressed that “the impact of the pandemic on our businesses led to a meaningful reduction” in executive pay, noting that executive chairman Bob Iger, who was awarded $21 million last fiscal year, gave up his salary for much of that time. Disney lost $2.8 billion in the period.

The great man theory:

    • Starbucks, which awarded Kevin Johnson $14.7 million, was among many companies making the case that their C.E.O. was essential to future success. “Continuity in Kevin’s role is particularly vital to Starbucks at this time,” said Mary Dillon, a member of the compensation committee. The company made a $930 million profit in its latest fiscal year, down three-quarters from the previous year.
    • And General Electric sent a 487-word defense of the $73.2 million package awarded to Larry Culp, arguing that he was uniquely equipped to revive the ailing industrial conglomerate. “The board sees Larry Culp as essential to G.E.’s transformation,” a company spokesman said. The company turned a $5.2 billion profit last year, helped by restructuring measures that included reducing headcount by more than 20,000.

Capitalism under threat!

Reprinted from Richard Cluver Predicts

If you are a regular reader you will be alert to my concerns that the world is racing towards an unprecedented economic catastrophe that owes its origins to the unsustainable debt of nations which has been mounting at an exponential rate in recent years. When that debt reaches crisis point sometime in the near future it will inevitably shatter world investment markets as global economies struggle to adjust to whatever new reality emerges.

Much of my consequent pondering has revolved around the measures ordinary folk need to take to insulate themselves as much as possible from the otherwise arguably inevitable destruction of their life savings. But what if the entire concept of capitalism should go out of the door? There are, after all, rapidly growing and increasingly vocal groupings which have through their social circumstances been shut out of the many monetary benefits of the present system and are thus advancing coherent arguments in favour of abandoning the entire concept of capitalism together with the concept of usuary which lies at the very heart of modern economics.

Thus, in the month when we in South Africa have been celebrating both “Workers Day” and simultaneously cutting off the Social Relief Distress Grant which has prevented close on six million South Africans from starving during the Covid pandemic, it is timely to weigh the respective arguments.

Let’s start with one of South Africa’s most respected citizens, Professor Thuli Madonsela who has this month blamed our crisis of burgeoning poverty on capitalism. She has, with logic that is hard to fault, argued that in the face of escalating inequality, and arguments that South Africa can’t afford to honour its constitutional obligations, that it is time to “rethink capitalism”

Understandably, the most vocal critics of capitalism are the advocates for the “Have-Nots” and its stoutest defenders are the entrepreneurial class that is epitomised by poster boys like Bill Gates, Geoff Bizos and Warren Buffet who have been able to exploit the capitalist system in order to accumulate such incomprehensible amounts of cash that between the three of them they collective command more wealth than a sizable proportion of the global population.

Sandwidged between these extremes lies a not insignificant portion of the global population; of quite ordinary folk like you and I who, through lifetimes of hard work and thrift, have built modest nest eggs that currently ensure a modicum of comfort in their retirement lifestyles. Is it fair, I ask, to expect their welfare to be sacrificed because, taking the South African example, the ANC government has disastrously failed to deliver an education system which would have offered the poor the only guaranteed pathway to economic self-sufficiency?

Therein lies the kernel of a global debate that goes to the heart of most national constitutions which, by guaranteeing various human rights, saddle the “Haves” with the responsibility of feeding the material needs of the “Have-Nots.” If the “Haves” complain, “Why should I sacrifice all my hard work on behalf of those who are not prepared to get off their backsides and work, the “Have-Nots” have an equally moral argument that, “You have by virtue of your birth or your education been handed the tools that our birth denied us, so it is your responsibility to care for us.”

Far be it that I should try to be the arbiter of such opposing groupings. However, I am sure that most of my readers would likely argue that out of the incomes they have provided for themselves they pay their taxes and give to charity and quite correctly expect the recipients of these two income streams to get on and deal with the problem. Indeed, it is arguable that individual responsibility should end right there if we were blessed with wise and responsible governments. But that is not an argument that is likely to soften the indignation of a grouping which currently labels itself as “Woke” and whose sense of entitlement might be just as fundamentally laid at the door of the politicians who, at best, have failed to deliver on their promises and at worst have allowed corruption and misallocation to defraud their taxpayers.

Now, it makes for interesting discussion if by dismembering capitalism we mean that we should strip away the entire wealth of everyone, and more particularly that of those enjoying the income of the ‘Top One Percent” of the world’s capitalists and distribute the proceeds as a cash payment to the “Poor” who, by definition might be recognised because their annual income is less than the global income mean? However, analysis of the numbers suggests that each member of the latter would in that case receive a cash payout equal to considerably less than one year’s earnings. All we would achieve by such a re-distribution would be a temporary party for the poor. And the price of it would be to destroy entrepreneurship which has been the single greatest social liberator this world has ever known.

Meanwhile, it is worth recognising that the idea of capital redistribution is not new. The idea was tried and tested in the ancient world and ultimately discarded. Debt forgiveness is mentioned in the Book of Leviticus, in which God councils Moses to forgive debts in certain cases every Jubilee year – at the end of Shmita, the last year of the seven year agricultural cycle or a 49-year cycle, depending on interpretation. The same theme was found in an ancient bilingual HittiteHurrian text entitled “The Song of Debt Release” as well as in Ancient Athens, where in the 6th century BCE, the lawmaker Solon instituted a set of laws called seisachtheia, which cancelled all debts.

In eschewing interest payments, orthodox Muslims today offer us an innovative approach to the problem. However, as I understand their approach, the sum of the interest due for the duration of the loan is simply capitalised at the start. So while this would clearly relieve the unsophisticated borrower of the “misunderstood” penalties of compounding debt, it does not really get away from the principal idea.

But what if we decided by global decree to do away with the idea of interest altogether? Well, for a start it would arguably do away with the concept of pensions and result in the elderly being forced to rely upon the financial support of their children.

Worse, however, it would also destroy the idea of venture capital; the process whereby start-up businesses are able to obtain money with which to employ staff who can bring a brilliant idea into profitable maturity, creating countless jobs in the process.

Conceivably it would also destroy the valuation models upon which modern investment markets and stock exchanges operate since comparative price-earnings-ratio-based valuations are currently closely integrated with the “Prime Rate” of borrowing.

Such a step would thus so radically interrupt the modern business machine that, it is probably fair to conclude, the entire supply chain that delivers our personal everyday needs would probably collapse and plunge humanity into famine and chaos. Mankind’s attempts to do away with the capitalist delivery system, most markedly by employing central command systems in China and the Soviet Union during the last century, demonstrably led to the death of millions of people through starvation. It is a story exemplified by a Soviet commissar who, on a goodwill visit to Britain reportedly asked to be taken to meet the man in charge of bread distribution. The story goes that he steadfastly refused, after being taken to one of England’s countless ‘Mamma and Poppa” type corner bakeries, to believe that the capitalist approach effectively handed over the health of the entire British economy to ordinary citizens and that the lack of round-the-block queues was the proof that the system worked!

And therein is encapsulated my own belief in the system. Capitalism hands power to the people while socialism renders the individual powerless…. though it undoubtedly needs to be held in check by institutions like a Free Press and social pressure groups.

Far be it then that I should thus try in one short column come up with a solution to a problem that has eluded mankind for centuries. I would, however, argue that capitalism is a system that has evolved with civilisation by trial and error over the millennia. Like Democracy, it is a terrible solution to our social needs….until you try all the alternatives. But the two ideas working together to moderate each ism’s excesses, have so far proved to be our best Elostoplast method of working together for the common good.

In summation, the wealthy who are currently in an uproar about the Biden tax proposals in the USA will arguably succeed in mitigating them somewhat but nevertheless in the process give up some of the ground that the Trump administration gave them at the expense of the poor. It’s a process best likened to the swinging pendulum of politics which, in theory anyway, has brought mankind to this era when, collectively, we are all enjoying the wealthiest phase of mankind’s history accompanied by the longest period of uninterrupted peace the world has ever known.

In short, it is probably fair to argue that we are all already living closest to the ideal of Nirvana that mankind has ever seen and, provided we live by a constitution which guarantees things like the separation of powers and the freedom of the Press, we will arguably continue making material progress for everyone.

Meanwhile, noting that US share markets have been roiled this week by the Biden tax proposals which call for the top rate of tax to rise from a current 23.8 percent to 58.2 percent in the most highly taxed states, Treasury Secretary Janet Yellen has, however argued that the increase will only affect the 2.7 percent of Americans who earn more than a million dollars a year….the group that can best afford it.

According to the Bureau of Labour Statistics (BLS), the median wage for workers in the United States in the fourth quarter of 2020 was $984 per week or $51,168 per year. To complete that statistic, of 153,235,089 tax returns for an adjusted gross income of under 1 million filed in 2018 (the latest year the IRS has record for) there were only 539,207 tax returns files for adjusted gross incomes of over 1 million. That means, for every thousand Americans who filed taxes, just three and a half of are income millionaires.

The Return of Active Management

By Jared Dillian

Jared DillianIf you go back to 2015–2017, the biggest fad in finance was to open an account at, throw a few thousand bucks in it, and stick it in index funds. This is how Vanguard accumulated many trillions of assets very rapidly.

Vanguard’s assets under management are still growing, but not as quickly. These days, people are shoveling money into Robinhood accounts and buying Tesla (TSLA), SPACs, and crypto.

    • From a personal finance standpoint, this is undesirable.

I’m not the biggest fan of indexing. But the nice thing about people investing in index funds at Vanguard is that they’re more likely to keep those holdings longer term. Part of that is due to the open-end structure, as opposed to ETFs, where active trading is more common. But underlying this is a pervasive belief that people can beat the market.

That sure seems easy when TSLA returns 1,000% in a year. And there are brief periods in history when beating the market is easier. We are even seeing a surge in hedge fund returns as value stocks begin to outperform. I saw some year-to-date ranked returns of hedge funds the other day, and they truly are astounding.

So this is the return of active management? I was very pessimistic about this a few years ago. When passive strategies reached 50% of assets under management (AUM), I figured the trend would continue until passive reached a much larger percentage of AUM, like in Japan.

But it hasn’t worked out that way. In fact, the point in which people were freaking out the most about passive ended up being the best time to dive back into active management (around the time of the “Passive Investing is Worse Than Marxism” report from Bernstein & Co. in mid-2016).

Funny how that works.

My Criticism

One of my frequent criticisms of passive investing is the idea that people look at returns to the exclusion of all else. Yes, it is true that passive outperforms active over time. And that outperformance is not insignificant. But investing in passive funds gives you no way to mitigate risk.

    • When you invest in an index, you not only get the return of the index. You also get the volatility of the index.

Active managers can do a lot of things to mitigate volatility.

First of all, they can hold more in cash. They aren’t doing that right now (because it’s a bull market), but they can. They can also construct a portfolio that gains from disorder, resulting in less downside volatility. In CFA terms, this is known as the Sortino ratio.

But if you’re 100% in passively managed funds and a correction hits, you pretty much have to take it on the chin.

    • The trick is to find the right actively managed funds.

You don’t want the ones that are going to load up on beta and increase your volatility. You want a portfolio manager who is thoughtful and cautious about risk.

Most average investors don’t have the ability to evaluate portfolio managers on this basis, and that’s the problem. I’ll tell you what I do—I pull up the latest 13F and look at the portfolio. You can tell pretty quickly if it’s a smart portfolio or a dumb portfolio.

Or, you can build your own portfolio, which retail investors also do not have a lot of experience with. To be reasonably diversified, you should have 20 stocks are more. That means you should probably have $100,000 in your account, with 20 $5,000 positions, in order to achieve sufficient diversification.

Most of the people at Robinhood don’t have $100,000 in their accounts. They are highly exposed to idiosyncratic risk.

Which is what they want, actually.

The Mood

This brings us to the overall point: that people are in the mood to take risks.

Averaging 8% a year doesn’t sound so sexy these days. I saw recently that people’s return assumptions for the stock market have risen to 15%, the highest in the world.

The stock market may return 15% a year for a few years. But I assure you that it will not average 15% over anyone’s investing career, absent a large inflationary shock. (Which won’t come as a shock to your portfolio if you’ve read my inflation report.)

People are also not much in the mood to invest in bonds. I get it. It seems like we’re going to have lots of inflation, and the risk-reducing characteristics of bonds have deteriorated. But you still have to have some.

When people call the show and ask how to get started investing, I still direct them to Vanguard, but I qualify that by saying that there will be a point in their investing career when they outgrow Vanguard. It happened to me; it happens to everyone.

Building a better tomorrow – the economics of preserving historic buildings

by Brian Kantor

brian kantorThe destruction by fire of historic buildings on the campus of my alma mater, the University of Cape Town, has brought home for many the cultural and societal value that lives in so many historic buildings.

It’s not just runaway fires that destroy beautiful old buildings though. Humans willfully do so too. My wonderful wife Shirley and I frequently regret the demolition of those interesting older Cape Town inner-city buildings we fondly remember; buildings that have been replaced by non-descript office blocks. The ornate faux Granada, Alhambra, on lower Riebeeck Street that doubled as a cinema and was our largest concert venue (seating about 3,000), provides one set of memories of times past.

It was replaced by a very conventional and boring office block that now looks and will probably soon qualify for demolition or conversion into apartments. It has no redeeming architectural features and I would suggest not even decent rentals to justify its survival or maintenance.

The willing – and at the time quite uncontroversial – destruction of many an iconic Cape Town building was a reflection of a very limited cultural sensitivity. The redevelopment and widening of lower Adderley Street, a once charming, essentially narrow main shopping street for the city, to make way for a new railway terminus, was a particularly egregious example of insensitive narrow-minded urban planning.

Master plans that often go wrong are a danger to the natural evolution of the built environment, as it proved to be, for inner city Cape Town. The old Cape Town railway terminus was a Georgian masterpiece. It was demolished to make way for an expanse of uninteresting, and completely out of place, a bit of lawn, for looking at not sitting down upon.

Are preservation orders a fair process?

The cost of preserving an interesting building should be borne by the taxpayer not its owner. In other words, full market value should be offered when making a compulsory purchase of a building of historical interest, a market value that would include the value of the redevelopment opportunity. The loss of wealth that would come with freezing the development opportunity, so reducing the value of the house or commercial building, should not be imposed on the owner. Owners who will see the value of their home, perhaps representing a large part of their savings that they were depending on for retirement, decline significantly because redevelopment of the site has now become impossible.

Scarcity that comes with time and redevelopment can add value to an older structure

A particular building style that was once commonplace, for example Victorian, Georgian or Cape Dutch homes that were the fashion of their day, become less common over time with redevelopment and the introduction of newer, more favoured styles. Styles change understandably and naturally in response to newly available technologies and materials.

This fading away of the past and the falling number of structures that reflect the past therefore should add to the rarity (and scarcity value) of traditional buildings and hence their resistance to redevelopment.

Scarcity and the higher rents the iconic building might attract can add to the business case for preserving at least the facades of such increasingly rare and admired buildings. The more valuable the building, the less likely it will be demolished.

I think of the attractive facades of the still many art deco apartment blocks in Vredehoek, an inner city suburb of Cape Town, that must make them more desirable to rent and therefore more valuable to their owner-occupiers (Incidentally, the particular walk-up block of flats in Vredehoek where I spent my first five years (1942- 47) is still intact).

I wonder how well these then unusual art deco blocks of flats were received in the 1930s and 1940s when they were constructed, on mostly vacant land. Perhaps they were welcomed as representing worldly progress, not resisted as a threat to established land and home owners.

The economics of redeveloping property and the case for demolition

The test of the quality of any building or architectural feature will be its ability to command interest and respect from later generations. Most new buildings are commissioned with an expected economic life of about 20 years, given current interest rates. A building would be given a much longer life to prove itself, if the interest rates and political and inflation risk premiums incorporated in high borrowing costs in SA were lower. If an investment in a new structure in SA cannot be justified with 20 years of expected rental income, enough net rental income to cover the costs of a new building, plus the costs of purchase of the land or the building to be demolished, it will not now be built. If it can last beyond 20 years, it will be evidence of the superiority of the original design that will have added value to the building.

A building might be demolished when it is worth less than the land it occupies. A building would be valued as the present value of the expected or implicit rental income it could generate when owner-occupied, and discounted by prevailing interest rates (or more generally discounted by the returns available from similarly risky investment opportunities, by so called capitilisation rates). Demolishing the building releases the land for alternative use. It makes new buildings possible, with the potential to create a greater stream of net rental income with a higher present value: a present value of net rental income value that would have to be expected by some risk-taking developer to be high enough to make a profit. In other words, a building whose subsequent market value would exceed the value of the lost income from the existing structure, after adding demolition costs and to recover the cost of the new building.

At any point in time, the vast majority of buildings do not qualify in this way for redevelopment and demolition. Hence, as can be observed, older buildings mostly remain standing for much longer than the 20 years of economic life that brought them into being. A burst of property redevelopment activity is always a good sign of economic progress under way. It informs us that the land is becoming more productive and capable of commanding higher rental incomes, or the equivalent, capable of bearing higher implicit rentals for their owner-occupiers. It is a trend that’s helpful to property owners but a threat to those hiring accommodation or intending to enter the ranks of owner-occupiers.

How to deal with the “nimby” crowd and facilitate value-adding property developments

Therefore politics, plus the expected higher costs of renting or owning, may frustrate the intending developer. The “nimby” crowd (“not in my back yard”), may not favour redevelopment because it threatens the value of their own real estate nearby. But frustrating the conversion of land from less to more productive uses, as with all such interventions that prevent value adding innovations, will mean wasted opportunity and slower economic growth.

I have long thought that the higher wealth tax receipts that come with more valuable real estate should be shared in part with the owners of property in the neighbourhood. Extra revenue generated by higher wealth taxes collected on more valuable property can be shared with the local owners as compensation for the extra noise or traffic that the redevelopments may bring. Tax revenue that could be used to improve local parks or provide better local security or better access roads, in an obviously earmarked way, would help reduce resistance to redevelopment of the back yard that then becomes more desirable. This will mean more valuable buildings and gains in wealth for the owners of surrounding property.

It is also my contention that every generation of architects and builders should have the opportunity to impress upon the world the strength and beauty of their designs. Not all changes in design will be for the worse. Many may turn out for the better – only time can tell. A city must live and evolve – it cannot be frozen in time and kept as a museum for tourists. And a lively, economically successful city that can sustain good services to its citizens, with a mixture of the new and not-so-new structures, that have been allowed to respond to essentially market forces, can surely attract visitors as well as migrants from other cities.

Property development is part of an evolutionary process that will add to the capabilities of the city to provide additional work and income earning opportunities. Developments can add to the value of real estate to be shared between its owners (paying higher wealth taxes) and the local authority, applying additional tax revenue in generally useful ways.

Climate change: Prophets vs Wizards

Matt's Thoughts In BetweenAstral Codex Ten (formerly Slate Star Codex) is running a book review contest. All the (anonymous) entries have been worth reading, but I particularly liked this review of The Wizard and the Prophet by Charles Mann. The book is a duelling biography of William Vogt and Norman Borlaug (who has a plausible claim to be the greatest hero of the 20th century), but also an exploration of two archetypes for thinking through humanity’s greatest challenges. As the reviewer puts it:

Wizards want continual growth in human numbers and quality of life, and to use science and technology to get there… “Prophets” believe that we can’t keep growing our population or impact on the world without eventually destroying it, and ourselves along with it

I was thinking of this framework when listening to Rob Wiblin’s excellent recent interview with Kelly Wanser, a climate change activist who advocates radical climate interventions, such as seeding or brightening clouds, to reduce warming.

The segment on objections to her work (around 28 mins in) is fascinating – particularly the concern that it might make people more complacent about reducing emissions. As Rob says, this seems like worrying that seat belts make people drive less carefully: even if true (and it could be the opposite), a worthy trade off! As the ACT reviewer says, there is a place for Prophets – and Wizards don’t have a spotless track record. But climate change seems such a wicked problem that we surely need all the wizards we can get.

Talent as a geopolitical resource, TSMC edition

One hypothesis that follows from the “stubborn persistent of the physical world” (see TiB 161 and 162) is that nation states will increasingly seek to exercise more control over non-fungible, strategic resources in their physical possession, from rare earths to pandemic PPE (we discussed the coronavirus-specific case in TiB 109).

Another of those resources is talent, especially talent needed for strategically important industries. As we discussed a couple of weeks ago, arguably the world’s most strategically important industry today, semiconductors, is particularly dependent on a small number of specialist individuals. You can’t simply take advanced foundries and make them run. The talent required to run them is scarce, non-fungible and far from evenly distributed geographically. 

Taiwan’s moves this week to ban local job advertisements for roles in China should be seen in this context. The directive even specifies, “If the recruitment involves semiconductors and integrated circuits, the penalty will be even higher”. This follows extensive efforts by Chinese semiconductor firms to poach TSMC talent (see also this piece from March on Taiwan’s prosecution of Bitmain, a Chinese chipmaker, for illegal talent poaching). I suspect we will see a lot more of this. Semiconductors today; machine learning tomorrow. Watch this space.

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