Rants, Raves & Reflections

It has been said, “Opinions are like @ssholes, because everybody has one. But after weeks of holding back throughout this whole pandemic crisis, I can no longer do so. Here is my checklist of observances and opinions that keep me awake at night.

1. Masks.  I am sickened and outraged about the lies our government has purported upon us regarding the use of masks in the general population as an effective defense against COVID-19.  We were told that they were not necessary and that their usage should be limited to health care workers. But now that the shortage of masks for health care workers seems to have abated somewhat, we are now told that everyone should wear facial coverings. But the messaging stops short of advising use of approved N95 or common surgical masks as that would further impact the supply for health care workers and entice general hoarding even more. If anyone questions the efficacy of masks as a tool against contagious disease, look no further than Japan, South Korea, or even Hong Kong as evidence.

2. Corona Task Force Daily Briefings. I appreciate the information presented at these briefings by the respective experts in their field. But the sideshow created daily by the stupid and politicized questions from the press from the likes of Jonathon Karl, ABC (aka The Mickey Mouse Club) and Jim Acosta, CNN (aka The Communist News Network) and Trump’s generally off -topic and incoherent responses makes me cringe.

3. States vs Federal Government. Sprinkled throughout the Briefings discussed above, Trump likes to imply that the individual states need to solve their own problems. He chastises them for not having medical stockpiles in place to fight this pandemic. He doesn’t seem to get it that the states are stepping all over each other and the federal government to procure limited medical supplies. He responds naively that the government will simply pull back its bid if they discover that they are bidding against a state. It is just absurd to think that the federal government could manage this.  Well herein lies the reality folks. States do not have a printing press with unlimited access to dollars. Further, many states have credit ratings close to Junk while burdened with hundreds of millions of dollars of unfunded pension liabilities. California alone has over $90,000 in unfunded pension debt per household. 

4. Universal Basic Income. Well over a year ago, I penned an article for the consideration of adopting a Universal Basic Income for all citizens and legal residents in the United States. https://wjexchange.wordpress.com/2018/07/14/the-case-for-universal-basic-income/ This initiative was the cornerstone of Andrew Yang’s bid for the Democratic nomination for President. As an unintended consequence of the COVID-19 pandemic, it looks like we now have such a measure in place. The government has pledged $1200 per month for all residents that meet the income threshold. Additionally, the federal government has agreed to top off state’s unemployment benefits by $600 per week. While I have no beef with the $600 weekly unemployment subsidy, the $1200 monthly program seems a little misguided to me. I fail to see how a married couple making a secured income up to $150,000/year should be entitled to an additional $28,800 annualized equivalent from this stimulus package ($1200 X 2 = $2400 X 12 = $28,800). Wouldn’t the national interest be better served if that money earmarked for the presumably well-off went to those at the poverty level? For the stimulus to work as intended, the grant money would be circulated back into the economy. However, it is my belief and conviction that this extra “found” money for those with secure unaffected incomes will merely be saved and not spent.

5. Then there is the public outcry over Navy Captain Brett Cozier who was relieved of command for his letter exposing positive Corona Virus testing among crew members of the aircraft carrier, USS Roosevelt. While I am sympathetic to his intentions, I have a newsflash to share. “The U.S. Military is Not a Democracy.” The core of military readiness is discipline. Without it, you have an ineffective fighting force. To maintain discipline, you must adhere to the chain of command. Members of the military are governed by the UCMJ, Uniformed Code of Military Justice. Like it or not the UCMJ trumps individual liberties granted under the constitution or elsewhere.

6. Now, a few words about the Food Supply Chain. This is an area that I know something about having served over 40 years in the business. Headlines abound about farmers dumping milk and eggs, and plowing fields of fresh produce. Half of the food supply is dedicated to foodservice, ie., restaurants, hotels, institutions etc. That business has virtually disappeared. It is very difficult to convert that foodservice output to retail. Among the obstacles is the conversion to packaging acceptable to retail and just gaining access to the system. Obtaining a vendor code alone, takes weeks and more. The concern now is will farmers reduce their spring planting because of the demand shift. This could create severe shortages in the summer months even if we defeat the virus.

7. Finally, a last word about the Politics of the Time and how we work our way back to prosperity. Narratives should not be structured to fit into a blue or red box, but unfortunately that is the reality. Just listen to the opening line on the nightly news. If the latest model shows a range of 100,000 to 240,000 anticipated deaths from the pandemic, ABC news will lead with the 240,000 number to fit their politics, and not with the lower number. If the estimate is revised downward to 60,000, they will lead with the total deaths and downplay the progress of a reduced forecast. On the red side, Fox News will quote Trump boasting that the economy will come roaring back stronger than ever. That may happen and I hope it does, but it will take months or even years for that to happen. By the time it is all said and done, we will have added another 6 Trillion dollars to our deficit. There is no other way. It had to be done. But with the world awash with newly minted dollars, what will it do to the future purchasing power of our currency? I don’t claim to be smart enough with the answer.But it seems to me that we will have to grow our way out of this mess.  This means repatriating manufacturing and production back to the USA away from the likes of China particularly with pharmaceuticals and other critical goods. Automation and Artificial Intelligence must play a key role in all of this to make it happen. The chief reason for outsourcing to China has always been lower labor costs. As automation and artificial intelligence takes hold, the cost gap should narrow.  Before this crisis, the unemployment rate was around 3%. With this reboot of repatriating manufacturing and a renewed emphasis on rebuilding our infrastructure, it is doubtful that our labor force will be sufficient to handle it. While the transformation takes place, we will still need customers to purchase our increased output, so we there may still be a need for subsidies to the under employed and unemployable in this new era economy. This goes back to some version of Universal Basic Income.

 

It’s not exactly a news flash that our country is experiencing one of the most political divisions in history. It seems that every issue, outlook, and opinion is based on partisan politics. Gone are the days of independent thought as a method of arriving at one’s position on a subject.

The other day I was having a conversation with my wife on this very topic that was initiated as a result of my recent vote for our local congressman on my mail-in ballot. Congressman Raul Ruiz is our incumbent representative and he is a democrat. My wife is a Republican and I am an Independent, albeit with a strong Republican bias. My reasons for voting for Mr. Ruiz were based on his record and involvement in our local community as well as his strong commitment to protecting the rights of seniors and veterans.

While my wife agreed with me on the virtues of Congressman Ruiz, she wisely pointed out that above all else, he is still a democrat and unlikely to break party ranks on the larger national issues confronting our population. In other words, politics will prevent him from exercising independent thought if it is not in concert with the democratic majority. Doing so, would brand him as an outcast and likely ostracize him from the ruling class. Furthermore, his chances of reelection would be rendered slim without the support of his Democratic colleagues.

There is nothing on the horizon that suggests that anything will change as the issues dividing the two parties are deep and wide. Unfortunately, it seems that the only time we can come together as a nation is when we are faced with a crisis of the proportions of 911. What a shame!

DRIP, is an acronym for a Dividend Reinvestment Plan. It is a system of automatically reinvesting dividends in additional shares of the same stock in lieu of receiving cash dividends thereby increasing one’s equity in a position over time. It comes in two forms – an authentic DRIP sponsored by the issuing company and a pseudo-DRIP where a brokerage automatically reinvests dividends according to the instructions provided by the investor. This can be an efficient form of commission-free dollar cost averaging using a fixed dollar amount (the dividend) to purchase fewer shares at higher market prices and more shares at lower market prices. For those situations where the goal is to build additional equity and forgo cash dividends, it is a great strategy for traditional equities. However, there are two types of investments where this system is not advisable.

First, employing a DRIP strategy for Master Limited Partnerships (MLPs) is almost always not a good idea and is not a tax efficient strategy for investors that depend on MLP distributions to supplement their income in retirement. Unlike traditional equities, MLP distributions, with few exceptions, are not dividends, but in fact, Return of Capital. When selling traditional dividend paying equities with dividends reinvested in a DRIP, the tax liability will be treated simply as a short term or long term capital gain or loss, computed by the net difference between the purchase price and the selling price. Prior dividends were already taxed in the year that they were received. With MLPs, it’s not that simple.

Due to the treatment of Return of Capital, the cost basis of MLP sales must be reduced by the earlier distributions received for the lots being sold. This will result in an increase in the taxable capital gain at sale beyond the simple difference between the purchase price and selling price. This additional tax liability for sales of MLP units often comes as a surprise to many uninformed investors, thereby wiping out much of the deferred tax benefit enjoyed in earlier years. If the intent of using an MLP DRIP strategy is solely for the benefit of heirs and not for income, then it becomes a reasonable strategy, as the cost basis will be stepped up for them upon the original investor’s death.

Notwithstanding the benefit of a stepped-up basis for heirs, tax efficient MLP cash distributions should, at some point, be spendable and should therefore be taken as cash rather than additional shares. Further, to receive the maximum tax benefit, MLPs should be held in a taxable account as opposed to an IRA or 401K. One risk worth noting is the potential conversion of an MLP to a C-Corp. This conversion will result in a tax trap causing the MLP units to be sold as they are converted to common shares.

The second form of investment that I do not recommend DRIP purchases is preferred shares. Although qualified DRIP plans for preferred shares are not directly available directly from the companies themselves, the process can still be implemented through the reinvestment of dividends per the instructions issued to your broker. Preferred shares are typically issued at a Par value, usually $25.00 with a fixed coupon rate. Most often, they give the issuer the right, but not the obligation, to buy them back at a future specified call date at par. In a stable or declining interest rate environment, the universe of Preferred stocks tend to rise in value, and conversely decline as prevailing interest rates rise. Because the issuer has no obligation to redeem the shares at the call date, they will most likely not do so if rates have risen causing the market price of the issues to fall. On the other hand, if rates decline, causing market prices to rise, there is a good chance that the issuer will exercise its right to redeem preferred shares at par and reissue new shares at lower coupon rates than those redeemed.

The DRIP problem with preferred stocks is this. As shares climb above par in value because rates are rising, then dividends will be reinvested at the higher market prices, not par. By purchasing shares above par value as a result of DRIP instructions, the investor is in effect granting a no cost call option to the issuer to purchase those shares at below their original issuing price, locking in the probability of a principal loss to the investor.

Another factor to consider for any purchase of preferred stocks above par value is the Yield to Call (YTC) of those shares if the company chooses to exercise its redemption option. The coupon rate remains the same at the “when issued” price causing the effective yield on the investor’s purchase of shares above par to decline. For example, consider xyz preferred issued at $25.00 with a $1.50 dividend yielding 6%. If market conditions cause the same shares to rise in value to $28.00 and are purchased at that price either outright or through dividend reinvestment, the $1.50 annual dividend remains the same, but will now have a nominal yield of 5.4% based on the $28.00 purchase price. While a 5.4% yield may be deemed acceptable to the investor, there is a trap looming. If the call date is three years out and the shares are redeemed at par ($25.00), the effective “yield to call” on those shares will be 1.89%, not 6% or 5.4%. Even though a total of $4.50 in dividends were received during the three year period, a principal loss of $3.00 will be incurred as a result of the company’s redemption at par.

“It Was the Best of Times, It Was the Worst of Times” – Charles Dickens; Tale of Two Cities.

To say that the ten-year period between 1965 and 1975 was a defining decade may be one of the understatements of the century. Just as the first of the baby boomers began to graduate from high school in 1964, the era of the “Happy Days” culture was about to become a distant memory. America’s involvement in the Vietnam conflict would forever erase that age of innocence that we enjoyed during the previous ten years as portrayed in everyone’s favorite sitcom by the characters of Richie Cunningham and the Fonz.

If you were an able-bodied young man in that graduating class of 1964, of which I was one, your near-term future would be dictated by the options available because of this conflict. You either secured a college deferment, fled to Canada, or just took your chances on the draft. A fourth option was to enlist in the military service in hopes of landing an assignment to anywhere but Vietnam.

It was in October of 1965 that I enlisted in the U.S. Army for a four-year hitch for that very purpose. However, as things turned out, despite guarantees otherwise, I ended up in Vietnam anyway. I was stationed in a place called Phu Bai, which was located about six miles south of the city of Hue. Hue, which was the northernmost major city in South Vietnam, was the country’s provincial capital until 1945. We were a unit of the Army Security Agency operating under the cover designation of 8^th Radio Research Unit. Phu Bai was also the headquarters of the 3^rd Marine division.

Up until the end of 1967, Hue (pronounced Huway) was largely untouched by the warring parties. That would all change at the beginning of the 1968 lunar new year, aka, Tet on January 30, 1968.

If there was a tipping point in this decade, it could arguably be the North Vietnamese Tet offensive. As chronicled in detail in Mark Bowden’s recent book “Hue 1968”, it was the single bloodiest battle in the entire Vietnam war, brilliantly conceived and concealed by the North Vietnamese planners with secrecy that could rival that of Pearl Harbor. Throughout the conflict, the U.S. military brass continued to discount and dismiss the strength and resolve of the North Vietnamese invaders. U.S. Marine ground forces who were trained for jungle warfare, were now fighting house to house. The battle continued for a month, and ultimately the city was recaptured, only after heavy U.S. and South Vietnamese casualties.

The misguided judgment and bungling of the U.S. command, headed by General William Westmoreland, in managing this conflict sparked a sea change in America’s support of the war. Within 30 days after the end of hostilities in Hue, President Johnson announced that he would not seek reelection. General Westmoreland was summarily relieved of his command. A brand-new counter culture was born in America. In the first six months of 1968, more than 200 demonstrations took place in colleges across the country.

Throughout this period, we endured bell bottom pants, leisure suits, and the Watergate scandal, until the defining decade mercifully came to an end on April 30, 1975 with the end of hostilities in South Vietnam.