Coyote Blog

From reading various comments on Trump's taxes, it is clear to me that many people do not understand even the basics of corporate accounting and taxes.  I sometimes forget, as the owner of a medium-size business, that everyone does not live and breath this stuff.  The following is meant to illustrate a few concepts I see the most confusion about.  This article is not written to be exculpatory of Trump's tax or business practices -- in fact I did not even read the NY Times article because at this time of year the last thing I need to do is spend time burying myself in someone else's taxes.

We are going to take a very simple example from my world.  Let's imagine my startup company has a piece of land we acquired years and years ago.  Suddenly in the pandemic we have an idea -- we are going to buy 50 Airstream trailers (as if we could actually obtain them in this market, but ignore that) and put them on our land and rent them out.  Let's say in the first year we bought them all on January 1 for $5 million using $5 million of bank debt (banks actually are happy to finance this sort of asset) and they ended up generating a net income (after expenses and interest) of $1 million.

So how do we account for the year?  We know we have a million dollars of operating income, but what do we do about the $5 million in capital spending on the trailers?  By GAAP accounting, capital investments of this sort that have a long service life are not expensed immediately.  They are depreciated over the life of the asset. So if we say these trailers have a 20 year life, we would expense 1/20th or 5% of their cost each year.  For our $5 million investment, that is $250,000 a year in depreciation.  In this case our final income statement for  the year would show $1 million in operating income less $250,000 in depreciation expense for a net income of $750,000.  One might expect that is what we report to the IRS and pay taxes on.

But we live in a more complicated world.  Our Congress loves to express its preferences for how business should operate in the form of changes to the tax code.  For example, Congress prefers we buy electric vehicles and solar panels, so it gives special tax credits for these.  Relevant to our example, Congress strongly prefers that companies reinvest their profits in new capital spending.  It provides incentives for this by allowing accelerated depreciation for capital investment in certain types of assets and equipment.  We can argue about the tax code -- I have not checked this particular example with my CPA -- but it is very likely that current law would allow us to depreciate our $5 million investment in trailers not in 20 years but in one.

So how does this change our example?  Well suddenly, in year one, we still have a million dollars in operating income but $5 million (100%) depreciation expense for taxes.  This means we have a $4 million loss we will report to the IRS.  This loss is carried over and used as a credit in later years.  If we continue to make a million dollars in operating profit a year, this means we will go five years without paying taxes.  The owners, for example if it is an S-corp or LLC with no double taxation of distributions, might be pulling hundreds of thousands of dollars out of the company every year, living the dream, while neither they nor the corporation pay any taxes.

This is what everyone is calling a "loophole" but I think that is a misnomer.  "Loophole" implies people are taking advantage of some drafting error or unanticipated use of an IRS rule.  That happens all the time, but our example is not an unanticipated use.  In our example we are using IRS rules exactly as Congress intended -- the company is being rewarded by Congress for the investment it made in new equipment with a multi-year tax deferral.

Note that this is only a deferral.  Once the five years is up, the company will pay its full taxes on the million dollars (unless it makes more investments with the profits which would allow it to defer more taxes).  Even if the company keeps investing and keeps getting accelerated depreciation, eventually when it sells the business it will have a large tax bill in the form either of depreciation recapture or goodwill in the business.

There are of course many other tax dodges that range from legal but ugly to outright fraudulent.  I don't know what Trump was doing.  But I wanted to show an example of how it is perfectly possible to legally (and I suppose socially responsibly) pay no taxes while generating a lot of income.  The key in this case is to reinvest profits, a behavior Congress has chosen to reward.

Long-time readers will know that I am interested, to the point of obsession, in incentives.   One should always be suspicious of bad outcomes described as irrational or the nefarious actions of bad people.  In both cases, if one looks carefully, the outcomes usually turn out to be the perfectly rational outcomes of perfectly normal people responding to bad incentives, assumptions, and/or information.

I personally believe the COVID response in this country (and others) is exaggerated and counter-productive.  But for this post I am not going to ask you to agree or disagree with my skepticism.  Instead, I am going to focus on incentives, and show how media, academia, and government all have incentives, assumptions, and information asymmetries that push them towards exaggerated COVID responses.

The following list is not necessarily complete and the items here are not independent of each other.  Having completed this post, they now look a little random but this is sometimes the way I clarify my thinking on things -- to write and publish and get feedback and maybe be more structured the next time.

Incentives

• Political incentives to "do something" about the issue of the moment.  We see this after every high-profile "bad thing" that happens.  There is immense pressure on politicians to do something -- pass some law (often with a person's name in it) or, if the legislative process is perceived as to slow, fire off some executive order.  In the heat of battle these actions are often taken without regard to efficacy, cost, or unintended consequences.  In the heat of these frenzies, a multi-dimensional decision is magically redefined as having only one dimension that matters.  Anyone who focuses on costs or unintended consequences or even efficacy problems of the proposed solution are cast as heartless and uncaring, potentially even evil and nefarious.
• Politicians always legislate to first-order metrics, never second-order metrics.  Politicians know that the public and the media is looking at their country or state every day and publishing the number of COVID cases and deaths.  No one is publishing the number of additional suicides, or cancer deaths from people too scared to go to the hospital, or increased starvation and disease deaths in poorer countries as food prices rise and aid from rich countries dries up. These second order effects are real but hard to prove or measure.  They are what we call "unintended consequences" but should instead call "ignored but entirely predictable consequences."
• Political incentives to expand power.  Every politician in every branch of government is always working to expand their own power (this is not unique to government, you can say the same thing of executives and functional departments in many large corporations).  When the public is scared and panicky, politicians are able to break through past limits and norms and establish new precedents.  The best example of this is that governments in Western democracies all expanded their power during the 20th century wars, expansions that largely stuck and were not reversed in peace time (except for a few fortunate examples like locking up whole ethnic groups in internment camps).  When the public is scared, power is to be had and it is the unusual politician that will say in such a situation that the right solution is to do nothing.
• Political incentives not to admit error.  Politicians simply cannot admit error.  To some extent this is due to the personality and ego traits that the political process sorts for, and to some extent this is based on day to day political incentives.  But think about any President in your lifetime and try to think of even the smallest issue on which they said something like "I tried X, over time X has not worked and now I realize we should do something other than X."  We would actually hope this is the kind of person we have leading the country, but simultaneously our own behaviors don't allow it.  Presidents frequently admit past errors of others (eg, a current President saying the war in Afghanistan was a mistake) but they can never turn against any policy of their own.  So if, say, lockdowns were the response to wave 1 of the virus, lockdowns are damn well going to be the response in successive waves.  Because not doing so is essentially an admission that it was a mistake the first time.
• If it bleeds, it leads.  This one takes little explanation, because I think most of us understand the strong incentives of news organizations to create and amplify emergencies to increase the attention and viewership they get.  Cable news had a huge spike in viewership after 9/11 and again in the early days of the Gulf War, and they are constantly jonesing for the same sort of hit.  Remember that the media has accurately called 11 of the last 2 pandemics, earlier predicting disaster from swine flu (dating myself here), bird flu, ebola, zika, mad cow, and probably several I can't remember.
• Reference to personal circumstances when making national trade-offs.  I would say that the number 1 thing that drives me crazy about statists on the Left and Right and which makes me a libertarian is the tendency to impose solutions to tradeoffs on everyone in the country based on how you would personally make decisions for yourself.   If one-size-fits-all public policy decisions are going to be made, I want them to be made in a way that suits me.  For example, a politician in Chicago might say they would never feel comfortable letting thier kids walk to school on their own, so no parent should be allowed to let their kids walk to school alone.  Applying this to COVID, we know there is a large contingent in media, academia, and politics who will say that is is wrong to consider economic damage when evaluating COVID lockdowns.  What do all these folks have in common who tend to be advocating strongest for lockdowns?  They still have their jobs, are still getting paid, can still be productive over the Internet, and are comfortable getting their social interaction over zoom.  Note that these are the same folks that constantly tell us to check our privilege, but then tell us to ignore the economic hardships of lockdowns that they are too privileged to experience.  Only by the most extreme action do the voices of the less privileged who are suffering the most under lock-downs get heard (and even then, like the hair dresser in TX and later in SF, they get mocked by the elite).

Assumptions

• Trump is so bad that no price is too high to get rid of him.  I have told folks for years that every generation thinks their current era is uniquely politically toxic.  I don't think we have yet risen even to 1968 levels of discord, but one exception is the hatred for Trump that exists in some quarters.  I personally have never seen anything like it.  The nadir was when Trump mentioned that HCQ looked like a promising COVID treatment and the governors of MI and NV immediately banned HCQ without evidence to make Trump look bad (a desire I assume stems from a perception that Tump is so dangerous and represents such an existential threat that any action to undermine him or make his re-election less likely should be pursued).  A prominent study was essentially made up out of whole cloth to prove HCQ was dangerous and thus Trump bad, a conclusion that should have made zero sense to everyone as HCQ is used by millions every day as a malaria prophylactic.   I find Trump distasteful but trust the American system to limit the damage of tyrants, but many are working from a very different assumption.
• Humans have conquered nature.  I will confess to having an almost Victorian confidence in progress, but even I accept that sometimes nature throws things at us that are a) not our fault and b) we can't yet stop.  But throughout our COVID responses there seems to be, particularly in Western nations, an assumption that we should be able to prevent death from this thing -- ie that any death should be judged as a failure of our response.  But diseases still kill people.  Last year communicable diseases killed at least 15 million people in the world.  And many of our Western deaths have been among the very old in care facilities where the average life expectancy pre-COVID was numbered in months.

Information

• Good cause skewing of data, or "fake but accurate."  Decades ago, there was a stat that there were a million homeless people in the US.  Everyone repeated it as gospel.  Someone tracked it down, and eventually discovered that it was just made up by a homeless advocate who just picked a round large number.  When this was presented to a well-respected reporter on NPR, that the "fact" she was quoting was no such thing, she just shrugged.  She said homelessness was clearly a problem and if the number she was quoting (as a reporter!) was exaggerated, then it was in the good cause of increasing attention to homelessness.  This was the first example I can remember of something that was considered fake but accurate, but there have been many more since.   During COVID, this has caused outlets like Goggle and Facebook to actually censor opinions the tend to be skeptical of the severity of the disease or efficacy of mitigation steps like lockdowns.  They claim to be doing so for a good cause, believing it is better to err on the side of having the public too cautious rather than insufficiently cautious.
• Asymmetric public exposure to experts.  Throughout COVID we have been told that the experts all say X, that there is a consensus for X.  And sure enough, we mostly only hear X on the news.  But anyone in academia can tell you that this sort of homogeneity of opinion can't possibly be true.  As in other science, on issues such as mask or lockdown effectiveness or herd immunity thresholds, academics hold a wide range of opinions and there are a wide range of findings in the literature.  But this heterodoxy in opinions never really gets full public view due to media incentives, political incentives, and good cause skewing.  The most extreme voices on the end of the academic scale that support the media's and politicians' desire to create fear are selected for public exposure.  Then, these selected academics are retroactively crafted into leading experts.  Any of you folks every heard of Anthony Fauci before this started?  How about whatever expert your governor is using?  No, you had not -- these are prominent people in their field but just one of ten or twenty equally qualified persons who could have been selected and presented as experts.  They are then retroactively reinvented not as one of ten folks with a wide variety of opinions but as the one leading true unassailable expert.
• Social media amplification of tail-of-the-distribution events.  One of the features of social media independent of these incentives is that it tends to spread and amplify tail of the distribution events/risks.  The problem is that there seems to be two personality types in people -- one, and I would include myself in this -- who are knee-jerk skeptical of such stories.  Did it really happen?  Did A really cause B?  Is this really anything more than one bizarre outlier?  But there is a second type of person, and I would say that they are WAY more prevalent than I would have believed a year ago, who sees a story that someone's gynecologist's hairdresser's uncle claimed to have had heart issues after getting COVID and suddenly "everyone who gets COVID has permanent heart damage!"  Even before the Internet, Americans were very bad at parsing relative risks and now they just seem terrible at it.

Via Andrew Sullivan

What Freddie [DeBoer] is arguing is that, far from treating genetic inequality as a taboo, the left should actually lean into it to argue for a more radical re-ordering of society. They shouldn’t ignore genetics, or treat it as unmentionable, or go into paroxysms of fear and alarm over “eugenics” whenever the subject comes up. They should accept that inequality is natural, and construct a politics radical enough to counter it.

For DeBoer, that means ending meritocracy — for “what could be crueler than an actual meritocracy, a meritocracy fulfilled?” It means a revolutionary transformation in which there are no social or cultural rewards for higher intelligence, no higher after-tax income for the brainy, and in which education, with looser standards, is provided for everyone on demand — for the sake of nothing but itself.

This has been coming for years in the labor movement -- requirements to use seniority over performance for layoffs, ban the box laws, lawsuits over reference checks, attacks on gig economy where rewards are tied to performance, etc.  Way back in 2010 I worried that the increasing restrictions on what information could be used in hiring stemmed from this same desire

That being said, as someone who has 500 service employees working for me, I understand the insatiable desire for information on employee reliability and conscientiousness.  A large number of our employees we hire who interview well tend to get released within 60 days of their hire.  I can't tell you how many people who seem totally normal and friendly turn out to be raving maniacs in stressful customer contact situations.

The elephant in the room that neither McArdle or folks like Kevin Drum mention is that businesses are starved for [reliable] information on potential employees.  It used to be the best source was to check job references.  Nowadays, though, very few employers will give a honest job reference, or will provide any information at all.  I know I am guilty of that -- my company does not allow any manager to give out performance data on past employees.  I only needed to be sued once over somehow interfering with someone's living by giving honest information about that employee's reliability to change my behavior.

I understand that this is exactly what the Left is shooting for - an environment where the competent have no advantage over the incompetent.  If employers are resorting to FICO scores, it just demonstrates how all the other reasonable avenues of obtaining information have been closed to them.

A number of folks thought the bit in bold overwrought, but I still feel this is directionally correct.  Clearly DeBoer defines an extreme.  I think the actual goal of the Left could be better stated as wanting to make all employment decisions based not so much on competence but on credentials, credentials that are awarded via processes and institutions controlled by the Left (and that might over time be awarded as much for political orthodoxy as for learning relevant skills).  Which, by the way, is pretty much exactly how the Soviet Union worked.  And is pretty much how tenure works at most universities today.

• I found the immediate arguments about filling the Supreme Court vacancy literally seconds after the announcement of her death to be extremely distasteful.
• I think the idea that she somehow betrayed her supporters by not retiring when a Democratic President was in office with a Senate majority is outrageous.  Court justices shouldn't be in the mode of actively managing the Court's ideological makeup.  That's a political process.  And yes, I say this despite the fact that I would not choose to have the Trump-McConnell axis filling the Court.
• I know several young people who looked to her as a role model, which in the judiciary likely puts her in a Venn diagram circle of one person (unless someone is selling a set of 9th circuit trading cards that I have missed).
• As with most libertarians, I liked some of her decisions and disagreed with others.  Of the latter, Kelo (in the majority) and Citizens United (in the minority, fortunately) stick most in my mind as betrayals of individual rights in the face of expanding government power.
• I think people would be surprised (given the tone of media coverage of the Supreme Court) how many decisions are 9-0
• The way we focus on the Supreme Court almost solely through the abortion lens is frustrating to me.  Can't we have a second Supreme Court, whose job is just to twiddle the abortion knob and the original can be left alone to handle the 99% of the other business the Court addresses?

If you want to get right down to the core of the disagreement on responses to COVID, this post by Kevin Drum illustrates it perfectly.  Start with this:

My usual daily look at COVID-19 deaths was posted a few minutes ago, but I thought it might be worthwhile to also give you a quick look at COVID-19 cases. As you can see, they’re going up all over the place. Spain, France, and the Netherlands are skyrocketing. The United States skyrocketed back in July and looks like it’s now turning upward for a third time. The UK is going up, and so was Switzerland until a week ago, when it suddenly slammed the brakes on. Even Germany is rising a bit.

If we weed out exaggerated language like "skyrocketing" and ignore things like testing sensitivity and frequency, this statement is largely true.  The difference is how people interpret it, and the world splits into the Whitmer clan and the Sweden clan.  Drum speaks for the Whitmer tribe:

it sure looks as if even a modest re-opening quickly causes cases to boil over. ... Still, it’s obvious that we shouldn’t let up. The only way to keep cases and deaths down is to rigorously maintain social distancing precautions. If only we could get our president to agree.

For Drum and the Whitmer tribe, evidence that loosening of harsh lockdowns is followed by increasing COVID cases is proof that we should never stop lockdowns, at least until everyone is vaccinated with a vaccine that does not exist, may not exist, and will not exist for most of us until well into next year.

For those of us in the Sweden tribe, we come to exactly the opposite conclusion from the same evidence:  that lockdowns only pointlessly drag out the pandemic and artificially increase its costs, since no matter how long we hide, the disease is still there to infect us when we come out.  As I wrote last week:

All lockdowns do is delay the onset of the disease, not avoid it, and thus add severe economic dislocation, increased poverty, domestic violence, alcoholism, suicide and any number of other negative lockdown effects to the inevitable toll of the disease.  If we are doing anything at all to affect the course of the disease, we are stretching out the misery.

I go on to write that lockdowns make protection of the vulnerable harder.  I have two examples -- my 85+ year old mother-in-law and a bunch of immune compromised kids we support via Care Camps.  In both cases it's easy to keep them locked away for a few months.  But what happens when that stretches to 7 months?  Does my mother-in-law want to spend her all too precious remaining days locked inside?  Are we helping sick kids by essentially imprisoning them alone?

This may sound over-the-top, but I could argue that it is the duty of all of us who are under 60 and in good health to go out and risk exposure to the disease and get our society to herd immunity so the vulnerable can be safe and stop self-incarcerating.  I say this knowing the Mr. Drum may be among the immune compromised and particularly vulnerable.

My Now-Standard COVID Postscript:  I am not a fan of "check your privilege" retorts, but if one accepts that framework for a moment, one might notice just how privileged the exhortation to "Lock down, work from home, and stay in touch with friends over Zoom" really is.  Listen to the folks rooting for lockdowns and you will find that the vast majority

• have professional jobs that can be done from home
• continue to get paid even when they don't work at all (e.g. teachers and politicians)
• have a lot of savings

A large number also tend to ignore the rules they foist on everyone else.

Update:  I am still working on data, but the declaration of second and third waves is often BS.  In most cases, these so-called second waves are the first waves in areas that were not affected earlier.  New York has had one wave.  Arizona has had one wave, just later.  Louisiana has had two waves, but it is a unique case due to the timing of Mardi Gras.

There is a debate raging between the usual suspects as to whether the larger fires in California are the inevitable result of manmade climate change or whether they are the result of poor forest management practices.  For this post I actually am not going to weigh in right on this , except to say that long-time readers will know I am skeptical of most claims that tie tail-of-the-distribution events to manmade CO2 and I find it hard to correlate large fire loss years with actual temperature / drought data for the same year.

For a moment, let's accept that the fires this year are due to the climate change effects from rising manmade CO2.    As of today, CO2 makes up 412.55 ppm of the atmosphere (0.0412%).  To the extent that this number is driven upwards mainly by manmade CO2 (it was about 370 or 0.037% at the turn of the century), this is the lowest this number is going to be in your lifetime.   Even fast, drastic action in the US is only going to lower our CO2 emissions somewhat (as long as we stop short of sending the economy back to the stone age).  And even if we do go full paleo on the economy, India and China will continue emitting away.  This number will keep rising for decades, and even if we get to the point of reversing the rise, that would take decades more to get back to where it is today.  Note how far we have dialed back the world economy in 2020, and you can't even see a difference in the slope of the CO2 concentration curve.

I personally don't believe that manmade CO2 is the primary control knob on the climate, but for those of you who do, the temperature and drought conditions in California (by your assumptions) are the best this year that they will ever be again in your lifetime, even with dramatic climate action.

So do your thing on CO2 -- I have proposed a carbon tax plan that works here -- but using the need for climate action as an excuse for avoiding the forest management issues is absolutely irresponsible.  As I have shown above, if this is caused by CO2 then the need for mitigation and defensive actions to make forests more robust to fire is more rather than less crucial because CO2 is only going to go up in the coming years.

My company operates over a hundred Forest Service campgrounds in California, and over a hundred more in Oregon and Washington.  My employees live right in the middle of these forests you see burning down on the news -- the Sierra, the Sequoia, the Mt Hood, etc.  We see the condition of these forests up close, and it is terrible.  There is fuel laying everywhere, in part due to massive bark beetle tree kills and in part due to the natural aging of forests.   These forests are like houses with matches and oily rags lying all over the floor.  They need to be cleaned up.

I know environmentalists have a beautiful vision of our forests returning to their primeval state, free of active human intervention.  But that is never going to happen, at least in California.  There are simply too many people living in and around the forests.  In fact, we have increasingly found ourselves in a position that is worse than either total non-intervention or active management.  We intervene to put out small fires that burn up fuel when the fuel loads are low, thus letting fuel build up until we get catastrophic fires.

Real estate investment trusts (REIT's) have had their stock values pounded in the last six months, and is it any wonder?  Many have tenants who aren't even allowed to open, who are slowly (or quickly) going bankrupt and not paying their rent bills.  Industrial REITs are doing OK (particularly those that specialize in data centers and e-commerce warehouses), but will shopping malls ever come back under the Amazon/COVID 1-2 punch?  Will office real estate survive now that many companies are getting more comfortable with work at home?

I picked up a few REIT stocks at the bottom I thought had been pounded too far, and was lucky to have Warren Buffet jump into one of them after me ($STOR).  Which got me to looking at office REITs.  We have seen stories like the ones of REI giving up their entire headquarters for work at home.  Many people reading this may still be working at home.  Large companies may continue to pay their rent until their leases run out, but will anyone be renewing those leases in the future?

At first, my answer was that the commercial office real estate business was going to suck for many years, and I have not totally changed my mind on that (relatively obvious) conclusion.  But then I started to think about a few things that have happened to me in the last few weeks

• My banker, who was working at home, was unable to complete a couple of tasks I needed from him because Bank of America would not allow him to handle certain confidential information in his home or via his home computer
• I rented an extra office for a new HR director I have added to my own company -- not because she really wants an office or uses it much -- but because we had to have a secure locked location to store confidential employee files
• Working with my attorney on a deal has been inefficient because he does not have access to files and certain resources at the law firm

This raises a question -- is some amount of commercial real estate necessary just for security concerns (banking, financial data, employee data, HIPAA, legal correspondence)?  Perhaps in the near term.  But if we really get more comfortable with working remotely, then the ultimate solution is not to keep expensive office space for file cabinets and secure networks but to create document and data management models that secure data even when everyone is working remotely.  There are a lot of pieces to this, but some of them include

• Hardware/Software solutions to secure notoriously poorly secured home networks and computers
• More commitment to HRIS and on-boarding systems to move all employee paperwork off paper and into the cloud
• A return to some of the "paperless office" services that really did not catch on.  For example, services that receive all company mail and scan it and then distribute it digitally.
• For old dead tree documents, which I guarantee will still exist, more use of 3rd party / remote file management and storage solutions

I am quite convinced there are going to be some new businesses here -- and so far we have zoom and not much else.  If I was in technology, I would be thinking if I had the technology or the position to solve problems in this space.

One company that intrigues me is Iron Mountain ($IRM).  They have said nothing that I have seen in their marketing about post-COVID opportunities, but their business model (a combination of paper and digital document management and storage solutions) seems a good fit.  I think they are sitting in a very interesting spot to benefit from the post-COVID work environment, and I have bought a block for my portfolio (which is not that painful to hold on the come because it also pays an 8.5% dividend).

PS-  I am not an investment advisor and just have fun casually thinking out loud about investments and markets, from time to time.  The vast majority of my money is invested in my own business, which, through absolutely no foresight on my part, happens to be in one of the few retail segments and virtually the only hospitality segment to see record revenues this year (camping).  I am trying to think about long positions because, like someone who only recently gave up smoking, I am trying my absolute best to give up on shorting stocks -- it is just too painful in this nutty market *cough* Tesla *cough*.   With my skepticism I bring to most things, shorting is a natural fit for me but there is only so much pain I am willing to endure to fight an overly-active Fed and an overly-dormant SEC (this article plus my personal experience caused me to capitulate).  I do still have a few shorts on the books, including $tsla of course for tradition sake, but these now amount to what are essentially bar bets.

I saw this story in my feed reader today:  

the Dallas Cowboys cheerleader reality show — consider it the Hard Knocks of cheerleading — is back for its 15th season. CMT announced today it’s bringing back Dallas Cowboys Cheerleaders: Making the Team for one of the more interesting seasons in show history due to COVID-19.

I have never even heard of this show, much less seen it, and it is on its 15th season**.  In my youth, any show on its 15th season would have been known to all, whether one watched it or not.  Fewer than 10 prime-time series before the year 2000 even made it to 15 seasons, and even the ones that made only 9 or 10 seasons were part of the national zeitgeist and familiar to about everyone (e.g. Gunsmoke, MASH, Cheers, Hawaii 5-0, Perry Mason, Beverly Hillbillies, etc.).  It's amazing to me how niche shows can find an audience and continue to make economic sense today in a totally different way than used to be possible.

Modern music, of course, has been through roughly the same changes.  Of the eleven albums with the longest runs as Billboard #1, only one (Adele 21) was released in this millenium and only one other after 1990.

Quick:  According to Wikipedia, what is the longest running show on cable at 44 seasons?  That is 5 more seasons than ESPN SportsCenter.  I could not have named it if you had given me 200 guesses.

** I am not dissing the show or its audience.  If you love this show, there likely is another example out there of a show on its 15th season of which you have never heard.

Well, it is that time of the year when Valley Metro, the Phoenix area transit authority, publishes its fiscal year (July-June) ridership numbers, and boy are they awful this year.

In past installments, I have pointed out how our shift to funding a ridiculous light rail system in one of the least dense cities in the world has killed transit ridership.  Since rail costs more than 10x per passenger mile to move riders vs busses, the shift to light rail tends to starve bus funding in every city it has been tried, leading to net losses (even pre-Covid) in total ridership numbers -- yes even in Portlandia.  This is all discussed more in our 2019 transit report.  Here is a brief bit:

The problem with light rail (and the reason it is popular with government officials) is that it is an upper middle class boondoggle.  There can be no higher use of transit than to provide mobility to poorer people who can't afford reliable automobiles.  Buses fulfill this goal better than any mode of transit.  They are flexible and can reach into many corners of the city.  The problem with buses, from the perspective of government officials, is that upper middle class people don't like to ride on them.  They like trains.  So the government builds hugely expensive trains for these influential, wealthier voters. Since the trains are so expensive, the government can only build a few routes, so those routes end up being down upper middle class commuting corridors.  As the costs mount for the trains, the bus routes that serve the poor and their dispersed commuting destinations are steadily cut.

Without further delay, here are the updated numbers including 2020. (Tellingly, Valley Metro has for some reason failed to update its chart on its ridership web page to include 2020 numbers.   I wonder why?)

As you can see, even before COVID we were trending towards a total system ridership decline vs. the days before the commitment to light rail.  And we certainly had killed the growth in system ridership we had seen prior to light rail.  But now, with 3-4 months of COVID in the numbers, ridership has fallen off the map.  Boy, I sure bet we would be better off right now with a bus only system where capacity is easier to add, subtract, and relocate vs. light rail whose costs and routes are literally sunk in the ground.  I have no opinion on whether transit ridership will return to pre-COVID levels but I am sure that such massive disruptions in the system are far easier to economically manage in a bus network than in a rail network.

But you will be happy to know that Valley Metro is still spending money to put rails in the ground -- in fact, it has accelerated its spending post-COVID if you can believe it:

Phoenix is ramping up its light rail system despite record-breaking declines in ridership spurred by COVID-19.

Light rail ridership is down a little over 50% from where it was pre-COVID-19, according to Valley Metro CEO Scott Smith. Bus ridership is down about 40%.

Light rail construction hasn't slowed, however. In fact, Valley Metro has accelerated some projects, taking advantage of less vehicle traffic on the road while more people stay home.

Does this make a bit of sense?  Here is the defense:

But with ridership at all-time lows and no indication as to when ridership will return at pre-pandemic levels, is it smart to continue with pricey expansion of the light rail system?

"I think if we used that same logic, we'd say 'Let's go tear down all the movie theaters and all the stadiums.' Nobody expects this to be around forever. We're going to at some point in time, whether it be in the next month or the next year, return to some normalcy," Smith said.

Ooh, @Scott_SmithAZ has obviously had an expensive education that includes lessons in how to defend a bad position using logical fallacies.  Comparing expanding light rail to tearing down movie theaters is a false analogy.  No one is talking about tearing out light rail (well, maybe except for me).  The appropriate comparison is to ask if anyone is saying "let's go build a bunch of new movie theaters and sports stadiums" right now, and the answer is definitely no.

But don't despair, Phoenix taxpayers.  Because Valley Metro is clearly carefully considering its routes and is only building those to locations they are sure will be super popular both during and after COVID.  For example, one current expansion is to connect the existing network to... an aging shopping mall.

A couple of years ago I wrote about the 1994 Myra Sadker book "Failing at Fairness,"  a book that tried to make the case that girls were getting hosed (as compared to boys) by the US educational system.  Leaving aside my general sense that all kids of all races and genders are getting hosed by the current public school system, the idea that girls were doing worse in education was already wrong in 1994 and is demonstrably ridiculous today.  I showed these charts at the time.  First from the indispensable Mark Perry:

In this second chart, even the New York Times has noticed

Really, one only needs to go look at the unemployed knuckleheads living in their parents' house and rioting for Antifa to know we have a boy problem today, not a girl problem.  But I wanted to add one more piece of data, from some research I cannot vouch for in Self.  The income results for young women are about what you would expect from the education data above, and the crossover (somewhat coincidentally because it is dependent on start date chose) almost exactly matches the crossover in the education data.

Perhaps it has always been so, but we live in a time when our social science mythology is really divorced from social science data.

Granted, I am not a large tenant in my building.  I have about a thousand square feet of office space, but we are doubling the size of the company and I sent a note a number of days ago to my building management asking if I could look at getting perhaps twice as much space.

The building is at least half empty and many of the tenants they do have look to be checking out.  So I sortof expected some response, but today I had to follow up to a list of several people at my landlord with an email that said

Uh, hello?

I know I am a small tenant but with a half empty building and COVID uncertainty I sort of expected some sort of positive response

The one thing I have learned is that there are definitely some odd incentives in the real estate world.  One that I have found striking is that, at least for my landlord, maintaining growing average rental rates is more important than occupancy or cash flow.  In several cases, in a perennially half-empty building, they have let even large tenants walk and leave space open for years rather than give on rates.  Is this maybe an agency problem, where the rental staff have different metrics and incentives than the owners?  Or maybe it is a function of trying to sell the property, where a new owner who thinks they are good at filling space will care more about average rental rates than occupancy?

Note the new ETF products:

GraniteShares has listed 18 ETPs offering three-times leveraged and inverse exposures to popular US-listed stocks.

The 18 leveraged and inverse ETPs are listed on the London Stock Exchange (LSE) with a total expense ratio of 0.99%.

The stocks covered include most of the momentum Robinhood favorites, including Tesla, Uber, and Apple.  Nothing says "top of the market" like investing in the "GraniteShares 3x Long Tesla Daily ETP (3LTS)" whose underlying stock has a PE of like 1200 or even better in the "GraniteShares 3x Long Uber Daily ETP (3LUB)" whose underlying stock has never even come close to being able to calculate a PE.

This was my favorite line, "The ETPs enable sophisticated investors..."  LOL, I am pretty sure that sophisticated investors are able to much more efficiently leverage their trades if they want this much leverage (in any market, but particularly a volatile one, the math of the daily resets means not only a lot of fees, but also a steady value leakage from the fund -- see postscript).

The game is given away in the next line which says, "The range of ETPs is listed at $5.00 per share while most of the underlying stocks trade at prices in excess of $200".  Right, because sophisticated investors can't come up with $200 for a single share.   This product is obviously aimed, entirely inappropriately, at new Robinhood style NOOBS day-trading with their unemployment check and who grew up in an era when stocks only go up (and whose value is, like Bitcoin, untethered to any fundamental).

This is sleazy as hell -- avoid it at all costs.

Postscript:  Here is an example of the result of the leakage math that just gets worse in a volatile market like we have had this year.  Consider two existing S&P500 3x leveraged funds, SPXS is triple short and SPXL is triple long.  The S&P is up 8% for the year, so the average investor would think, "so, SPXS is down 24% and SPXL is up 24%"?  But that is not right, because of the daily recalculation in a volatile market.  We will ignore the math (sometime I might post a spreadsheet) but the result is this:  With the S&P500 up 8% YTD, the SPXS is down a whopping 60% and the SPXL is DOWN (not up) but down almost 9% -- you can see this right on their web site.  You would have been better off in either case just to buy or short SPXX with leverage.   You might have even been better with options -- making leveraged bets on momentum stocks generally means one expects volatility, and at least options increase rather than decrease in value with volatility.  You have to deal with expiration and theta in options, but as we have seen these leveraged funds have their own theta-like behavior over time.

Warning:  I am not, not, not an expert nor a licensed investment advisor or any other sort of advisor.  But take my word for it -- don't buy these.

Chinese online educational company GSX announced today that the SEC had opened a probe into their finances, potentially reminiscent of the Luckin Coffee and Wirecard investigations that revealed all sorts of fraud inflating reported revenues and profits.  In all these cases, private investors and journalists began reporting the fraud long before government agencies ever got interested.

I have always found stories of business frauds to be fascinating.  I am not sure why this is, but it may be in part because I really got sucked into the Enron cult, in part due to my working briefly with Jeff Skilling at McKinsey on Enron.  It took me a long time to accept the core of the Enron fraud (thanks to combined efforts of Smartest Guys in the Room and Conspiracy of Fools)** and since then I have taken a won't-get-fooled-again approach, I think.   So much so that I have probably become unhealthily skeptical, unable to get excited about investing in much of anything in this market and shading towards the Zero Hedge permabear stance.

Anyway, I like a good business fraud and discovery story (Bad Blood about Theranos and Billion Dollar Whale about Jho Low and 1MDB are good recent examples).  To that end, I found that the Muddy Waters Research paper on GSX is pretty interesting, detailing how they came to the conclusion that most of GSX's customers are actually bots rather than real paying customers.

Disclosure:  I am short GSX