Corporate/Business Tax- a Red Herring

Corporate/Business Tax- a Red Herring

As previously discussed, the profit function for a business is:

Total Profits = Total Revenue – Total Costs

So when discussing taxation on businesses it is important to realize that the taxes are not extracted from the entity ultimately.  They are always transferred either to the the employees, or to the end consumer- either by transferring the additional costs incrued to the cost portion while reducing current costs, or by increasing revenues through price hikes.

This is a fact which, while trivial, often goes overlooked in political punditry and the media.

Now there is an argument to be made that the way that the taxation is distributed amongst the employees may not fall upon the low level employee (though often it does, in the form of lay-offs or wage cuts), or it may not fall on the consumers inside the country of that the tax is extracted.

Regardless, the economic consequences of business and corporate taxation should be clear.  It is a transfer of wealth from private to public, and more often than not it will adversely gut prosperity for a group of individuals in order to bolster the society at large (or occasionally just the politicians.)

Why do I mention this?  It is an important distinction to make for an upcoming question which I will be discussing.

Advertisements

Envisaging the Global Money Supply

Disclaimer: I looked for data sources for infographic. Could not find where the data was compiled from.  Regardless, the general orders of magnitude of each monetary asset class are likely to be similar.   
Courtesy of: The Money Project
Derivatives, of course are (often complex) financial contracts- owing to their complexity and the way in which they are structured it is difficult to say exactly what (or who) might be at risk of exposure to their derivative holdings.
They have, however, been responsible for some notable bankruptcies over the decades.

Trade Unions: Why They Fail.

Trade Unions: Why They Fail.

When I was younger it was fair to say I had Socialist leanings, as I have grown older I’ve educated myself in Economics, Finance and I’ve worked in businesses and my views have shifted away from that perspective.  I’ll try to explain succinctly below why trade union action can (occasionally) be justified, but is often wrong.  In short this is worth reading (however painful, or cognitive dissonance inducing) as an individual with Socialist leanings.

Note: the following thinking is true of a relatively free-market system; not one with massive market-distorting agents which infere with the underlying market mechanics.

Profitability.

Profitability is the lifeblood of private commerce; without profit businesses fail and people are laid off.  Profit is not a capitalist construct, it is a fact of life.  It refers to the positive balance of the efficiency of work done between the productive elements (labor, factories, machinery etc.)

This is not a PURELY economic concept. This can be categorized within the real economy in physical terms and physicists and engineers often do calculate this.

Also be aware, market distortions are often introduced through agents with vested interests, like governments, monopolists, cartels etc.

In simple terms:

Total Profit = Total Revenues – Total Costs

Furthermore profits are often REINVESTED to keep growing the company and maintain future profitability.

The_hand_that_will_rule_the_world

So why are unions often wrong?

There is precisely one scenario when unions are (potentially) justified in their action.  I will detail this one scenario below, and from there it follows that in every other conceivable scenario, union action is incorrect.  If you follow any other scenario through, given the above equation and based on how companies operate, you will see that this has to hold.

In the scenario where profitability is high AND the real economy is growing AND the company has more profit than reinvestment opportunities AND the divergence between the pay scales of the owners/management versus the workers is VAST then union action may be justified.

You’ll notice this is a lot of “ands”- this is why trade union action often fails.  Trade unions tend to apply action any time workers receive pay cuts in real terms. In a shrinking economy, or during times of shrinking profitability, this tends to lead to failed businesses where everyone loses.

Also be aware, ownership and management should ALWAYS accrue a risk premium for their efforts.  There is significant risk in owning and managing businesses (in the face of being acquired by another business, management may well be laid off, whereas the workers tend to remain with the firm).  Additionally, depending on the legal structure of the business, owners may lose their shirt too.

Are there any other negative issues posed by trade unions?

Yes, absolutely.  Unions tend to increase the unit cost of labor for firms- in absence of the above scenario, this will increase unemployment.  Workers will be laid off to reduce the overall costs of the business and maintain profitability.  It is the equivalent of a minimum wage hike (although that will affect the entire labor economy).

In short, unions only function well when the ownership is deliberately acting in an unscrupulous manner- sometimes this is true, but often this is not the case. I would argue that given the propensity for worker dissatisfaction and disruption to business activities, unscrupulous ownership and management is poor ownership and management.

Bank of Japan goes NIRP.

Bank of Japan goes NIRP.

The Bank of Japan unleashed a shock negative interest rate announcement upon unsuspecting markets in the Asian session- Kuroda, having done a full 180 degree turn in less than a week buoyed stock markets and sent the Japanese Yen (JPY) plunging against the US Dollar.

441e4c4d3adf7422fa110bb929fd3730d65c4547.jpg
The markets reeled from the unexpected news today as it broke, sending the USD spiking against the JPY.

Why all the fuss?

Until now only several European Central Banks have implemented negative interest rate policy (NIRP) and the Bank of Japan was broadly expected to not take their rates negative until the successful vote for the policy shift last week.

The negative interest rates act as a mechanism to force liquidity (in the form of excess reserves held with the central bank) out into the open market.  This is why stocks floated (seeking reserves seeking yield) as well as the Yen moving based on future inflation expectations.

Where from here?

The Bank of Japan has been undertaking a huge QE program, and unprecented monetary policy in the form of Abenomics in order to try and maintain inflation after decades of staglation, but it has been met with limited success.  It is likely that this is an effort to throw more fuel on the monetary fire which Abenomics started.  It’s likely that from a policy perspective the Bank of Japan is now cornered on the ropes- with a historical probability of default at over 0.90, given their Sovereign Debt to GDP ratio, nothing short of a miracle will avoid a default in the longer term.

maxresdefault.jpg
While it’s highly unlikely they will run afoul of international creditors given that most of their sovereign debt is held internally, the BoJ is entering a dangerous period for monetary economics. They’ll need to exercise discipline and be prudent moving forward.  In short: be careful what you wish for Abe.

The Japanese should be careful to be certain they get exactly what they wish for with their policies.  This monetary situation could easily be the “Monkey’s Paw” of monetary policies.  Care and smart policy is needed, which I hope they will enact, lest they become a cautionary tale like Venezuela.

Ethereum- The New(ish) Cryptocurrency on the Block

Ethereum- The New(ish) Cryptocurrency on the Block

In an earlier article on various notable Bitcoin “competitors” (some of which actually compliment Bitcoin’s architecture) I mentioned Ethereum.

Ethereum is extremely interesting and holds a great deal of promise, but is substantially more complex than Bitcoin in its functionality.  Seeing as how it has, as mentioned previously, diverged with Bitcoin’s price somewhat and has seen an approximately 300% price rise since early Dec. 2015 it is worth watching from an investor’s perspective also.  I would point out that it is still relatively early in its cycle and I doubt the full risks and potential benefits of the technology has been understood.

This is a far more complex innovation than Bitcoin, but I will try to summarize what Ethereum is below.  Keep in mind, I am not a coder, and even if I was it is unlikely that the full scope of this innovation has been realized.

What is Ethereum?

Ethereum is an innovative platform technology which contains its own built in cryptocurrency (Ether)  and is custom coded.  It is based upon the cryptographic theory and model behind Bitcoin.  Most recently, Microsoft showed significant interest for their Microsoft Azure cloud computing services.  It is more than just a cryptocurrency in the sense that it contains a built-in (Turing complete) coding language (Solidity) which allows for the creation of custom-coded smart contracts.

Furthermore it is faster validating tranfers than Bitcoin, and unlike Bitcoin it is not a deflationary “currency”.  The supply will increase over time rather than being fixed.

The platform is already attempting to be scaled to create a 2.0 version with additional features.  While the currency has been designed to be proof-of-work like Bitcoin, they are attempting to move it to a proof-of-stake model, where a “deposit” is put on the line to transfer a transaction, rather than validating transactions with the other nodes on the blockchain, which has some benefits.

What are Smart Contracts?

The idea for the platform adopting this model arose out of many different cryptocurrencies being designed for different purposes. Ethereum tries to give coders the customizability which was being written into hundreds of cryptocurrencies in a single platform.

Smart contracts are rule-based snippets of executable code which exist on the Ethereum blockchain.  The code is public access (hence, can be written by coders, but utilized by other market participants) and is immutable- the code, once written and verified upon the blockchain, cannot be changed.  They also cannot be removed by a third party once they are verified.

smart-contracts1
An example of an Ethereum smart contract using pre-written code blocks.  One application of Ethereum.

Examples of Smart Contracts?

The implications of the smart contract system is substantial. Anything from crowdfunding a business, to making a Bitcoin clone, to creating a currency specifically for the creation of an specific financial arrangement, like a derivative, could be coded up on the platform.

You could even use it on a trading platform, or in a bond auction.  It is worth noting that it is far faster than Bitcoin in its transaction speed.

Where do I stand?

This is a potential quantum leap in electronic currency, and it does away with many of the “less beneficial” aspects of Bitcoin.  I expect this technology to be extremely disruptive to a range of existing electronic business models if it turns out to not be flawed in its design.  As it is still a relatively young technology, it may have a few stumbles along the way to becoming fully viable.

Either way Ethereum is definitely something to keep an eye on.  I urge that investors stay grounded, however, don’t overbuy the hype in the short term and remember that new technologies take time to properly develop.

Many existing Cryptocurrencies (of which there are literally hundreds) do not excite me in scope the way this currency does.

Bitcoin: Higher Stakes Than Most Realize

Bitcoin: Higher Stakes Than Most Realize

Having previously mentioned just why Bitcoin is a major technological innovation in currency, as well as why the media notion of it being shady- the currency of smugglers and reprobates, is just incorrect, I thought I would now turn to some of the risks.

It is worth noting, that quite recently I downloaded the Blockchain just to understand how large it had become- the blockchain is the ledger indicating all transactions on the network ever carried out.  The growth of it appears to be more or less exponential since 2009:

download (1).png
While rather difficult to see properly, this general trend shows the total cumulative bitcoin transactions since 2009 to present.  The trend should be clear.  An interactive list of live transactions can be seen here.

Aside from the frequent exchange scandals which have become part of the Bitcoin landscape, there are multiple risk factors associated with Bitcoin.  While the exchange scandals in themselves are not a huge issue for the cryptocurrency (you can store your coins in a secure electronic, or even paper wallet), there are other risks which are worth  stating.

It is worth noting that from a financial perspective, anyone who understands the nature of seniorage understands that Bitcoin flirts with awakening the wrath of governments in addition to bankers globally.  While I believe it is innovative, I don’t think that it could sustain a global attack against it. The resources (and technological capital) which could be levelled at the cryptocurrency are tremendous.

Regardless, here are some risk factors, and chinks in the cryptocurrency’s armor.

Bandwidth:

During the events of the Arab Spring, which I witnessed first hand, it wasn’t uncommon to have municipalities choke the bandwidth of the local internet connections down to a crawl in order to restrict the flow of information.

While the West enjoys some additional protections under the legal system, it would be the ultimate way to shut down capital outflows, if Bitcoin transfers became a risk.  Aside from that, even with regular bandwidth, it is likely that Bitcoin transfers may be bounded at the upper limit by the speed of the connection.

Blockchain Storage:

There is, of course, a possibility that at some point the blockchain will outstrip growth in personal data storage capabilities, to the point where it may becoming increasingly centralized, invalidating one of the core principles of the cryptocurrency.

Not Invincible When it Comes to Attack:

When it comes to Bitcoin’s encryption, it is not invincible to attack. The way Bitcoin has been designed, it encourages individuals (or organizations) to make it unprofitable spoof the participants in the chain.  This incentive keeps fraud to an absolute minimum.  However, while it would require a huge amount of computational power, it is plausible that a body with essentially endless pockets (hint, hint) might go scorched earth on the cryptocurrency, even if it meant burning through resources to do so.

Erosion of Trust:

The Blockchain is built with economic incentives in mind so that trustless, anonymous individuals can easily transfer Bitcoin in a safe environment, however, public perception and actual fact are two different things.  It is plausible that a massive smear campaign, or a coordinated attack on the Blockchain could destroy faith in the currency to the point where vendors refused to take it.

There also might be hidden ways to exploit the network that no one has found yet.

Competitor Cryptocurrencies:

As with anything in the tech. space derivative technologies and new and improved versions will come out, meaning Bitcoin may eventually fall by the wayside. And of course, should a competitor be “anointed” by the powers that be over Bitcoin, a preferential tax status, or lower risk environment could be maintained over Bitcoin’s.

Purchase of the Exchanges:

He who controls the exchanges, controls the network, so to speak. It’s entirely plausible banks will buy up common exchanges as nodes to funnel the cryptocurrency holders through the conventional banking system, meaning it would no longer be autonomous.

Summary:

All in all it IS and innovative and exciting technology, but anyone who “invests” or utilizes it needs to understand the risks as well. As past experience has shown, there is an asymmetry between investment losses and gains- gains can be accumulated over decades and lost in a very short time horizon.

Trade Update Jan 28th, 2016

Trade Update Jan 28th, 2016

Cashed out my long positions on the Jan 26th close.  I missed some upside in the markets on the 27th but that was a possibility which was to be expected, and I had accounted for, with no open positions.  All of my portfolio positions were in the black save for DOW. My profit across entire portfolio for the 26th close was 0.63% from last week’s close.

Looking to go increasingly short as we approach the week end and go into next week.  Buying into the short position in increments as we progress into February to limit risk.

Buy in and sell-off points were as follows, the final percentage is the profit gain over the porfolio value from last week’s close:

GPRO (long) :          $10.74             $ 10.85                 1.01%                 0.11%

GE (long)      :         $28.32              $28.36                   0.14%                0.014%

DOW (long)   :         $42.85              $42.69               -0.37%              -0.040%

BHP (short)   :         $21.24               $20.86                 1.78%                  0.22%

TVIX (short):           $9.41                 $9.24                    1.81%                  0.33%

The SEA, BRSS, COPX and CP-J positions did not action as the purchase orders could not be executed for the designated price.

Moving into next week I have lined up a long TVIX position, a short AAPL position (both small) and a straddle position with options on GPRO which will expire in February.  I will be adding to the portfolio (and likely purchasing more positions before week end) as well as increasing my exposure to TVIX and AAPL as next week progresses. I am liable to lose on these positions before I gain.

In addition I made a 4.00% return on an Ethereum (Cryptocurrency portfolio) short position over the course of yesterday (27th Jan 2016 PM).  As it stands the position is now accruing interest as a short-term loan which expires on the weekend, with the counterparty liable to be investing the funds on margin.  Hopefully the counterparty risk will be minimal.