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May 2023

MAY 2023 CLIENT NEWSLETTER

 

First the California good news:  The California Department of Justice has announced the creation of a Housing Strike Force to advance housing access across the state. This is the result of CDOJ disagreeing with the city of Elk Grove over a low-income housing project in a part of the city where commercial properties had storefront businesses at street level and residential above. The DOJ wanted the project to be higher density with units straight up. The City Planning Department lost, and City zoning laws were tossed. Beware if the new agency comes to your town. Thanks to AG Bonita for the lovely picture of him and Biden.

 

Second, are the Bank Holidays: A bank holiday happens when you go to the bank and follow the line to the front door sign that says it is closed. Then you race home and electronically try to transfer your funds from your bank to your other bank or savings and loan. No, bankers do not get special days off for holidays, they simply cannot cover the exodus of bank accounts to cash in a brief time without selling assets such as Treasury notes they are required to hold because they were so highly rated for collateral and uninvested reserves. The problem is that a lot of older Federal Reserve Notes only pay 1% interest. Because the market this year is up to 4% interest, it will cost the bank 15% to unload the old Treasuries in a hurry without waiting years until maturity. This was the problem at Silicon Valley Bank, Signature bank, and the local Pacific West bank. All these banks had exceptionally large depositors and when they pulled out the banks folded, were. salvaged by being bought at a huge discount by other banks, or lastly, in banking purgatory with the FDIC.

 

The banks had many factors in their favor. The Silicon Valley bank gave 70 million dollars to social justice causes like BLM, ESG, and other woke causes. They went without a Chief Officer for risk management for eight months last year but still received a clear audit report a month before closing. KPMG also gave the Signature bank a clean slate although none of the banks had adopted basic risk-managed hedging interest rate risk techniques. Thanks to Newsmax.

 

Another bank, the First Republic has also failed [taken over by the FDIC] and is in the process of being acquired by JP Morgan Chase, or PNC Financial Services Group. If they are fortunate, they will have a new name over the door next month. The panic of bank failures is a virus that spreads from one bank to another.

The ultimate solution is not the usual $250,000 in FDIC guarantees which covers normal small businesses or individuals. The solution was for President Biden to throw the FDIC guarantee away because it only covered small accounts while the bank paid fees for their limited coverage. Biden used the insurance reserves and the FDIC to cover all the big uninsured depositors. He stated that,” there will be no losses borne by the taxpayers.” “The money will come from the fees that banks pay into the FDIC Fund [which were not paid to cover the large depositors].” Accordingly, there is now a two-tier system of little people and businesses who have paid to be insured and those large financers and businesses who were covered by never paying for insurance [by the banks]. Somebody will pay but it is never the guilty party, (WSJ 3/14/23).

 

Other federal agencies are also entrapped by the interest rate changes. A recent WSJ editorial noted that the Federal Reserve Bank is now losing $7 Billion daily because it holds trillions of dollars that yield only 2% but their cost of funds is now 4.6%. The rapid increase in interest rates has cornered financial entities everywhere. I do not believe our current interest rates will come down as most people believe. It was really an abnormality for the Government to decrease rates so much in the first place. Now we will all need to adjust to the new norm, which is really a misplaced old norm.

 

Note to all my clients: There are scads of tax articles and an IRS operations review which I wish to print but had so many economic events rolling in that I needed to separate my information into two lots called May and June. Currently, we have another crisis coming due in June if there is no budget agreement. And I will continue with this true but deep understanding of the financial crisis we are experiencing.

 

The Federal Debt Ceiling was breached earlier this year and is short over two trillion dollars. The debt is now 31 trillion and the debt ceiling, which is a House-Congressional agreement, must be raised to continue borrowing more money to keep up with the runaway spending habits of the Government. Here is a discussion from the usual WSJ about constitutional issues such as the 14th Amendment which states that the “validity of the public debt of the United States, authorized by law…shall not be questioned.”  This means that the Treasury cannot repudiate debt held by the public as issued in Treasury bonds and notes. What it does not allow is for the President to issue new debt without the consent of Congress. The President cannot issue spending or forgive Federal loans without Congress’s statutory approval. These are some of the laws of the nation with the checks and balances which are ruled by the Supreme Court. Meanwhile, next month will be the month when federal spending will exceed federal tax revenue. They MUST prioritize paying interest on Treasuries and retire debt principal when due. Social Security is a separate fund and should not be affected by the threatening rhetoric from the parties. Student loans are not forgiven, just thrown about for more votes.

                                    Today there was a WSJ article about the coming U.S. default which included a neat graph of our largest debt holder China. It showed the biggest drawdown of our Treasuries by their holding .5 trillion dollars in 2008 to peak at 1.3 trillion in 2020 and declined to .8 trillion today. There was also mention of recent large corporate bonds replacing maturing Treasury notes in the U.S. For the second time in history the debt of the U.S. is about to be downgraded and higher risk means higher interest rates for all. If they can be sold.

 

Good news from Asia:  Cargo containers 40-foot standard box shipping rates from Asia trans-shippers to our Pacific Coast have fallen from $14,000 to only $1,500. This is because weaker demand for apparel, furniture, and electronics has cut shipping. Great news for retailers and consumers here alike. Because this is an aftershock of the Pandemic worldwide disruption, the prices are expected to rise as the shippers are now losing money, (WSJ 3/14/23).

 

Mixed news about natural gas prices:  Now that the Winter is past and the storage tanks are full, Germany and Europe have absorbed as much as they could manage without a dire emergency, and prices here are well back to normal. Oil is another concern, especially in California where pump prices are about $2 per gallon more than the rest of the nation except Alaska and Hawaii. After we shut down the pipelines and limited oil production, OPEC is running the show again. Before the last election, we had become the largest producer of oil in the World which made us the swing producer on pricing. This kept the prices decent for years after the great oil crisis of the 1970s when OPEC limited oil production to keep prices over $100 per 42-gallon barrel. Currently, OPEC is now limiting production again to raise prices. Contrary to news from Washington that oil usage is declining overall, worldwide demand is up over 10% in the past three years and a 2-million-barrel daily shortage is expected this fall, (WSJ 3/14/23).

 

            Our current Administration, which helped create the shortage, sold off half of the strategic petroleum reserve stockpiles in November last year to temporarily offset rising fuel prices. The Strategic Reserve which held almost 700 million barrels of oil from the shock of the Arab embargo before, is now down to only 350 million barrels. Meanwhile, the Administration will need to refill the Reserve with more expensive oil from the same people who caused it. Vaporware learning curve, (WSJ 3/14/23).

 

          The Bidenesque approach to a solution for the shortage was to loosen the sanctions on the brutal Maduro Communist Venezuela Government which expropriated all the American owned oil production and shipping facilities. They lost a 10-billion-dollar international lawsuit over the matter and now Biden has resurrected the nightmare of being in business with them again. ConcoPhillips was awarded a license to be allowed to load, transport, and sell Venezuela’s oil in the U.S. on behalf of PdVSA. Conco hopes to recover the loss of their nationalized debt from the country. The heavy oil will be processed in the US for City Gas stations on the East Coast. To make the production part of the deal work Chevron Corp was issued a license to restart oil production and exports under the PdVSA. Currently production has fallen due to inadequate maintenance and sanctioned parts. The Venezuelan Maduro Corruption Party was famous for managing all sales of materials and supplies to the former oil producers and by using Communist pricing methods. A $10 copying machine ink toner cartridge would change hands for $100 as they controlled everything used as a state company store. This is an example of when your worst enemy becomes your worst friend. The trauma will surely continue, (WSJ 3/14/23).

 

The EPA solution to clean energy: All coal-fired power plants and gas-fired electric generating plants must use a modern technology called carbon capture and storage [CCS] and reduce greenhouse-gas emissions by 90% by 2035. That is coincidentally the same year all autos sold will be electric. The alternative is to shut down, which happened to the only commercial coal plant which tried CCS and shut down for economic reasons. This will result in the loss of 60% of all U.S. electric generation, (WSJ 3/14/23).

 

             The EPA is pushing Green Hydrogen for trucking. Green Hydrogen is simply undistilled water--not really, it is water molecules that are separated by solar, or wind generated electricity. When it is burned in truck engines it becomes water again. Clean, but expensive subsidized process if we can get past where to put all the solar cells and windmills. And it is priced by the liter and shipped in refrigerated tanks. The subsidies will amount to at least half of the fuel price like a reversed gas tax. Welcome to the future.

                                   

                                    New U.S. Energy Department rules for air conditions and heaters. To make your HVAC units more efficient the new rules will bestow a 25% increased cost for a new or replacement unit. Units must also be replaced if the old coolant needs to be replaced. The new rules are effective from January 1st this year so be prepared to pay thousands more, (Veteran’s Choice ad).

 

A major change in office space vacancies: The Pandemic kept office workers at home for a spell and they liked it. They also adjusted to the lifestyle of living with pet dogs, cats, and the lack of driving time and expense. At this point firms are fighting with employees to return to the office at a time when large firms are downsizing their employee populations due to the coming economic downturn. Elon Musk let 80% of Twitter employees and many fringe benefits go. Leases are always expiring which has become an opportunity to lease less space and shut down marginal branches. For-lease signs are everywhere including the vacant malls and strip shopping centers. Many property owners have recently found the best way to lose a tenant is to raise the rent after the Pandemic. Rents are falling, and the economy will be much leaner when the coming recession is over. As a stockbroker I sold many Real Estate Trust [REITS] which are specialized tax investments featuring a distinct type of investment such as shopping centers, office buildings, etc. The things would go public when they grow big [billions of dollars]. They were extraordinarily successful then the markets would change, and the real estate roller coaster would roll again, (WSJ 3/14/23).

 

Californian News:   Governor Gavin Newsom has signed a $50 million contract with a nonprofit generic manufacturer Civica Rx, to produce insulin with the goal of selling a 10-milliter vial for $30. “This is a big deal, folks,” he said to a press conference implying that no other state has ventured into the pharmaceutical complex drug business. Other drug companies will cap their price at $35 per month. Diabetics typically use two to three vials monthly. So, California’s branded insulin would cost patients only $25 to $55 MORE monthly IF Civica can produce it at the $30 price. Like the Train to Nowhere, that is an exceptionally long shot. Somebody forgot that California is now on track for a $31-billion deficit this year. Interesting number because if you multiply it by 1,000 you get the National Debt, (WSJ 3/14/23).

                                    The Slavery Reparations story:  Last year Gov. Newsome created a committee of nine to study reparations for people descended from slaves. California was never a slave state but felt guilty about the evils that may have befallen the victims. There was no mention of American Indian reparations for lands stolen from them. Or for the Japanese internment of Californians during WW 11 when they lost all their property and freedom. Or rewarding the Chinese who built our railroads. The recent summary of the group of nine’s findings was that there were about 2 million people affected and that it would cost upwards of $1.2 million each to pay for them. Total cost about $800 billion. A bill was created for this purpose and sent to Gov. Newsome who promptly vetoed it. Yes, Gov, you need all the votes you can get, (WSJ 3/14/23).

                                    Governor Newsome purchased [state money] media ads on Florida TV stations urging Floridians to move to California:  They cited Floridian legislated abortion limits, ban on critical race theory and the moratorium on discussions of sexual orientation and gender identity until fourth grade. Newsome signed laws transforming the Golden State to a Sanctuary State for abortion and transgender rights. The Freedom State he called California. Where super high taxes, illegal immigration is encouraged, bans on gas stoves and cars will be enforced, and where homelessness and soft-on-crime prosecutors thrive. Also, where the most drastic Covid-19 restrictions were imposed. If this state is so popular, then why did it lose $29 billion in Adjusted Gross Income in 2021? On the other hand, Florida gained $39 billion from new residents. Which is freedom?

                                  

                                    Labor Secretary in California Ms. Julie Su was a union activist:  Created the famous AB5 law which reclassified independent contractors as employees. This was aimed at taxi drivers and truckers who own their own vehicles. This entailed many other occupations and many of my professional clients left the state or jobs over this. She also supported the Fast Act which empowered an unelected board to arbitrarily impose restaurant work rules and a minimum wage as high as $22 hourly. There were also issues about including tips in the tab as wages for employees. She issued $30 billion in fraudulent jobless benefit payments during the Covid Pandemic. When the U.S. Labor Department repeatedly warned California that it needed to improve its fraud protection, Ms. Sue’s department sent out checks faster. She now works as Deputy Secretary in Biden’s Labor Department Cabinet. He recently proposed that she is his choice to run the Department of Labor. She would be typical of his Administration, which has no real focus on economics or the people, (WSJ 3/14/23).

 

 

Thanks for reading. Forward to taxes and IRS operations in June newsletter.

 

Best wishes,

 

Phil Chute, EA, and Staff

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