Henry Dampier

On the outer right side of history

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John Paulson’s Puerto Rican Exit Strategy

John Paulson, a hedge fund manager that you might know from books like The Big Short, has been spending the last couple years promoting Puerto Rico to New York’s financial elite as a way of avoiding Federal taxes without dropping their American citizenship, thanks to a 2012 tax shelter law.

Business Week wrote a long article about it back in June, and various firms are promoting Puerto Rican real estate to entrepreneurs and investors as a way to both reduce their personal and corporate tax burden. The gist is that if you spend half of the year living in Puerto Rico, they don’t have to pay Federal taxes anymore, whereas they would need to if they were living in most other foreign countries while keeping their citizenship. US expats, unlike most other countries, are often double-taxed, although there are some minor loopholes that are more accessible for people earning below a certain amount.

The slogan ‘exit over voice’ is being implemented right now, and being used by some of the biggest names in finance. The funny thing is that it would not take a large number of people listening to Paulson to upset the fiscal boats of both the United States and various extremely left-wing American cities, which are entirely reliant on the very wealthy to handle their budgets. Paulson himself donated $100 million to the upkeep of Central Park — and it’s worth noting that, during the restoration of New York City, the renovations of the parks around the city was handled almost entirely by wealthy donors.  For comparison, Central Park’s annual budget is typically half of what Paulson gave to it.

One of the reasons why Paulson is pushing hard on the Puerto Rico point is that he has personally come into conflict with New York City’s Communist mayor, De Blasio. Whatever you think of Paulson, he’s almost certainly in the region of thousands of times more competent and intelligent than the mayor, and certainly more connected.

If there is a problem with the plan, probably the biggest one is simply the presence of Puerto Ricans, and the connection with the US government. On the other hand, from the government’s perspective, this sort of halfway measure can keep a lot of wealthy people who would otherwise expatriate to remain citizens.

This sort of initiative can do more damage to the size of the American government than 10,000 Ronald Reagans winning elections.

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‘More Right’ Responds to Brin

After about a year, Michael Anissimov at More Right has responded to science fiction author and screenwriter David Brin’s attack on Neoreaction.

The key passage:

I stand by these statements. Aristocratic systems are more fiscally stable. They are more decentralized and less susceptible to failures of the central government. This is exactly the kind of “antifragile” governance our chaotic modern world needs. The current system is highly susceptible to catastrophic failure. We need less federal and state spending, and more local spending. It’s a question of resilience. Communities will shape their own fates; not have their fates shaped by compulsory entanglement with the federal and state governments. As for governance, private government is more reliable and predictable. Let others take their chances with public government. We’ve seen what public government can do, and we don’t like it.

Most of the positions advocated within the ‘Dark Enlightenment’ are, in fact, moderate positions when considered in historical context, even completely non-controversial. The only context in which they are radical is in the current one, in which radicals who share David Brin’s point of view enjoy a temporary perch of influence atop what was once (but is no longer) the largest economy in the world.

It should be noted that Taleb’s book, Antifragile, earned a $4 million advance from a mainstream publisher and was a New York Times best-seller. That book is more closely in accord to what neoreactionaries write about than it is in accord with universal-enlightenment-democracy advocated by a figure like Brin or Francis Fukuyama.

Compared to Taleb, as Anissimov writes, most Dark Enlightenment writers are ‘fringe figures’ in the contemporary sense, but when compared to the historical norm, it’s representing the ordinary, mainstream position in the European tradition.

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“Believers In Markets Out-of-Step With Markets”

Jim Grant has always offered a good balance between a theoretical understanding of economics and a practical experience in working the markets. Last month, he gave a keynote speech at the Cato Institute about the post-bailout monetary era.

In the speech, he notices an apparent contradiction in markets and public opinion: people who are advocates of markets tend to believe that asset prices are currently over-valued, whereas people who oppose the market system tend to think that company fundamentals are not terribly relevant to asset prices. As Grant says in his speech, “…they distrust the resiliency of the price system.”

For the ordinary person, what the time since the financial crisis has meant is that people who have been able to attach their personal wealth to asset markets have done quite well, whereas people who have been less connected to the monetary spigot have done poorly (as in most laborers who are not bringing in money from a pension of some kind).

This is actually a common historical progress seen in other paper money regimes: enterprise suffers, while paper speculators thrive. This is because of the real process of inflation, which differs from the bureaucratic definition as a ‘general increase in prices’ as defined by a committee at the Federal Reserve.

The disconnect happens for a simple reason: there are choices about how you allocate your funds.

You can buy a stock, or you can buy products and services with that same money. That money is staying in the asset markets. You give your cash to the broker, who handles the exchange, delivering that money to the seller, and taking it as a cut. The money might eventually go into the real economy circuitously, but as more money piles into the asset markets, it tends to stay there, or get recycled into the asset markets after a brief detour into the ‘real’ economy.

In the corporate sense, the companies can do stock buybacks or they can invest into expanding operations by hiring new people, building new facilities, or giving raises to existing employees. In the case of governments, increasingly state governments have to allocate funds into the asset markets to pay past employees, while having to cut payrolls for existing employees. Apple spent $17B last quarter on share buybacks instead of spending that $17B on hiring, as an example.

One market is subsidized in infinite amounts by the Fed, and the other gets the deferred trickle-down, and even then only in certain markets.

We see this sort of time-displaced asset jump in markets like the SF-Bay, where pension money goes into the hands of venture capitalists, and is then deployed into money-losing companies and then into the hands of real estate developers & hipster hackers spending $5,500 a month on rat-infested apartments with water damage. The money gets deployed to the SF-Bay first because the people who manage the assets allocated to them don’t want to fly to the cooler markets, and the entrepreneurs aren’t either, because the point isn’t to allocate capital intelligently into profit-making structures, but to allocate capital from the asset markets into their pockets.

When you reward people for pumping up asset prices as high as possible without regard to the fundamentals, entrepreneurs will do things like fill a company with useless employees because the companies are valued based on technical headcount rather than fundamentals. If you value the company based on a compelling investor story, you get fraudulent stories that are more common to mafia-run pink sheet scams than they are to brand name venture capital firms.

Or, at a larger scale, you’ll get executives who borrow tons of money on the bond market, and then use it to build out sham product lines that never sell, or otherwise just use it to push up the stock, which they then sell, and recycle into some other investment. To people who primarily work in the asset markets, it seems like a boom, because it is, whereas the people who don’t will tend to see it as depression conditions.

If earnings are not a primary determinant of stock prices, then employees who grow earnings will be under-valued compared to how they have been in the past, because what matters most is boosting the stock price instead of the fundamentals that are conventionally supposed to be driving that price.

Because markets seek equilibrium, eventually, the disconnect corrects, with a convergence between the pumped-up asset market and the liquidity-starved market for the underlying assets.

Update

Charles Hughes Smith covers the corporate bond issuance & stock buyback trend.

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