Weekly Reflection for November 10, 2023

The Week - An Update in Charts

The negative effects of inflation and the wars in Ukraine and Israel/Gaza are causing "sentiment", the monthly survey from the University of Michigan, to flag. The survey asks consumers to weigh in on a myriad of factors around economics. Americans are saying that they currently feel worse than they did at any time during the pandemic and about as bad as they did during the Great Financial Crisis of 2007-2009.

The tax brackets are shifting up in 2024, much like they have for 2023 income. Thanks to inflation, more of your income each year is taxed at lower rates. The IRS tries to help families avoid "bracket creep" with these adjustments so when inflation pushes up income but does not allow you additional purchasing power, you are not penalized when paying taxes.

For example, in 2022, a married couple filing jointly would have paid 22% on income over $83,550. In 2024, the 22% income tax bracket kicks in at $94,300.

An index representing the 100 most widely held cryptocurrencies is up big in 2023, after a rotten 2022 that saw $2 trillion of value wiped out. Does this mean that crypto is finding legitimacy?

Crypto enthusiasts say that the crack down on fraud and the guilty verdict of Sam Bankman-Fried, the former CEO of FTX, shows that law and order will come to the space, making it more investable.

Others, like analyst Dennis Kelleher of Better Markets, says that cryptocurrencies is mostly useful for its ability to scam and manipulate others. “Crypto’s use and value is in breaking the law, from ripping off customers, money laundering and tax evasion to ransomware, gambling, and funding terrorists and rogue states like Hamas, North Korea, and Iran.”

A large banking crisis that seemed inevitable in March has not happened. The three banks that folded earlier this year, Silicon Valley, Signature and First Republic, have "only" been joined by two smaller banks in Iowa and Kansas. Overall it is far from the looming disaster feared by many.

Buy Now, Pay Later (BNPL) is not a new concept - it is the premise of mortgages, credit cards and payday loans. But firms like Affirm and Klarna offer a new twist and are trending under the short-hand BNPL. These companies give purchasers the option to pay for their goods over a short series of installments with no interest. Missing a payment means incurring interest and possibly a ding to your credit. Americans and Europeans are increasing using these options, forcing traditional credit card companies and banks to give similar offerings.

We Are the Problem with Housing

If we were not having such a housing shortage in America, is there any chance that this house could possibly ask a buyer to pay $1.5 million? The price is in the range of the surrounding homes, but this gem comes complete with its own, now inactive, meth lab. Buyers will take on the cleanup effort without any help from its owner, Peter Karasev, who presumably has more problems on his hands than just meth. He’s been arrested on charges of attempted destruction of San Jose’s electricity transformers.

The reality is that someone will probably buy this home for the seven figures it is listed at and that is a sad insight into how bad our housing shortage has become. Per a recent Zillow survey, 67% of prospective buyers would buy a haunted house if were affordable, well located and had other appealing features, like a pool!

We are desperate and with the shortage of homes nearing 4 million, the supply imbalance is baffling. Per Freddie Mac seems to think that they have the answers and really the problem is us, in a nutshell.

To start, there is not have enough construction labor, per the Associated General Contractors of America. Then there are pre-existing zoning restrictions that make it difficult or impossible for a builder to navigate construction in certain areas, even those with the most demand. Other neighborhoods and cities have land use regulations that prevent any new building, period. There is the NIMBYism (not in my back yard) aspect. Homeowners in established neighborhoods fight fiercely to avoid changes, especially where multifamily housing is considered, which is the most neededand efficient type of home-building to counter the shortage crisis. In recent years, raw material shortages and the resulting costs have been a deterrent.

When red tape and public resistance are a not a problem, it is often a lack of land developers, or land to develop, that are the problem.

Perhaps the biggest problem is the payoff for homebuilders. It is much more profitable to build a huge home, than an entry level home, which is where the most severe shortages lay. There has been a long-term deterioration in the construction of “starter” homes. In the early 80s, new entry-level single-family homes were some 40% of the overall build. That number has been dropping and is now less than 10% of all new construction.

Honoring our Forces

Celebrating Veteran's Day as a holiday began in 1954 with the day specifically chosen to commemorate the signing of the Treaty of Versailles to end World War I on November 11, 1918. The global hope was that the Great War would be "the war to end all wars". It was clearly not and sadly today we find ourselves adjacent to two ugly wars in Ukraine and Israel, both with the potential to grow larger.

But the U.S. has not let down its guard or its spending over the last 100 years. In 2022, the last year that full data is available, the U.S. outspent every other country in the world with military expenditures of $877 billion, three times the closest country, China, at $292 billion. Our active military population ranks third, behind China and India.

As with the averted government shutdown in September, the military will be in focus this time. Congress has a week until November 17th to fully agree on abudget for the current next fiscal year, which started on October 1st. The Senate, which leans slightly Democratic, is preparing a budget that would include an extra $106 billion for border security at home plus monies for Ukraine, Israel, and the Asia-Pacific region. The House with its Republican

majority is more enthusiastic regarding security at home and Israel rather than other efforts. In any case, it seems that the budget could be worked out by next week's deadline. and military spending seems certain to rise again to record levels, given no war has yet ended all wars.