UK's First Bitcoin Heist: a Midsomer Mystery

Moulsford, Oxfordshire

The English village of Moulsford, the setting for several Midsomer Murders, just experienced the UK's first Bitcoin robbery. Four hooded men in black broke into a cyber-currency trader's house, tied up his wife, and forced him to transfer "a fortune in Bitcoin" to them.

The Thames Valley Police are investigating, although without the help of Detective Inspector Barnaby. 

The Guys Who Give Tulips a Bad Name

Christian Day, a professor at Syracuse University law school…has written about bubbles and panics. He said that comparing Bitcoin to the tulip craze was unfair to tulips…. 

            – John Schwartz in The New York Times

Those of us who find cryptocurrency mania difficult to fathom can learn from Nellie Bowles' fascinating sketches of the young guys who are busy creating cryptocurrency investment opportunities in San Francisco.  (Not that 20-somethings appear young in that milieu. See Bowles' earlier magazine piece on the city's teenage techies.)

Worried that clients will lose their shirts on Bitcoin or alternative cryptocurrencies? Then suggest they buy a sweater for emergency use. Hodlmoon.com will provide one stitched with the logo of whatever cryptocoinage they're betting on.

Bring Back the Three Martini Lunch!

OK, full disclosure. Even in his young, Mad Men days your obedient blogger could never do more than one martini. I don't even like martinis. But I'd happily quaff one at a business lunch rather than go with the new flow –  wooing clients at cardio workouts.

Sorta, Kinda But Maybe Not Really Fiduciary

Some investment advisers are fiduciaries, others sell products. Telling the difference has never been easy.

Leading discount brokers, for instance,  invite investors to talk with representatives who aren't paid commissions. Does that make them fiduciaries? Not in the view of The Wall Street Journal.

Investors who seek advice from discount brokerage firms might assume the counsel they get is impartial, given how these firms have rejected the old Wall Street model of working on commissions.

In fact, advisers at some of the biggest discount brokerage firms make more money if they steer clients toward more-expensive products, according to disclosures from the firms and people who used to work at them. That means customers could end up with investment products and services that are costlier than they need.

Fidelity's reps, for instance, get a small cut (0.04%) when a customer buys ETFs. Their financial incentive is more than twice as great (0.10%) if they sell managed accounts or annuities. Reps especially proficient at directing customers to pricey products get bonuses.

Fidelity, Schwab and TD Ameritrade all pay incentives to representatives for referring clients to registered investment advisers. "These advisers charge clients an annual percentage of their assets, and the discount brokerage firms receive up to 0.25% annually on assets committed to the advisers."

This year, at long last,  the SEC is expected to weigh in on the fiduciary issue. But the emphasis appears to be on disclosure rather than behavior. (Why should brokers call themselves "financial advisers"?) Knut A. Rostad of the Institute for the Fiduciary Standard asks, "Are commercial sales rules increasingly redefining the very meaning of fiduciary advice?"

What Will Baby 2018 Bring Us?

The great American illustrator J.C. Leyendecker originated the contemporary concept of

representing the new year as a baby, starting with his New Year’s cherub that welcomed in 1907 on a December, 1906 issue of The Saturday Evening Post.

Leyendecker went on the create new year baby illustrations for a generation of Post readers, often putting the tot in a setting that suggested a trend of the times.

Baby 1910 had only vestigial wings but, thanks to the Wright brothers biplane, he could actually fly!

Baby 1934 had reason to worry about the stock market. Still,  if he bought and held, he could have retired as one of the richest members of the Silent Generation.

We end this year with stocks at new highs, so baby 2018 is entitled to toot his horn, just as baby 1937 did. Will he be showered with Bitcoin instead of confetti? 

Who is Fiction's Best Known Executor?

[TV keeps rerunning "It's a Wonderful Life," so we'll repeat this 2006 post.]

Come now! 'Tis the season when the answer should be at the tip of your tongue:

"[Jacob Marley's] sole executor, his sole administrator, his sole assign, his sole residuary legatee, his sole friend and sole mourner" was . . . Ebeneezer Scrooge.

Flinty old coot, Ebeneezer Scrooge. Happily, the Christmas spirit(s) set him right.

"It was always said of him," Dickens tells us, "that he knew how to keep Christmas well, if any man alive possessed the knowledge.

"May that be truly said of us, and all of us!"

The Tax Act's Marketer in Chief

President Trump advised Congressional Republicans to make their tax legislation palatable by communicating simply, the Washington Post reports. Talk tax cut, not tax reform. A big, beautiful tax cut. Biggest ever (well, not quite, but still pretty big).

To his great credit, the President questioned the Walmart-pricing approach to setting tax rates. What's with this 39.6%, 38.5% nonsense?

Reportedly, the President feels the most marketable tax rates are multiples of five. Congressional Republicans didn't achieve that simplicity, but at least the new rates are free of percentage points.

HNWIs Will Have Seven Years to Die Prudently

The rush to pass the tax bill sows confusion. David Leonhardt in the NY Times, for instance, assumes the doubling of the federal estate tax exemption, like the lowered income tax rate for corporations, is intended to be permanent.

Not so, according to this Times report and other sources. Along with the personal income tax changes, the higher estate exemption will expire after 2025.

Grey-haired High Net Worth Individuals may wish to plan their demise accordingly.

Wealthy Donor's Bitcoin Dilemma

You've already used up your $5-million plus estate and gift tax exemption. Now you want to pass  along another asset, worth $2 million, to your heirs.

Should you make the transfer immediately and pay federal gift tax? Or wait until next year, when you'll pay no tax because the new tax legislation will double the exemption?

A no-brainer? Not necessarily, suggests Paul Sullivan in his Wealth Matters column. If that $2 million is in Bitcoin, who knows its value in 2018? $20 million? $50 million? You might be smarter to pay tax on $2 million this year.

Or, you might wait for the Bitcoin bubble to burst. No $50 million, no $2 million, no tax problem.

Nothing Beats an Aston Martin for Christmas

Is your wealthiest client still looking for "something special" to give her husband this Christmas? How about an Aston Martin?

No, not the car. Too common. Think boat.

The Aston Martin AM37 will cost your client about $1.64 million ($2.1 million for the souped-up version). Beauty seldom comes cheap.

Your client's husband already owns a superyacht? Then she might consider the latest superyacht accessory – the Aston Martin Neptune, a three person submarine. Order now for delivery in a year or so. Price: about $4 million.

Wealth isn't always a burden. Cannily deployed, it's fun.

Tax Plans Stranger Than Fiction

 Generally, well-compensated employees should pay income tax at higher rates than business owners and investors. 

However, certain high-income business owners should pay tax at a marginal rate of 85.2%.

Haste and input from billionaires have produced weird taxation possibilities.

Don't Like the Parrot? How About Bitcoin?

Eager investors are getting rich quick with Bitcoin. But  Bitcoin reminds an Economist blogger of  a certain parrot. A real live currency it ain't.

It seems that every day, Bitcoin seems to hit a new high. But the reported price can move up and down by $1,000 or so within a few hours. This might have made it a great investment for those who got in at the right price and are nimble enough to get out in time. But it doesn't make it a useful means of exchange. When the price is rising fast, those who use bitcoin will be reluctant to part with it; when the price falls, those who sell goods will be reluctant to accept it.

Inheritance REDUCES Inequality?

As great wealth spreads from generation to generation, it provides more and more people with smaller and smaller inheritances.  Maybe, The Times (London) suggests, inheritance actually reduces inequality.  Not likely, but there's some interesting Swedish research.

Death Taxes on Life Support

Estates of the newly deceased have long been a tax target. Augustus, the first Roman emperor, imposed the vicesima hereditatium or "20th of inheritance" in 6 AD. 

Have death taxes finally run their course?

Could be, according to The Economist. Australia, Canada, Russia, India, Norway and Sweden are among the countries that have abolished their death duties.

Although the US Congress seems unlikely to abolish the federal estate tax this year, the exemption might be raised high enough to eliminate tax for families that are not at least entry-level rich.

Happy Thanksgiving

We borrowed this image of a Currier and Ives print,  G. H. Durrie's "Home for Thanksgiving," from a Yale Art Gallery post. Durrie was a Connecticut artist, born in Hartford in 1820. He died in New Haven, where he had a home on Temple Street, in 1863. That year Currier and Ives published two of his winter scenes. They became popular (nothing like death to enhance an artist's career) and Currier and Ives reproduced six more Durrie paintings.  "Home for Thanksgiving," issued 150 years ago, was the last.

The Ivies push back

Apparently, Harvard thinks a 1.4% tax is too much for it to pay.

It's because they understand the "camel's nose" phenomenon.

I'd much prefer we simply end "nonprofit" status for everyone, and ditch the charitable deduction to boot.  But it's a start.

The Incredible Shrinking Stock Market

In 1996, writes Jason Thomas of the Carlyle Group in his WSJ($) op-ed, there were 7,322 domestic companies listed on U.S. stock exchanges. Today there are only 3,671. The Wilshire 5000 is down to around 3,500 companies.

Easy access to venture, growth and private-equity capital means that companies no longer need to pursue an initial public offering to fund growth or access liquidity. Increases in regulations, shareholder lawsuits and activist demands have also diminished the appeal of a public listing. Over the past two decades, the number of annual IPOs has fallen sharply, to 128 in 2016 from 845 in 1996.

Successful new companies prefer to stay private to avoid hassle. Thanks to eased rules, they can acquire plenty of capital and hundreds of direct or indirect shareholders without going public.

The trend away from IPOs has benefited private market players at the expense of everyday investors. With companies like Uber, Airbnb and other successful startups delaying their IPOs for so long, there is little prospect for public returns on a scale similar to those enjoyed by Amazon’s early stockholders.

Yesterday’s growth stocks have migrated to private portfolios. As a result, stock pickers have slimmer pickings. Investors in index funds face leaner returns. "Today," Thomas asserts, "it isn’t possible to assemble a portfolio with the same makeup as the stock market of 1997 without exposure to private markets."

Another drawback, not mentioned by Thomas: Investing in nonpublic stocks through private equity partnerships or hedge funds is way more expensive than buying an index fund. Private investors face high fees and must hand over a share of the profits.

The world of everyday investing is in transition. Over the next decade or two the changes are likely to be drastic. Now if we just had 20-20 foresight….

Related post: The Stock Market is Disappearing Before Our Eyes.

Art Appreciation

Approximate sales prices for a damaged, heavily restored painting now considered to be the work of Leonardo da Vinci:

1958

$125

2005

$10,000

2013

$80,000,000

2014

$127,500,000

2017

$450,000,000

Sources: Washington Post, The Wall Street Journal, The New York Times

Harvard Will Invest the Yale Way

In a move Jim Gust has frequently deplored, some years ago Harvard laid off its endowment's "overpaid" investment whiz. The endowment's returns have suffered. Now Harvard has decided to try the Yale model: a small in-house staff overseeing the efforts of carefully selected outside investment managers. (The system works great when the selecting is done by Yale's David Swensen.)

Take a second look at the Yale Daily News article linked above. Strikes me as pretty professional. Better than I'm likely to read in our local paper.

Who's Jinghi Cui, the student journalist? Glad you asked. She's a Yale soph who graduated from the Experimental High School attached to Beijing University. You pronounce her name JING-ee SOO-ee.

Here's another example of her reporting, this time on the pension burdens borne by Yale and other universities. Does any large private or public employer not have a pension problem?

Fun and Taxes

The tax legislation being hurried through Congress is serious business. Still, haste sometimes makes humor.

Reinventing the bubble that killed the 1986 tax reform
Back in '86, last-minute tinkering increased the nominal top income-tax rate from 28% to 33%. But it was just a "bubble" – for the highest incomes, the rate dropped back to 28%. Without this silliness, the '86 reforms might have survived longer.

So what did House Republicans just come up with? A new bubble that would raise the current top tax rate of 39.6% to 45% before dropping back to 39.6%. (Members of Congress will do anything for a laugh.)

Before-tax loss, after-tax gain
Senate Republicans propose delaying the 20% corporate tax rate for a year while allowing immediate deductions of some business expense from income taxable at 35%. Professor Dan Shaviro of New York University Law School gave the NY Times an example of the fun possibilities:

Normally no one would invest $100 to earn only $90 back. But under the Senate plan, where some business expenses could be immediately deducted at a 35 percent rate, you would get $35 back in 2018. So your actual cost is $65. By the time your $90 earnings are paid in 2019, though, the tax rate would be 20 percent. That would cost you $18 in taxes, and leave $72 in your wallet. So even though your investment lost $10, you are still coming out ahead: with $72 on a net investment of $65.)

Best new tax acronym

"To reduce their home tax bill, " the Times reports, "companies like Google and Pfizer, for instance, often relocate patents and copyrights in tax havens and then sell use of that intellectual property back to their American subsidiaries at eye-popping prices." This Global Intangible Low-Tax Income is known as GILTI.

The tax bill will seek to cut off GILTI, but the restrictions could prompt companies to move more research and manufacturing off shore.

This Year 50 to 80 Family Farms or Businesses Face Estate Tax

Most owners of family farms or businesses needn't worry about federal estate tax. Most, but not all.

The Center on Budget and Policy Priorities estimates that 50 estates consisting mostly of a farm or business will pay the death tax this year. Data from the Tax Policy Center suggest the number is 80.

Repeal of the estate tax would make life easier for those 50 to 80 families. But repeal would also allow more than 5,000 other wealthy families to retain their diversified wealth tax free.

At the moment, chances of repeal have dimmed. The House version of the tax bill leaves the federal estate tax in place for seven years, albeit with a doubled exemption. The Senate version deletes the delayed repeal.

If It Smells Like a Tulip . . .

This year…

The value of Bitcoin has increased by more than 600 percent.

One hundred hedge funds have been set up to invest exclusively in Bitcoin.

And as of the end of last month, nearly a third of Bill Miller's hedge fund was said to be invested in Bitcoin.

Nathaniel Popper of the Times provides a lucid introduction to this year's steaming hot investment.

“You could get a possible run on the bank if one large investor withdraws and that causes the price to tank," says one trader. But that appears to be a minority worry. Almost everybody frets about a possible collapse of stock prices. Almost nobody, aside from grumps like JPMorganChase's Jamie Dimon, seems to think that Bitcoin will wilt in the heat of irrational exuberance.

The Agonies of Wealth

Why can't I be sure I won't go broke?
Why can't my money buy love?
Why doesn't my money boost my self esteem?
Is everyone after my money?

The average member of Tiger 21 has over $87 million in investable assets. (It takes a minimum of $10 million to join.) Yet the Tiger 21 member mentioned in this NY Times story finds wealth a source of anxieties and insecurity.

Many Times readers, including your obedient blogger, find it hard to sympathize with the burdens of life as an UHNWI.

Wealth managers, on the other hand, welcome the new-business opportunities offered by traumatized Gilded Agers. Wealth worries also help support groups such as Tiger 21 and (minimum wealth $30 million) the Institute for Private Investors.

$300 million per year

That is how much will be raised by the scant 1.4% tax on the net investment income of private university endowments.  So if it were 14%, as it should be, it would raise $3 billion per year.  Real money.

However, this estimate is probably high, for two reasons.  First, the tax has already been watered down--initially, it applied to endowments of $100,000 per student and more, but now it applies only to endowments of $250,000 and up.  So Harvard and Yale still pay, but many schools have been let off the hook.

More important, what is "net investment income"?  It's not the same as total return.  I'm sure the endowments will adjust their investment strategies for maximum tax avoidance.

I don't like tax bubbles

The new tax legislation has one, for those earning $1 million and more in a single year.

Why I support the tax reform bill

I've been arguing for this for years:

Some endowments will be taxed.

The tax rate is too low, but the camel's nose would get into the ten.

Famous Owner? Bigger Bucks!

Three factors are said to determine the value of real estate: location, location, location.

When art and collectibles are auctioned off, the prices they fetch also reflect three factors: provenance, provenance, provenance.

This BMW Z8, for example. At an upcoming auction it might sell for $200,000. But because its first owner was Steve Jobs, it may fetch as much as $400,000. (If Steve had been more of a car buff. expectations might be even higher.)

Paul Newman drove race cars. His wife gave him a Rolex Daytona. How much did that provenance add to the value of the watch? A lot. This month the coveted chronometer sold at auction for $17.8 million.

Tax Reform‘s Fierce Foe

Alarmed by talk of lost deductions for mortgage interest and state and local taxes in the Republican tax bill, the National Association of Home Builders flexed its lobbying muscle to promote a homeownership tax credit. No luck, apparently, but give the builders full credit for chutzpah.

Homebuilders don't like the current effort at tax reform any better than they liked the 1986 version. They blame the '86 act, explains Damian Paletta, for discouraging real estate investment and thus triggering the savings and loan crisis.

There were numerous causes of the savings and loan crisis, but the home builders aren’t the only ones that think the 1986 tax law is a precipitating factor. During congressional testimony in 1991, then-real estate developer Donald Trump made the same argument. He called the 1986 tax law an “absolute catastrophe.” 

"It has taken all the incentive away from investing in real estate," Trump complained. Nevertheless, he soldiered on for another twelve years before launching his career on reality TV.

Even Dogs Diversify

A guy we know received this birthday card from his financial adviser.

The Sound of Trial Balloons Popping

Every Congress has to learn the lesson: Cutting income tax rates is easy; expanding the tax base is difficult. Every tax break has beneficiaries who claim they can't live without it.

Legislators seeking ways to limit the cost of President Trump's tax plan  realize that citizens regard deductions for mortgage interest and charitable gifts as inalienable rights.

Could SALT, the deduction for state and local taxes, be a candidate for elimination? Nope. Republicans from high-tax states wouldn't hear of it.

Next trial balloon: a suggestion that the annual limit for contributions to 401(k) plans be cut from $18,000 to $2,400. Pop! After widespread criticism, that idea has suffered death by tweet.

Back in the Reagan years, cutting tax rates was relatively quick and easy.  Cutting rates and broadening the tax base in the 1986 tax reform act was not.

At Last! Family Farms Worth Taxing

Opponents of the federal estate tax habitually warn that it imperils family farms. But they've hemmed and hawed when asked for examples. Now some family-owned farms actually may be large enough for death tax. Two thirds of our national agricultural output, the WSJ($) reports, comes from super-sized farms with annual sales of $l million or more.

Example described in the article: a Kansas farm that stretches for over 30 miles and encompasses more than 30,000 acres.

Guardianship

I have routinely written in my trust articles how a living trust avoids the need for guardianship, in the event of incompetency.

This article from the New Yorker puts that idea in a whole new light.

Was Tulip Mania Fake News?

For generations, economists and financial writers have illustrated the folly of investment bubbles by referencing the 17th-century  tulip mania. As colorfully described by Charles Mackay in Extraordinary Popular Delusions and the Madness of Crowds, Amsterdam went nuts over "broken tulips," bidding astronomical prices for virus-inflected bulbs that produced exotic blooms.

But we may have to find another financial frenzy with which to scare investors. There was no tulip fever, Smithsonian asserts. Prices for "hot" bulbs did soar and eventually crash, but trading was largely limited to urban upward strivers, eager to obtain the exotic status symbol of the day. Mackay fell for tall tales told by Dutch moralists dramatizing the evils of trying to get rich quick.

For the moment, looks like we'll have to settle for the millennial dot-com bubble to illustrate the dangers of irrational investor exuberance. But have patience – bitcoin mania may have legs.

•

Like to learn more? Peter M. Barber's Famous First Bubbles can be read online here. YouTube offers numerous treatments of tulip mania – this two-parter will tell you more than you may want to know.

No sir, Reagan did not need years for tax reform

From Tax Notes:

Trump alluded to former President Ronald Reagan’s long journey to pass tax reform, noting that he has been in office for only about nine months. “I would like very much to see it be done this year. . . . If we get it done, that’s a great achievement. But don’t forget, it took years for the Reagan administration to get taxes done,” 

This is not accurate.

Reagan "got taxes done" with the Economic Recovery Tax Act in 1981,  enacted in the first year of his Presidency.  That law slashed the top income tax rate from 70% to 50%.  How did that happen?  Reagan made it a priority right out of the gate, he didn't defer all legislative action until after the August recess.  As the Republican Congress did.

I am generally a Trump supporter, but this comment makes me wonder if the President has any idea what he is talking about.

Oh, I suppose Trump might be referring to the 1986 bipartisan tax reform, the law that briefly brought the top rate down to 28%.  That was an historic achievement, and the country would be well served by simply re-enacting that legislation, word for word.

But it was ERTA '81 that ignited the stock market and the economy in the 1980s. The boom was well under way by the 1984 election, which was two years before the 1986 tax bill.

Trump needs to get this done.  Republicans need to stop dithering.

Dartmouth 14.6, Yale 11.3 – But Not Exactly

Dartmouth's football team beat Yale, 28-27. Dartmouth's endowment has won more convincingly. For the fiscal year ending last June, Dartmouth achieved an investment return of 14.6%. Yale lagged at 11.3%.

In reality, there's less to all those numbers than meets the eye. Yale's one-point football loss resulted from an erroneous out-of-bounds

 ruling on an end-zone catch that video showed to have been a touchdown. As for the endowment returns, their precision is partly the result of accounting fiction, as Yale School of Management's Roger Ibbotson has pointed out:

"When you have private equity and venture capital assets that are not priced every day, it is difficult to know exactly what the real performance is. I don’t really like ranking the endowments annually because there’s such a significant measurement error."

Long term, the investment performance of Yale's endowment remains remarkable: an average of 12.1% per annum over the last 20 years.  The endowment's domestic equities returned 12.2%,  trouncing the benchmark return of 7.5%. Makes you wonder why David Swensen allocates only 4% of Yale's endowment to shares in U.S. companies.