$22 Trillion and Counting

Feb 15, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Political news notwithstanding, it was a good week for the markets.  The gains can be directly attributed to a break in the budget impasse with the president signaling he will sign the bill when it reaches his desk.  Uncertainty regarding this stalemate had been weighing on investors who feared another government shutdown would have a real and lasting impact on the economy.  Fortunately, our legislators realized the last shutdown didn’t garner either party much favor and they worked as would be expected to avoid a repeat.

Not widely reported this week was a new record as our national debt tops $22 trillion.  It stood at just under $20 trillion when President Trump took office on Jan 20, 2017, but has been rising following the passage of a $1.5 trillion tax cut and spending increases on domestic and military programs.  Worth noting is data released this week which shows 2018 individual income tax revenue grew to a new all-time high surpassing 2017 by $9.3 billion, while corporate tax revenue fell $95.2 billion or roughly 33% over the same period largely due to tax reform.  At the current rate, the national debt is growing by a little over $1 trillion annually.  To ensure that you don’t think I’m being partisan, President Obama’s administration racked up $9 trillion in debt over the eight years of his administration, nearly as much debt as in the entire 232-year history of the country before he took office.  National debt is a growing problem and appears to be non-partisan.

In company news, we learned Amazon is backing out of its second headquarter location in New York City after political and local pushback.  Depending on which side of the issue you are on, the nearly $3 billion in subsidies to Amazon was either too much to bear or the future of the borough.  The finger pointing is in overdrive.  However, worth noting, we also learned Amazon will pay zero corporate income tax in 2018 and is the second year in a row it will owe nothing.  In fact, it will receive a refund of $129 million which is an effective tax rate of negative one percent.  The company earned $11.2 billion in profits last year.

In other news, JP Morgan announced it is developing its own cryptocurrency to be called the JPM Coin.  Trials are set to begin in a few months to instantly settle payments between clients.  As of now, only institutional clients that have undergone regulatory checks will be able to use this new service.  Most banks currently use the Swift Network which dates to 1973.  Considering how technology has advanced over the past 46 years, it is amazing that this network has remained largely unchanged.  The major downside of the Swift payment network is that it takes 3 to 5 days for money to transfer between banks or financial institutions.  Blockchain technology, first introduced with Bitcoin, speeds up transaction time to theoretically minutes if not seconds.  Competing blockchains have been working on this problem for the past few years with Ripple (XRP) being the leader in the banking space.

Along similar lines, we also learned this week that payment with plastic is about to get more expensive.  With most services that rely on technology, we’d expect prices to fall as the technology matures.  While that may be the case in many industries, it seems credit card processing companies are bucking the trend.  Mastercard and Visa are set to hike certain existing fees that U.S. merchants pay starting in April.  Although there is nascent competition from the likes of Square and PayPal, the large players in this industry clearly have enough market share to dictate pricing.  While you may feel sorry for merchants having to pay more to process credit cards, this fee increase will almost certainly be passed on to consumers one way or another.

In closing, I bring you the story of a rather ingenious strategy to save money called “skip lagging.”  I first heard of this years ago but it wasn’t until this week that I heard of airlines fighting back.  Skip lagging is a money-saving method where passengers leave their flight at a layover instead of the final destination.  For example, a traveler going to Dallas could book a cheaper flight to Seattle with a layover in the Texas hub.  In some cases, the savings can be substantial.  Well, this week we learned Lufthansa sued a passenger for violating its terms and conditions by not completing the entire trip.  This is the first time I remember hearing an airline aggressively going after a passenger.  The airline lost the case but it is appealing the ruling.  Now you know.

February 15, 2019

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