Andy Kessler

WSJ: What’s a Wealth Tax Worth?

https://www.wsj.com/articles/whats-a-wealth-tax-worth-11570995598

Why do liberals think rich people have money just lying around, like Scrooge McDuck swimming in a giant pool of gold coins? That’s the myth behind plans to tax Americans’ wealth, as Sens. Elizabeth Warren and Bernie Sanders both propose.

Ms. Warren wants an annual asset tax of 2% on households worth more than $50 million, and 3% if you’re worth more than $1 billion. Mr. Sanders would tax “extreme wealth” starting at 1% on households worth $32 million and topping out at 8% on those worth $10 billion or more. Whereas the Soviets confiscated wealth virtually overnight, at least Bernie will take a dozen or so years to pilfer most of your savings.

University of California, Berkeley professors Emmanuel Saez and Gabriel Zucman estimate that Mr. Sanders’s tax would raise $4.35 trillion over 10 years, while Ms. Warren’s would raise $2.75 trillion. But something seems fishy—oh, Messrs. Saez and Zucman advise both campaigns on their wealth-tax plans. I doubt they account properly for how levies on wealth would shrink the tax base. Can we get some outside audits please?

Even setting comical revenue projections aside, the wealth-tax idea doesn’t stand up to scrutiny. Never mind that it’s likely unconstitutional. Or that a wealth tax is triple taxation, heaped on top of a 21% corporate tax plus 20% capital-gains tax when someone sells shares to pay it. (I concede that it definitely would provide lifetime employment for tax lawyers.)

The most preposterous part of the wealth-tax plans is their supporters’ insistence that they would be good for the economy. Only in an upside-down world could anyone think “a wealth tax is pro-growth,” as a New York Times columnist has claimed.

Start with the spending side.

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WSJ: An Investment Tip From Mr. ZIP

https://www.wsj.com/articles/an-investment-tip-from-mr-zip-11570393678

Here’s an enduring lesson about investment. In the mid-1990s, well before streaming (2007) or Blu-ray (2003) or even DVRs (1999), I was convinced that every television would someday have an attachment to record and play back shows digitally. Digital videodiscs were available and personal computers had only expensive read-only drives. But I figured drives that also let users burn DVDs would soon take off, so my partner, Fred, and I started scouring Silicon Valley for technology that would benefit.

In the small city of Milpitas—ZIP Code 95035—we stumbled upon a company named Elantec Semiconductor, which had gone public in 1995 at $7 a share. Cowen Inc. and Hambrecht & Quist were the underwriters, for those who remember those days. Don Valentine of Sequoia Capital and Apple Computer fame was the (pedigreed) chairman. It had $30 million or so in revenue but wasn’t really growing. When Fred and I found it, the stock was broken, trading around $3. It had 10 million shares, so it was trading at a lowly one times sales.

We started visiting the company, meeting the CEO and CFO once a month. They told us they had developed a little $2 laser-diode driver that could allow a compact-disc drive to burn data onto a blank disc. Lights flashed in my mind when I heard this: Could their laser driver do the same thing for DVD drives? Someday, I was told, but it would be really expensive. Even so-called CD-R drives for PCs were still $500. Gut check—time to move on? Nah.

We weren’t discouraged. Everything that comes out of Silicon Valley starts out expensive, then sells like hot cakes as costs decline. We were long-term investors—patience was our middle name. So we started buying stock at $3. It started ticking up: $3.13, $3.25, $3.50. We were geniuses! Then we got too busy to buy more shares for a few days and the stock slid back to $3. Turned out we were the ones driving up the thinly traded stock!

So we slowly kept buying shares and continued to visit the company for updates. Elantec’s only competitor for laser-diode drivers was Toshiba, and because Toshiba also sold CD drives, every other Japanese CD company bought from Elantec.

Around the same time, music was becoming available online through MP3 downloads, which Napster had made easy.

Read the rest here.

WSJ: Silicon Valley Goes Soft

https://www.wsj.com/articles/silicon-valley-goes-soft-11569785993

I miss Travis Kalanick. Sure, the former Uber CEO was known to attack colleagues in the boardroom and berate his drivers from the back seat. And yes, when I met him in 2013, he was pacing around with a golf club looking as if he wanted to break a window in his conference room.

But he told me the story of when Uber received a cease-and-desist order from the San Francisco Municipal Transportation Agency. Did you cease? I asked. “No.” Did you desist? “No” he repeated, asserting that Uber is perfectly legal, and that the agency didn’t have jurisdiction anyway. That was a bold move—just the kind that Silicon Valley is missing these days.

I’m not condoning the culture that festered under Mr. Kalanick. He famously wrote an email to the “Uber Team” before a Miami off-site meeting in which he advised, among other things: “Do not throw large kegs off of tall buildings.” It isn’t bad advice, but it shows he had a lot of growing up to do—much like the 22-year-old Mark Zuckerberg, whose card read: “I’m CEO, Bitch.” Uber during his tenure was also known for shrugging off sexual-harassment claims. Mr. Kalanick was replaced for a reason.

The problem is that too many in the media don’t distinguish between Uber’s rotten corporate culture and its legitimately bold business practices. Instead both get placed under the same umbrella of “toxic bro culture,“ as if everyone in Silicon Valley is a misogynist Neanderthal strutting around with his baseball cap on backward.

Tragically, the pendulum has swung too far in the other direction. Silicon Valley has gone wussy on us—wait, can I even say “wussy” anymore? The New York Times suggests tech workers are all experiencing “existential dread” and in need of therapy. Bad leadership is to blame.

Everyone is caving in like an overcooked soufflé. 

Read the rest here.

WSJ: Is an M.B.A. Still Worth It?

https://www.wsj.com/articles/is-an-m-b-a-still-worth-it-11569184032

“What year were you?” a Morgan Stanley colleague asked me years ago. “Huh? Year?” I replied. “What year at HBS?” H-B-what? “What year did you graduate from Harvard Business School?” Oh, I get it now. “I didn’t go to HBS,” I told him. “Actually, I don’t have an M.B.A.” After a long pause and scrunched-up face, he asked, “Well, then how the hell did you get a job here?” As I walked away, I murmured under my breath, “Maybe I earned it.”

So should you get a master’s in business administration? These days a lot of people are rethinking that question. Applications are down, even at HBS and GSB (that’s Stanford’s Graduate School of Business—get with the lingo). The number of GMAT test scores sent to two-year, full-time M.B.A. programs has plummeted since 2015. Last year 70% of two-year M.B.A. programs saw declining enrollment; in 2014 it was only one-third. Rats deserting a sinking ship?

Before I really pile on, it’s worth mentioning that there are a few decent reasons to go. The first is pedigree. If you want to get a job on Wall Street or in private equity, you pretty much need an M.B.A.—a golden ticket. But although these jobs pay well, they entail long hours chained to giant monitors. It’s basically the mushroom treatment: Higher-ups will keep you in a dark room and constantly throw, let’s just say, manure on you.

Another reason to go is the networking (it only takes a couple of drinks for most graduates to admit this was their main draw). Business school is a great place to meet other up-and-coming climbers to get pulled up by, or better yet, pass on your way to the executive floor, bathroom key included. I constantly meet people who studied with former Microsoft CEO and GSB dropout Steve Ballmer. The final reason to go to B-school is that you might actually learn something—like how to do macros in Excel.

But—you knew this was coming—man oh man is it expensive. HBS tuition is now $73,440 a year. Total costs are estimated at $110,740 if you’re single and more than 150 grand if you’re married with two children. That excludes the cost of your MacBook, let alone forgone wages. You’d better get that Wall Street job.

I’ve dug into the curricula at dozens of M.B.A. programs, from Booth to Kellogg to Fuqua.

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WSJ: Antitrust Can’t Catch Big Tech

https://www.wsj.com/articles/antitrust-cant-catch-big-tech-11568577387

On Friday the House Judiciary Committee joined the dog pile of 48 state attorneys general, the Justice Department and the Federal Trade Commission in investigating whether to break up the Big Bad Tech companies. It all makes me think of a Hangtown Fry, my favorite dish at the Tadich Grill in San Francisco. During the Gold Rush, a prisoner condemned to death could request a final meal. To delay the hangman, a smart prisoner would order an omelet with bacon and oysters, meaning someone had to head down to the coast for ingredients, which could take weeks or months. Delicious, by the way.

Any action to break up Google, Facebook and others is, like that Hangtown Fry, going to take a very long time to happen, if it happens at all. The first antitrust suit against IBM was filed in 1968. The U.S. government dismissed all antitrust cases against IBM as “without merit” in 1982. AT&T , an actual government-mandated monopoly, faced its first antitrust suit in 1974. It settled through a consent decree in 1982, with the Bell telephone system breaking into Baby Bells. Yet unlike Humpty Dumpty, the market put AT&T mostly back together again, with it and Verizon going strong in wireless—a field few foresaw at the time of the breakup.

After all the saber-rattling and congressional hearings, to succeed in court antitrust advocates will have to demonstrate that tech companies’ actions are harming consumers. Yes, the FTC recently penalized Facebook for privacy violations, but its antitrust investigation is aimed at countering potentially anticompetitive practices, an entirely different matter. The rather weak case from the director of the FTC’s competition bureau is that Facebook bought startups “that might ultimately unseat them,” which the director says may violate the commission’s “theory of competitive harm.” Theory indeed.

The Justice Department is more gung-ho. Its antitrust enforcer Makan Delrahim declared, “Without the discipline of meaningful market-based competition, digital platforms may act in ways that are not responsive to consumer demands.” Note that Mr. Delrahim uses the weasel word “may”—which is to say the tech companies may ignore consumer demands, but then again they may not. Mr. Delrahim is hinting at regulators’ dream: forward-looking antitrust analysis.

Mr. Delrahim and the crystal-ball gazers at Justice and the FTC think they have a perfect view of the future, so they want to break up companies before they commit any offense. They’re channeling Tom Cruise in “Minority Report,” in which cops use a psychic technology to catch murderers before they commit crimes.

Unfortunately for the Justice Department, current antitrust law is based on evidence of actual consumer harm and not mere speculation about what could happen in the future. A sharp legal mind tells me, “The key is the degree of certainty with which the government can prove the future harm is likely to happen.” Justice can pull a minority report on companies contemplating mergers—note how T-Mobile and Sprint had to give up business to get their deal done—but not antitrust.

So has Big Tech squashed competition? Hmmm, let’s see.

WSJ: The Fed Can’t See Its Own Shadow

https://www.wsj.com/articles/the-fed-cant-see-its-own-shadow-11567969957

What’s going on with the bond market, especially what the Journal has called “the relentless demand for longer-term debt securities”? Over the past few weeks 30-year bonds yielded less than 2% interest. That inverted the yield curve as short-term rates were higher, including the rate on repurchase agreements and what the Federal Reserve pays on excess reserves.

Should we blame the usual suspects—a weakening global economy and trade wars? Not so fast. Sometimes it helps to look at things differently. “There’s a dollar shortage,” Jeffrey Snider of Alhambra Investments tells me. “The market knows what’s going on and further knows the Fed doesn’t.”

For more than a decade the Fed furiously expanded its balance sheet through quantitative easing, buying Treasurys and mortgage-backed securities and then paying interest on excess reserves to soak up all the extra money in the banking system. The Fed’s assets increased from less than $1 trillion in September 2008 to almost $3.8 trillion today. Sadly, the stimulus hasn’t stimulated very much. What went wrong? Maybe the shadow knows.

Shadow banking, that is. That’s the market for repurchase agreements, or “repos,” a form of short-term borrowing. Mr. Snider calls it “collateralized interbank borrowing.” One party puts up collateral such as a bond, and is paid for the value of that asset on the promise to buy it back later at a higher price. It can be overnight, 90 days or more. Often that collateral is lent out again, creating a money supply outside traditional fractional-reserve banking. It’s huge—today nonbank lenders hold more total assets than traditional banks do.

But shadow banking has issues. In times of stress, the repo market demands better or “pristine” collateral, usually longer-term U.S. debt, of which there often isn’t enough. In 2013 I wrote about a shortage of collateral for the repo market and how Fed buying was squeezing the shadow banking system. Mr. Snider recalls the moment as well: “They were stripping the repo market of the best collateral as well as lesser-traded issues. They still had to buy up repo collateral to keep up the ruse that they were ‘printing money’ they weren’t.” The lack of inflation is proof that the total money supply has barely grown.

That shadow-banking crisis resolved as demand for pristine collateral eased, but today the collateral squeeze has returned at a much larger scale.

WSJ: The Market Gets What It Wants

https://www.wsj.com/articles/the-market-gets-what-it-wants-11566755407

Are you talking to me? The market dropped 767 points Aug. 5 on news of China’s currency devaluation, then popped 311 points the next day on delayed tariffs, then sank 800 points eight days later after signs that the yield curve had inverted further. It’s been yo-yoing since then—up 275, down 623 on Friday. When the stock market goes through these spasmatic gyrations, it’s a desperate cry for attention. But what is it trying to say? Ya got trouble, with a capital T.

We had a great economy going. Tax cuts had led to 50-year-low unemployment, rising corporate profits, and a growth rate nearing 4%—almost twice the anemic level it hovered at during the Obama years. But like an “own goal” in soccer, the Navarro-Lighthizer-Mnuchin tariffs scored one for chaos, and now the stock market is reacting. Until recently the market was pretty silent on trade. Could the recent drop be its loud call to end tariffs?

President Trump delayed some of his Sept. 1 tariffs until Dec. 15, including those on iPhones and laptops, and the market traded up. But the tariff burden is still onerous, and stocks dropped again in sync with the bond market as 30-year Treasurys dropped below 2%, their lowest rate since . . . ever. This flight to safety may indicate structural problems in credit markets, triggered by tariffs. But it’s almost as if the bond market is demanding the Fed cut rates in September, or else. Why should the stock market do all the talking?

It reminds me of Sept. 29, 2008, when the House voted down a $700 billion financial rescue package after the Lehman Brothers implosion. The market dropped 777 points, losing $1.2 trillion in value, the first time more than $1 trillion was lost in a day. Congress got the message. The Emergency Economic Stabilization Act passed five days later and was quickly signed into law by President George W. Bush.

The market gets what it wants. Facebook traded down after its initial public offering because of concerns that it lacked a mobile strategy—then it quickly got one. Uber laid off 400 employees to try to stem its post-IPO slide, but the stock has kept declining, so expect even more layoffs. And it doesn’t take a crystal ball to see the day within a year of WeWork’s IPO that their stock sells off and they finally change their squishy cash-soaking business model. This is what public markets are good at: creating urgency.

Sure, this makes the stock market sound like a stubborn bratty child throwing a hissy fit. And that’s basically right.

WSJ: What Will California Ban Next?

https://www.wsj.com/articles/what-will-california-ban-next-11566158511

First they came for our plastic grocery bags. Then they came for our plastic straws. Now they’ve come for our plastic water bottles at SFO. Yes, you read that right. Starting Tuesday, the sale of plastic water bottles will be banned at San Francisco International Airport, one of the few places they actually make sense. California has many dumb laws and statutes and bans, but this one is especially brainless—spurred by futile self-righteousness.

After running late for your flight after a 30-minute security line only to have TSA confiscate your Fiji water bottle, you’ll now have to stop at a crowded water fountain to fill your own metal flask. Or buy an overpriced glass or aluminum bottle at the concession stand, paying another 10 cents for a bag. And your teeth will chatter if you drink through a paper straw. Of course you could risk dehydration instead: Men lose up to a half-gallon of water during a 10-hour flight. Oddly, you can still buy sugary drinks in plastic bottles at SFO; only healthy, calorie-free water is banned in plastic. You can’t make this stuff up.

Other fields are even worse. Starting next year, the California Building Standards Commission will require every new home to have solar panels. This will add $8,400 to the average cost of the state’s already expensive homes. With a shortage of about 1.4 million housing units, according to the California Housing Partnership, that’s a $12 billion unfunded mandate.

But maybe the housing shortage can be solved with yet another legislative “fix.” Last December state Sen. Scott Wiener introduced Senate Bill 50, which would allow developers to ignore certain local zoning laws within half a mile of train or subway stations and some bus stops. The bill would allow five-story buildings, high density and massive parking structures. Although the bill was tabled in May, many of its growing group of supporters argued it didn’t do enough to create incentives for affordable housing. That tells me another version of this bill will pass eventually. So here’s what may happen: Many towns will preserve local zoning pre-emptively by closing their train stations. Lose-lose situation.

So what? you might ask: Just take an Uber or Lyft. Not so fast. Also winding its way through Sacramento is Assembly Bill 5, which would reclassify “gig economy” workers as employees, entitled to full benefits and a $12 minimum wage. This means the cost of rides, deliveries and even manicures would go up, up, up. The bill is an overreach because most drivers truly are temporary workers. According to the delivery company Postmates, half of delivery workers quit after 80 days and about 45% work less than nine hours a week. Once again California legislators are trying for a trifecta: Fix a problem that may not exist, kill a very Californian innovation, and damage the employment prospects of the same workers they are trying to protect.

There’s more. Proposition 64, passed in 2016, allows Californians to grow six pot plants at home. Why not seven?

WSJ: Social Media and Hawley’s Folly

https://www.wsj.com/articles/social-media-and-hawleys-folly-11565551761

What does Missouri Sen. Josh Hawley have against Silicon Valley? On July 31 he tweeted (as opposed to sending by Pony Express) “Social media ‘innovation’? What innovation? Big Tech doesn’t deliver for the American people, and that’s the biggest problem of all.” The previous day the senator introduced S.2314, the Social Media Addiction Reduction Technology Act, which would smother with a giant pillow the innovation he claims not to see. Be warned: Regulation may soon arrive in Techland.

Who is this guy—and why does he think he can micromanage a trillion-dollar industry? Born in Arkansas and bred in the Show Me State, Mr. Hawley graduated from Stanford, then Yale Law. He became Missouri’s attorney general in 2017 and began investigating the classified-ad website Backpage. The site sued to stop the investigation, lost, and then Mr. Hawley sued it back. He was thwarted in gathering information by Section 230 of the Communications Decency Act, which I wrote about last month; the provision defines certain online services as platforms, not liable for the content their users post. The episode may have stoked Mr. Hawley’s disdain for social media and Big Tech. He also opened an antitrust investigation into Google the same year.

This antitech inclination hasn’t always defined Mr. Hawley’s persona. As attorney general he said, “American workers and American entrepreneurs can compete with anybody, anywhere if our government will stop making America a cost-prohibitive place to do business.” Hear, hear. When he won his Senate seat last year he ran mostly as a conventional conservative.

But even then he already had his enemies marked. His first Senate speech lamented the “cold and judgmental world of social media,” and things kind of went downhill from there. He even wrote a letter to Mark Zuckerberg more or less describing Facebook as one of the “forces parasitic on our national life.” Ouch.

Mr. Hawley’s new bill has all the worst instincts of the regulatory state—a disappointing achievement coming from a Republican. It would remove the autoplay feature from YouTube, end infinite scrolling on Twitter and Facebook feeds, limit scrolling time to three-minute sessions, set default limits on the use of platforms to 30 minutes a day, and outlaw Snapchat streaks (rewards for consecutive days of contact with friends) and most “gamification” (badges, rewards) for any online service. These diktats are the opposite of market freedom.

WSJ: Have No Fear of Facial Recognition

https://www.wsj.com/articles/have-no-fear-of-facial-recognition-11564955494

Englishman Francis Galton first noted the unique arches, loops and whorls in our fingerprints back in the 1880s. Thirty years later, Clarence Hiller confronted an intruder in his Chicago home and was fatally shot. The culprit fled, but not before leaving a fingerprint in fresh paint on a railing. Thomas Jennings became the first defendant convicted using fingerprints as evidence. This is now routine, but back then there was public hysteria over the fingerprint’s invasion of privacy and then questionable accuracy.

Today, with faces matched almost instantly via machine learning and artificial intelligence, fears of Big Brother have created similar hysteria—especially after Georgetown legal scholars discovered last month that Immigration and Customs Enforcement has access to driver’s license photos from 21 states.

So much so that the crime-ridden cities of San Francisco and Oakland, Calif., along with Somerville, Mass., have banned the use of facial recognition by law enforcement, even though local businesses can use it to track who enters and leaves their buildings. Pretty crazy.

Paranoid? Is someone watching you? Let’s get some constitutional rights out of the way first, especially “unreasonable searches and seizures.” In Katz v. U.S. (1967), the Federal Bureau of Investigation used an electronic eavesdropping device, attached to the outside of a phone booth, to record the defendant’s gambling transactions. Charles Katz won and the Supreme Court ruled that in a phone booth, “like a home, and unlike a field, a person has a constitutionally protected reasonable expectation of privacy.” On the flip side, the justices held that “what a person knowingly exposes to the public, even in his own home or office, is not a subject of Fourth Amendment protection.”

But we are still protected against dragnets (dum du dum dum)—the use of cameras or other surveillance to track collectively where everyone goes and what they do. Even in public, where you have no reasonable expectation of privacy, law enforcement can’t record everything in hope that someone commits a crime. The USA Patriot Act weakened some of these protections, but the 2015 USA Freedom Act fixed that.

There’s added hysteria around the potential bias in facial recognition’s mistakes.