Saturday , November 28 2020
Home / Cullen Roche: Pragmatic Capitalism / Three Things I Think I Think – Grossly Rich Edition

Three Things I Think I Think – Grossly Rich Edition

Summary:
Here are some things I think I am thinking about: 1 – Rich People Being Gross. Do you remember that episode of the Sopranos when Tony sends a boat over to a neighbor’s house and blasts Dean Martin music to annoy him? This is, you know, the kind of stuff you only see in TV shows. Oh, but this is 2020 and anything goes this year so it’s no surprise that this is actually happening. According to the LA Times, former “bond king” Bill Gross has been blasting the Gilligan’s Island theme song towards his neighbor’s house. The two have a long standing dispute over a million dollar sculpture that Gross purchased. It apparently impedes his neighbor’s view. The choice of song is interesting. Gilligan’s Island was a story about, among others, a wealthy man who was stranded on a desert island. This

Topics:
Cullen Roche considers the following as important:

This could be interesting, too:

Cullen Roche writes The Other Side of the Trade

Cullen Roche writes The Markets and the Economy Don’t Care About Your Politics

Cullen Roche writes What the Heck Just Happened?

Cullen Roche writes Three Things I Think I Think – Cycles, Hunting Biden and Hacking Life

Here are some things I think I am thinking about:

1 – Rich People Being Gross. Do you remember that episode of the Sopranos when Tony sends a boat over to a neighbor’s house and blasts Dean Martin music to annoy him? This is, you know, the kind of stuff you only see in TV shows. Oh, but this is 2020 and anything goes this year so it’s no surprise that this is actually happening.

According to the LA Times, former “bond king” Bill Gross has been blasting the Gilligan’s Island theme song towards his neighbor’s house. The two have a long standing dispute over a million dollar sculpture that Gross purchased. It apparently impedes his neighbor’s view.

The choice of song is interesting. Gilligan’s Island was a story about, among others, a wealthy man who was stranded on a desert island. This sort of stuff makes me better understand why society increasingly wants to strand all these billionaires on an island together. Maybe Bill Gross could use a 3 hour tour?

2 – Will Stocks Crash if Biden Wins? Donald Trump has repeatedly stated that the stock market will crash if Biden wins. Now, we all know polls are flawed at best, but Biden has one of the largest national polling leads in pre-election history so it’s looking increasingly likely that he’ll win. My general view is that the President does not really matter for the stock market. There are just too many other factors that matter for the stock market and the President doesn’t have enough power to move the dial in a meaningful way. So, no, Obama didn’t make stocks boom and neither did Donald Trump. Likewise, Joe Biden won’t crash the stock market. BUT, there are some near-term concerns in my opinion. Among them:

  1. An increase in capital gains rates.
  2. An increase in corporate tax rates.

If Biden wins AND the Democrats sweep you might see an increasing backlash against the Bill Gross’s of the world. That is, taxes on cap gains will likely go up and wealthy corporations will pay more taxes.¹ So, it’s not unreasonable to expect the stock market to price this in before the new tax year. Then again, an all Democratic government is bullish in the long-run because it means the government is likely to be pretty loose with the purse strings. The Dems have been very vocal about their desire for huge spending programs like an expanded ACA, infrastructure and some sort of Green New Deal. That would mean bigger deficits and larger government contributions to corporate profits. So, cause for short-term pessimism, yes, cause for long-term optimism, yes.

3 – Houseflation? One of the more interesting dynamics I learned during my housing build was the interconnectedness of building supplies. That is, you pour your foundation to certain sizes because your lumber comes in certain sizes which is framed in specific ways to match insulation sizes, drywall sizes, sheathing sizes, etc. Every piece of supply in a home is interconnected to the pieces you’ll build later. So, when your framing is off by 1 inch you find out later that hanging your drywall becomes a problem because you don’t have anything to screw it into.²

Housing isn’t just interconnected at the micro level, however. It is interconneted to the whole economy at the macro level. When you build a house you realize that so much of the economy is dependent on stability in these goods that go into a home because they all comprise such a large part of the economy.

Housing has been one of the more interesting stories during COVID. If you’d told me that the economy would collapse 30% in the first half of the year I would have guessed that housing prices also collapsed. But no, COVID was a strange beast that actually added to the robustness in housing in large part because people are maintaining the place where they’re cooped up all day. So, for instance, you had a 100% surge in lumber prices over the Summer and a 50% decline since. But here’s the interesting thing – when I go to Home Depot these days (which luckily, isn’t nearly as often as it used to be) I always walk by the lumber section to check out a standard whitewood 2X4. The price of a 2X4 in San Diego was about $3.33 in March. It jumped to $6.25 over the Summer and has since fallen to $5.85.

To be honest, I’m not totally sure what’s going on here. Surely there is some lag between wholesale lumber prices and retail prices. But I also wonder how much pricing power a place like Home Depot has during COVID. Sure, wholesale lumber prices are up 20% since March (down 50% since Summer), but retail lumber prices are down just ~6% over the same period. Makes me wonder if there isn’t a bit of houseflation from all of this?

¹ – I’ve been pretty vocal over the years about higher cap gains taxes. I think it makes a lot of sense to tax cap gains more like regular income. Or, more specifically, make the long-term rate truly long-term (something like 5 years). That way you better align real investment (not stock market trading) with a long-term view. I’ve also been vocal about the silliness of corporate taxes. These taxes are paid by workers, consumers and shareholders

² – If you’re feeling nerdy you might be interested in this article about the history of lumber in the USA and why a 2X4 is really a 1.5X3.5. 

NB – I was pretty optimistic about the likely economic outcomes in April and I usually try to find the optimistic side of the coin, but as we head into the colder Winter months when corona viruses thrive, the body responds poorly and people are clustered indoors, I find it hard to think that the next 4-5 months aren’t going to be difficult. Even with a vaccine likely coming in the next 6 months the number that haunts me is 10%. That’s the total percentage of people who have had COVID in the 9 months that it’s been spreading. That means a huge part of the population is still susceptible and that this supposed herd immunity figure is very, very far away.

Cullen Roche
Former mail delivery boy turned multi-asset investment manager, author, Ironman & chicken farmer. Probably should have stayed with mail delivery....

Leave a Reply

Your email address will not be published. Required fields are marked *