100417 SVC Transcript
The Bauman Letter Weekly October 4, 2017 Transcript Good morning, everyone, and welcome to this week’s Bauman Letter Weekly podcast! I’m going to answer a couple questions today regarding the recently proposed taxreform framework, encryption and the Smart Money trading system. Let’s start out by looking at the proposed “tax reform” from the Trump administration and Congress. A reader wrote in and said: I’m interested in your thoughts regarding the Trump administration tax reform framework for fixing America’s broken tax code, which was released on September 27, 2017. I look forward to hearing your insights on this. Thank you for providing outstanding information. Well, thank you for enjoying the information. Let me start by saying that I think calling this “tax reform” is fundamentally misleading. In today’s political world, the standard modus operandi is to try to use words to make people feel differently about the things that they’re doing. It’s called spin, and it’s quite a scientific endeavor nowadays. People are very attached to certain words that make you feel better, and “reform” is one of them. The idea of tax reform, to me, would be something that addresses the fundamental problems of the tax code. Those include, in my view: 1. The tax code is fundamentally unfair. It allows some people to pay less tax relative to their income than others. 2. It is riddled with complications and loopholes that make it by far the most confusing and complex tax system to comply with in the world. 3. It doesn’t raise enough money to pay for all the things that Americans have indicated that they want; that includes Social Security, Medicare, strong national defense and so on. If people want those things — and vast majorities of people on both sides of the political aisle say they do — then we have to raise enough money to pay for them. 1
It does no good to have a tax system that doesn’t bring in enough money to pay for what Americans say they want. On all three grounds, this tax-reform proposal fails, because it does not reform the inequalities or unfairness in the system. In fact, it deepens these issues. I think it’s going to involve very substantial cuts in tax income from the very top of the income ladder. It’s going to increase taxes on a number of people; probably 30% of middle-class households will see an increase in their taxes. (By my estimates, I’m one of the ones who will see an increase in my taxes.) It will also have uncertain effects on people at the very bottom of the ladder. One of the most difficult problems that the tax-reform proposal raises is that it proposes to change the way that taxation on pass-through entities, like limited liability companies, happens. The problem with that is, as I discussed in my recent Bauman Unplugged podcast, that it will lead people to try to change their working situation so that they can appear to be independent contractors and, therefore, pay as little tax as possible. The proposal is to reduce taxes on these pass-through entities down to 25%. That’s one problem. But another problem is that President Trump and most of the members of his cabinet, who are fantastically wealthy people, own limited liability companies and S-corporations and other pass-through entities. As a result, their tax bills would drop by tens or even hundreds of millions of dollars because of this proposal. So, although they talk about it being something that’s for the sake of small business, honestly, don’t believe that. This “tax reform” is about cutting taxes of for people at the very top. On the question of complexity: Yes, this proposal does seem like it might reduce complexity to a certain extent. It promises to reduce the number of tax brackets and eliminate some tax deductions. But the problem is that it’s a partial and very piecemeal change, and it doesn’t change all the calculations that you have to do to figure out whether you are eligible for this and eligible for that. So, it will marginally simplify the tax code. But, honestly, that’s not really going to change very much. On the last question, the question of whether this tax reform raises enough money to pay for what Americans say they want, it absolutely does not. It’s going to blow 2
a hole in our budget that makes the things the Democrats have done in the past look like peanuts. The most reputable estimate that I’ve seen from a nonpartisan think tank says that it could add $5.5 trillion to the deficit over the next 10 years. It could also take our national debt as a proportion of GDP to over 100% … actually over 110%. Those are things that the Republican Party has said over and over again that they consider to be the most important issues in the world … that we have to get the deficit under control. Now that they’re in power, they don’t seem to care at all, and I think that this is a terrible thing. Now we see why we’re in deficits. We’re in deficits because neither party has any serious intentions of actually controlling them. Going back to the question of what we say we want as Americans: It’s clear to me that from every poll I’ve ever read that most Americans, whether they are Republican, Democrat, independent or whatever, are in favor of strengthening Social Security and Medicare and other social safety-net issues. They don’t favor slashing these programs. The problem with this is that, by blowing a hole in the budget, I can guarantee what’s going to happen next. If they pass this tax reform, and if we go deeper into deficit, the first thing they’ll do when the Democrats are back in power is argue that we must slash Social Security and Medicare and other things to pay for this. Of course, we won’t slash military spending, because we never do. But the bottom line is that this is part and parcel of the long-term trend in Washington, where the Republican Party, in particular, only cares about deficits for political reasons when they’re out of power and doesn’t care about them when they’re in power. So, I think it’s fundamentally irresponsible. It would be hugely dangerous to the country to allow something like this to pass, not just because of the increase in the debt, but for the precedent that it would set. It would show the rest of the world that we’re not serious about managing our financial affairs. I think this plan could actually lead to a collapse in the dollar. Think about it. If the rest of the world sees the United States government being this irresponsible, they’re not going to take it as a sign of good management or faith, and the dollar is our barometer of how much faith the rest of the world places in us. So, no, I don’t think it’s a good thing at all. I would encourage you to pay attention to this debate, and don’t be seduced by the idea of a tax cut. If you are middle to 3
upper-middle class, you have at least a one in three chance that your taxes will go up. The second question is: In a recent Bauman Letter, you discussed a number of encryption schemes and how companies like Google and Microsoft allow you to utilize encryption for individual security. I’d like to hear about the possibilities that some of the services may actually be unsecure because of back doors that may have been put into some of the encryption schemes from pressure from the National Security Agency and similar government agencies. This is a very significant problem, and I think that nobody really knows whether or not there are back doors in some of these key encryption tools. My guess is that the likelihood that companies like Microsoft, for example, might have allowed a back door to the government for their built-in encryption systems in Windows is probably significantly better than 50%. You know, it’s very difficult for a large corporation like Microsoft to resist the pressure they get from the government, particularly when you have an unstable international situation with threats of terrorism. It’s very hard to say, “No, we’re not going to do this.” And the reason why is because this is a huge company. If the government wanted to, they could make life very difficult for companies like Microsoft, or even Google. I think the pressure on them to cooperate is pretty high. So, here’s my advice: I think it’s fine to use encryption software like the stuff that Microsoft has built into Windows for everyday personal protection. But, for anything that’s really sensitive, where you think there could actually be some kind of challenge or issue in relation to government, you need to use open-source encryption software. Open-source means that the code for the software is available for anybody to look at. It’s not proprietary. It’s not hidden like Microsoft’s encryption protocols are, because it’s not proprietary software. What’s so great about open source software is that people can look at it and see if there are back doors built in. If there are back doors built in, then, obviously, you don’t use it. So my advice, as I’ve written before, is that the key thing is to make sure that you are using file encryption and/or disk encryption that is produced by a company that uses open-source encryption protocols. I think that’s the key thing. In the June Bauman Letter, and in several articles I’ve written for the Sovereign Investor 4
Daily, I’ve given examples of different companies that produce open-source software for encryption. The next question is from a reader who says: What was the internet security firm you recommended for home network security? I think it was from Florida. Yes, there is indeed a company that I work with that’s run by my good friend Brad Deflin. The company’s name is Total Digital Security. You’ll find them on the internet. Essentially, Brad and his team have taken the techniques, technologies and applications that are typically used for large companies and repackaged them to make them accessible and affordable to homeowners, families and small businesses. They provide the same kind of a remote 24/7 monitoring for security breaches that big companies get. (Although I would suspect that it’s much better than the security protocols in place at Equifax, since they didn’t seem to be able to protect our Social Security data.) Brad’s company is a very good one. I am particularly impressed with their ability to provide 24/7 support, and I would encourage you to give them a try. Last question: Do you recommend trading options with your Smart Money service that trades ETFs? It is cheaper to trade options. Can you give some guidance? No, we do not trade options in Smart Money. Options are a different animal. They’re a different way of making money from our Smart Money system. Smart Money is based on algorithmic trading on a monthly rotational basis where you’re actually buying positions in the exchange-traded funds. Now, of course, you can buy an option against an exchange-traded fund for very little, and the potential is that you make a great deal of money relative to the investment. But it’s a highly risky approach to investing. It’s one that requires constant and careful monitoring. There are some very good option services here at Banyan Hill. My colleagues Chad Shoop and Michael Carr, for example, are both options traders. I firmly believe that the goal of something like Smart Money or Alpha Stock Alert is to grow your money consistently over time, to consistently beat the market and to hedge the market appropriately. It’s not to play short-term income gains. 5
So the answer to the question is definitely no. We don’t use options in the Smart Money service. Well, that’s all for me for this week. This is Ted Bauman, and I will talk to you again next week. Have a good one!
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It does no good to have a tax system that doesn’t bring in enough money to pay for what Americans say they want. On all three grounds, this tax-reform proposal fails, because it does not reform the inequalities or unfairness in the system. In fact, it deepens these issues. I think it’s going to involve very substantial cuts in tax income from the very top of the income ladder. It’s going to increase taxes on a number of people; probably 30% of middle-class households will see an increase in their taxes. (By my estimates, I’m one of the ones who will see an increase in my taxes.) It will also have uncertain effects on people at the very bottom of the ladder. One of the most difficult problems that the tax-reform proposal raises is that it proposes to change the way that taxation on pass-through entities, like limited liability companies, happens. The problem with that is, as I discussed in my recent Bauman Unplugged podcast, that it will lead people to try to change their working situation so that they can appear to be independent contractors and, therefore, pay as little tax as possible. The proposal is to reduce taxes on these pass-through entities down to 25%. That’s one problem. But another problem is that President Trump and most of the members of his cabinet, who are fantastically wealthy people, own limited liability companies and S-corporations and other pass-through entities. As a result, their tax bills would drop by tens or even hundreds of millions of dollars because of this proposal. So, although they talk about it being something that’s for the sake of small business, honestly, don’t believe that. This “tax reform” is about cutting taxes of for people at the very top. On the question of complexity: Yes, this proposal does seem like it might reduce complexity to a certain extent. It promises to reduce the number of tax brackets and eliminate some tax deductions. But the problem is that it’s a partial and very piecemeal change, and it doesn’t change all the calculations that you have to do to figure out whether you are eligible for this and eligible for that. So, it will marginally simplify the tax code. But, honestly, that’s not really going to change very much. On the last question, the question of whether this tax reform raises enough money to pay for what Americans say they want, it absolutely does not. It’s going to blow 2
a hole in our budget that makes the things the Democrats have done in the past look like peanuts. The most reputable estimate that I’ve seen from a nonpartisan think tank says that it could add $5.5 trillion to the deficit over the next 10 years. It could also take our national debt as a proportion of GDP to over 100% … actually over 110%. Those are things that the Republican Party has said over and over again that they consider to be the most important issues in the world … that we have to get the deficit under control. Now that they’re in power, they don’t seem to care at all, and I think that this is a terrible thing. Now we see why we’re in deficits. We’re in deficits because neither party has any serious intentions of actually controlling them. Going back to the question of what we say we want as Americans: It’s clear to me that from every poll I’ve ever read that most Americans, whether they are Republican, Democrat, independent or whatever, are in favor of strengthening Social Security and Medicare and other social safety-net issues. They don’t favor slashing these programs. The problem with this is that, by blowing a hole in the budget, I can guarantee what’s going to happen next. If they pass this tax reform, and if we go deeper into deficit, the first thing they’ll do when the Democrats are back in power is argue that we must slash Social Security and Medicare and other things to pay for this. Of course, we won’t slash military spending, because we never do. But the bottom line is that this is part and parcel of the long-term trend in Washington, where the Republican Party, in particular, only cares about deficits for political reasons when they’re out of power and doesn’t care about them when they’re in power. So, I think it’s fundamentally irresponsible. It would be hugely dangerous to the country to allow something like this to pass, not just because of the increase in the debt, but for the precedent that it would set. It would show the rest of the world that we’re not serious about managing our financial affairs. I think this plan could actually lead to a collapse in the dollar. Think about it. If the rest of the world sees the United States government being this irresponsible, they’re not going to take it as a sign of good management or faith, and the dollar is our barometer of how much faith the rest of the world places in us. So, no, I don’t think it’s a good thing at all. I would encourage you to pay attention to this debate, and don’t be seduced by the idea of a tax cut. If you are middle to 3
upper-middle class, you have at least a one in three chance that your taxes will go up. The second question is: In a recent Bauman Letter, you discussed a number of encryption schemes and how companies like Google and Microsoft allow you to utilize encryption for individual security. I’d like to hear about the possibilities that some of the services may actually be unsecure because of back doors that may have been put into some of the encryption schemes from pressure from the National Security Agency and similar government agencies. This is a very significant problem, and I think that nobody really knows whether or not there are back doors in some of these key encryption tools. My guess is that the likelihood that companies like Microsoft, for example, might have allowed a back door to the government for their built-in encryption systems in Windows is probably significantly better than 50%. You know, it’s very difficult for a large corporation like Microsoft to resist the pressure they get from the government, particularly when you have an unstable international situation with threats of terrorism. It’s very hard to say, “No, we’re not going to do this.” And the reason why is because this is a huge company. If the government wanted to, they could make life very difficult for companies like Microsoft, or even Google. I think the pressure on them to cooperate is pretty high. So, here’s my advice: I think it’s fine to use encryption software like the stuff that Microsoft has built into Windows for everyday personal protection. But, for anything that’s really sensitive, where you think there could actually be some kind of challenge or issue in relation to government, you need to use open-source encryption software. Open-source means that the code for the software is available for anybody to look at. It’s not proprietary. It’s not hidden like Microsoft’s encryption protocols are, because it’s not proprietary software. What’s so great about open source software is that people can look at it and see if there are back doors built in. If there are back doors built in, then, obviously, you don’t use it. So my advice, as I’ve written before, is that the key thing is to make sure that you are using file encryption and/or disk encryption that is produced by a company that uses open-source encryption protocols. I think that’s the key thing. In the June Bauman Letter, and in several articles I’ve written for the Sovereign Investor 4
Daily, I’ve given examples of different companies that produce open-source software for encryption. The next question is from a reader who says: What was the internet security firm you recommended for home network security? I think it was from Florida. Yes, there is indeed a company that I work with that’s run by my good friend Brad Deflin. The company’s name is Total Digital Security. You’ll find them on the internet. Essentially, Brad and his team have taken the techniques, technologies and applications that are typically used for large companies and repackaged them to make them accessible and affordable to homeowners, families and small businesses. They provide the same kind of a remote 24/7 monitoring for security breaches that big companies get. (Although I would suspect that it’s much better than the security protocols in place at Equifax, since they didn’t seem to be able to protect our Social Security data.) Brad’s company is a very good one. I am particularly impressed with their ability to provide 24/7 support, and I would encourage you to give them a try. Last question: Do you recommend trading options with your Smart Money service that trades ETFs? It is cheaper to trade options. Can you give some guidance? No, we do not trade options in Smart Money. Options are a different animal. They’re a different way of making money from our Smart Money system. Smart Money is based on algorithmic trading on a monthly rotational basis where you’re actually buying positions in the exchange-traded funds. Now, of course, you can buy an option against an exchange-traded fund for very little, and the potential is that you make a great deal of money relative to the investment. But it’s a highly risky approach to investing. It’s one that requires constant and careful monitoring. There are some very good option services here at Banyan Hill. My colleagues Chad Shoop and Michael Carr, for example, are both options traders. I firmly believe that the goal of something like Smart Money or Alpha Stock Alert is to grow your money consistently over time, to consistently beat the market and to hedge the market appropriately. It’s not to play short-term income gains. 5
So the answer to the question is definitely no. We don’t use options in the Smart Money service. Well, that’s all for me for this week. This is Ted Bauman, and I will talk to you again next week. Have a good one!
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