The latest meme stock: DJT

During the meteoric rise of BitCoin in 2017, I wrote the following:

(Originally published November 28, 2017)

Gold Bitcoin Beanie Baby Bulbs

So, yeah, I’m not the first person to point out the parallels between the recent Bitcoin frenzy and the Dutch tulip mania of the 1630s. Nor, I suspect, am I the first to mention that Bitcoin’s meteoric rise bears shocking resemblance to:

I wasn’t around for the first of those, but I saw the others happen. I even lost a large part of my meager savings in the 1980 gold frenzy. Every one of these events saw people betting their futures on a “sure thing” that “can’t lose.” They were putting their entire life savings into it, borrowing heavily to gamble on a speculative market that seemed like it would just keep going up. And in every case, the bubble burst, wiping out savings in a very short period.

Those bubbles burst because investors flocking to the “can’t lose” scheme drove the prices to levels that were unsustainable. Early investors get in, ride the rise for a while, and then sell to new investors who want the same kind of trip. It becomes a positive feedback loop, until the price becomes too high to attract new investors. One day, somebody wants to get off and discovers that nobody wants to pay what he’s asking for his position. He decides to sell at a loss, at which point everybody else starts to panic and starts unloading as fast as they can, hoping to get out with something.

I don’t know enough about Bitcoin and other crypto currencies to say what, if anything, they’re actually worth, or if the idea of crypto currency has any long-term merit. But the the meteoric increase in Bitcoin prices over the last year, from $750 to $10,000, brings to mind those parallels, and a little bit more research reveals all the signs of a speculative bubble. The number of companies specializing in crypto currency trading has grown tremendously over the past year. There are “network marketing” schemes that pay you for “helping” others get in on the deal. New crypto currencies are popping up. People are borrowing money to invest. People are posting cheerleader messages (“Rah, rah Bitcoin!”) on social media. I’m seeing more hockey stick charts every day. “Look what it’s done in just the last three months!”

There may indeed be some lasting value to Bitcoin and other crypto currencies, just as there was lasting value in Beanie Babies. I saw some at a yard sale last week, going for about 50 cents each.

Proving once again that people looking for a quick buck never pay attention to past mistakes, we have invented “meme stocks,” the most memorable of which was GameStop. But I think the newest one, the social media company called Trump Media and Technology Group, will eclipse even that. This is the company that supporters of Donald Trump created after he lost the 2020 election and got kicked off of Facebook and Twitter for his actions. The new site, Truth Social, promising “no censorship,” was designed to prominently feature the insane ramblings of the Bumbling Buffoon, and users who contradicted his incoherent missives or said negative things about him were banned from the site.

The idea was always to create the site, create a shell company (a SPAC — special purpose acquisition company) to acquire it and take it public. The site of course had some trouble getting started and even today is mostly a joke. But they succeeded, after a lot of investigation by the SEC and others, in taking the company public. At a ridiculously inflated valuation and with a Trump-typical ticker symbol: DJT. I think the last public company the Buffoon in Chief formed was called TRMP. No surprise, it failed. But not before Trump bilked his investors out of their cash. I’m surprised he managed to escape that one without any criminal penalties.

Anyway, an “investment” in this new company is nothing more than a gamble. And not a very smart one at that. The company lost $49 million in the first nine months of 2023. Its total revenue–every dollar it took in–was $3.4 million. And yet the company is valued, based on the price of its stock and the number of shares outstanding, at something like $7 billion!

Yes, that’s right: the company’s market cap is 2,000 times its revenue, and the company is bleeding cash. Furthermore, the single largest shareholder is the Bumbling Buffoon himself, a person who has a history of taking “investors'” money, siphoning off enough to repay his own contribution, and running the company into the ground. At current prices, Trump stands to gain something more than $5 billion if the company lasts long enough and the stock price remains at its ridiculously inflated valuation. He can’t cash in immediately, though: there’s a holding period on his stock.

You couldn’t convince me to invest a single cent in any venture that’s associated in any way with Donald Trump, and even if the Prevaricator in Chief weren’t involved you couldn’t convince me to invest in a company that’s operating at a loss and is valued at 2,000 times its total revenue. In a rational world, the company’s stock would be trading at just that: pennies per share. What a scam.

Credit scoring is a scam

I do a quick check of my credit score approximately on a monthly basis. I’m not sure exactly why I do that, considering that I’m comfortable financially, my life is pretty much the same it’s been for some time, and I don’t foresee any major changes.

I have one credit card, and a five year auto loan that has about a year and a half left. That is the extent of my outstanding credit. My monthly purchases on the credit card fall within a very narrow range and I pay it off every month. The auto loan is current and I’ve never been late with a payment.

Given the above, one would expect my credit score to remain the same, with a few minor fluctuations on a month-to-month basis depending on how much I charge on my credit card. And it does, mostly. But in the last month my credit score dropped 32 points (almost 4%), and I have no idea why. There have been no recent inquiries, no new accounts, no missed or late payments, and the outstanding credit card balance is within the normal range of what I charge on a monthly basis. In short, nothing has changed.

At least, nothing on my side of the equation has changed. Whether something has changed in the way the Vantage credit score is computed is an open question. It’s an open question because only the people computing the credit score know how it works. We’re being graded on hidden criteria. The scoring system is proprietary. Most of us who are affected by it have no way of knowing how our scores are computed or how our individual financial decisions will affect that score. And yet, credit score is a huge determining factor in one’s ability to get a good rate on a house or car loan–or to obtain a loan at all.

Sure, we know some general rules: don’t have “too much” available credit or use “too much” of it. Don’t have “too many” inquiries or open “too many” new accounts. But be sure to have “enough” available credit and be sure to use “the right percentage” of it to show that you know how to handle the responsibility. And be sure to have a first mortgage because that shows your ability and willingness to handle long-term credit commitments.

You paid off your home mortgage? Shame on you! We’re gonna subtract points because “you don’t have enough experience with a first mortgage.” That’s right, paying that 30-year loan off in 20 years is a bad thing.

There are general guidelines (Vantage, for example, says that I should have at least $50,000 in available credit and using up to 10% of it is “Excellent”, which is ridiculous), but there’s no hard detail that says exactly what the grading criteria are and how they interact. As far as consumers are concerned, a bunch of numbers go into a black box and the MagicScore™ comes out. We don’t get to know how it all works, and apparently we’re not even told if the innards change and suddenly we’re being graded completely differently.

In a just world, we’d at least know how the score used to decide whether we get a loan, and at what rate, is computed. I realize that credit score isn’t the only determining factor, but it can be a deal killer (i.e. everything else looks good, but the MagicScore™ is off).

I’ve long held that credit scoring, as currently practiced in the United States, is essentially arbitrary. Incidents like my score’s recent drop, with no indication of why it dropped, strengthens that perception. The companies that market the scoring systems (Vantage is a joint effort of the three major credit bureaus, FICO is a product of the Fair Isaac Corporation) and the financial institutions that use them, seem to have absolutely no desire or incentive to tell us how the scoring works. And consumers have nowhere else to go: buy into the credit score scam or go visit Guido.

Out of control

The President unveiled his new budget today: 3.83 trillion dollars. The numbers fairly boggle the mind. The total budget works out to just about $12,500 per person in the United States, or about $47,500 per family. Or $34,800 for each of the 110 million taxpayers in the country. Of course, 41% (about $1.56 trillion) is deficit spending, meaning that 41 cents of every dollar the government spends in fiscal year 2011 will be paid for (supposedly) in the future. But with an existing debt of $12.5 trillion, this year’s budget will push the accumulated national debt past $14 trillion: about the same as the U.S. Gross Domestic Product. Interest on the debt alone amounts to about $175 billion per year, or about $2,200 per family, 25% of which ends up in the treasuries of other countries that hold U.S. debt securities.

This year, total government debt will exceed total income for the entire country. The White House budget office says that debt will remain at that level through 2019 (that is, debt will roughly equal GDP), but those projections rely on GDP growing faster than most analysts say it can. At $14 trillion, national debt is almost 20% of all household and business assets in the entire country. If government spending continues at this rate, the accumulated federal debt alone will exceed total assets in 20 years or so. That doesn’t include the approximately $40 trillion (currently) in debt owed by local and state governments, corporations, and individuals.

I won’t try to lay the blame for this situation on the President. Not on the current President, and not on the former Presidents. Undoubtedly, they all have contributed to it by proposing budgets that fund pet projects or further their own agendas, but that’s to be expected. No, the real blame lies with Congress for approving such outrageous spending over the decades, and with us–the American voter and taxpayer–for continuing to allow it.

The President on Wednesday announced a proposed spending freeze on domestic discretionary spending as a way of trying to get the deficit under control. As laudable as that is (any freeze or decrease in government spending gets my vote), it’s pretty difficult to take it seriously. He’s talking about a projected “savings” of about $250 billion over the next 10 years. That’s less than 3% of the total debt expected to accumulate over that period, or about 1% of total spending. And it’s highly unlikely that Congress will approve even that miniscule spending reduction.

The President is in a tough spot because there are programs he positively cannot touch. Even if he were willing to forego re-election, there’s no way Congress would approve cuts in those programs. Doing so is tantamount to political suicide. What programs? I’m so glad you asked.

The following numbers are from the FY 2010 budget

  • Social Security is 19.63% of the budget. 13% of the people in this country are over 65 years of age, and a very large percentage of them vote. Need I say more?
  • Medicare is 12.79% of the budget. See above.
  • Unemployment, welfare, and other “mandatory spending” is 16.13% of the budget. Almost untouchable, regardless of which party controls Congress.
  • Medicaid and associated programs: 8.19%. Ditto.
  • Interest on the national debt: 4.63%.  Can’t have us defaulting on our debt.

When you throw in the Department of Defense share of 18.74%, the total comes to 80.11% of the budget that the President has almost no control over. The budget is 20% over revenue before the President even gets to attempt spending reduction. Think of that: if you cut out military and all government spending other than the programs I mentioned above, we’d still have a budget deficit.

This is nothing new, by the way. I remember the same math being presented to me in 1981 or 1982. If anything, the President has fewer options today than Reagan did back then.

I see three ways out of this mess: Reduce spending, raise taxes, or somehow increase GDP by about 50% so that current tax rates will cover the deficit. In the current climate, spending reductions and tax increases are political suicide, and a 50% increase in GDP is impossible. Tax increases are less suicidal in most cases, and they have the “benefit” (in political terms) of pissing off fewer people, so that’s the route Congress will likely take in an attempt to prevent the inevitable. Even so, there’s no way they can make up a 40% budget deficit (or even a 20% deficit) with tax increases.

No. I guess I don’t see any way out of this mess. Our spending is out of control and there isn’t anybody in a position to slow or stop it.  It’s a frightening thought.

Budget neutral?

In a speech before a joint session of Congress in September, the President said that his “preferred” package for health care finance reform legislation would carry a price tag of around $900 billion. He also said that he will not sign a bill that raises deficits.

On October 29, the Congressional Budget Office released a preliminary analysis of the Affordable Health Care for America Act (H.R. 3962). According to the summary in that analysis, “enacting H.R. 3962 would result in a net reduction in federal budget deficits of $104 billion over the 2010-2019 period.” Sounds good, right? Let’s take a look.

On page 2, under Estimated Bugetary Impact of H.R. 3962:

According to CBO and JCT’s assessment, enacting H.R. 3962 would result in a net reduction in federal budget deficits of $104 billion over the 2010-2019 period (see Table 1). In the subsequent decade, the collective effect of its provisions would probably be slight reductions in federal budget deficits. Those estimates are all subject to substantial uncertainty.
(Emphasis is mine)

That section goes on to summarize the costs and benefits of the bill. Total costs are estimated at $1,055 billion, partially offset “by $167 billion in collections of penalties paid by individuals and employers.” (Penalties for not maintaining the mandated health insurance coverage.) The projected net cost is $894 billion. So how do we get from a net cost of $894 billion to a surplus of $104 billion? “[S]pending changes, which the CBO estimates would save $426 billion, and receipts resulting from the income tax surcharge on high-income individuals and other provisions, which JCT and CBO estimate would increase federal revenues by $572 billion over that period.”

So the President and Congress weren’t entirely truthful when they said that they’re going to pay for this program by cutting waste, fraud, and abuse. They’re going to do what politicians always do: raise taxes and hope for the best. Oh, and they’re going to force employers to either offer health insurance coverage or pay a penalty equal to eight percent of their payroll. What used to be an incentive–an added benefit of employment–has now become a federal mandate. If employers were smart they’d just pay the 8% penalty. That has to be less expensive than the health insurance plans most of them provide.

What the press, the White House, and members of Congress won’t tell you about is what else the CBO report says. For example, under Effect of H.R. 3962 on Discretionary Costs, the report says:

CBO has not completed a comprehensive estimate of the discretionary costs that would be associated with H.R. 3962. Total costs would include those arising from the effects of H.R. 3962 on a variety of federal programs and agencies as well as from a number of new and existing programs subject to future appropriations.

In other words, there are hidden costs. What are they? The report doesn’t say in detail, but it gives a few examples:

  • $5 to $10 billion to the Internal Revenue Service for “implementing the eligibility determination, documentation, and verification processes for subsidies.
  • $5 to $10 billion to Health and Human Services for “implementing the changes in Medicare, Medicaid, and CHIP as well as certain reforms to the private insurance market.
  • “Costs of a number of grant programs and other changes in Divisions C and D of the legislation. CBO has not completed a review of those provisions.”
  • And the big one:
    “As noted in the previous section and in Table 1, funding for the proposed Public Health Investment Fund and Prevention and Wellness Trust would also be subject to future appropriation action. The bill would authorize appropriations totaling about $34 billion for those purposes (of which approximately $33 billion would be spent over the next 10 years). The Committee on the Budget has directed CBO to count such spending as direct spending for purposes of budget scorekeeping in the House of Representatives.”

I like that last sentence. The Committee on the Budget told CBO not to count $34 billion of costs associated with this legislation. At least the CBO is up front about it. It’d be interesting to ask the Committee members about that one, wouldn’t it?

Anyway, if you add up those costs, which the CBO identified as “major”, but not all inclusive, you end up with an additional $44 to $54 billion, plus whatever those grant programs would cost. That $104 billion “savings” is now $50 billion. Even less when you include the grant programs and other costs that this preliminary report doesn’t specifically mention.

Oh, and then there are Important Caveats Regarding This Preliminary Analysis. The first item is particularly interesting. The report is based on preliminary legislation rather than the bill as actually introduced. Also, “the analysis does not reflect all of the provisions of the bill.”

In other words, there are MORE hidden costs.

The final section, estimating effects of the legislation beyond the first ten years, says that it will decrease deficits slightly. But it also has a few caveats of its own:

These longer-term projections assume that the provisions of H.R. 3962 are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation. For example, the SGR mechanism governing Medicare’s payments to physicians has frequently been modified to avoid reductions in those payments, and legislation to do so again is currently under consideration in the Congress. The bill would put into effect (or leave in effect) a number of procedures that might be difficult to maintain over a long period of time. It would leave in place the 21 percent reduction in the payment rates for physicians currently scheduled for 2010. At the same time, the bill includes a number of provisions that would constrain payment rates for other providers of Medicare services. In particular, increases in payment rates for many providers would be held below the rate of inflation (in expectation of ongoing productivity improvements in the delivery of health care). Based on the extrapolation described above, CBO expects that Medicare spending under the bill would increase at an average annual rate of roughly 6 percent during the next two decades-well below the roughly 8 percent annual growth rate of the past two decades, despite a growing number of Medicare beneficiaries as the baby-boom generation retires.

The long-term budgetary impact of H.R. 3962 could be quite different if those provisions generating savings were ultimately changed or not fully implemented. If those changes arose from future legislation, CBO would estimate their costs when that legislation was being considered by the Congress.

In other words, any projected savings is wishful thinking.

Honestly, you should read the report. It’s only 27 pages long, and about half of those are tables of numbers. Just reading the report without the numbers should be enough to convince you that this bill, like all the others, is a budget buster.

And, of course, that analysis was based on the bill as introduced on October 29. It was hailed as an “894 billion dollar” package. Today, the press is saying a “1.2 trillion dollar” package. I’m unable today to find any information about the additional $330 billion or how it’ll be offset by revenue so that the legislation remains budget neutral.

Not to be outdone, the Republicans published their own plan for health care finance reform. It has no chance of being passed, which is a good thing. The CBO estimate says that it will cover fewer people and will save $68 billion over 10 years. In other words, it’s just a way for Republicans to say, “See? We have a plan!”

Nobody in Congress has the courage to stand up and say, “Stop!” Where’s the voice of moderation here? Congress will mandate billion dollar multi-year environmental impact studies before doing something trivial, but now wants to push through, without sufficient study, legislation that will have a huge impact on every citizen in the country. Why? Because they can and because they think it will get them votes. For all their pronouncements about it being “good for the country” and “the right thing to do,” that’s all they’re really interested in: re-election. Otherwise they’d be much more concerned about the real costs of what they’re so eager to support.

The President has said publicly that he will not sign (or did he say that he would veto it?) a bill that “adds one penny” to the budget deficit.  It’s probably too much to expect the President to subject any legislation to extensive real world analysis, so I’ll have to be content with the CBO’s final report.  But if, as I suspect, the bill that will be presented for a vote in the House on Saturday turns out to require deficit spending, I will expect the President to keep his word.

Another look at Cash for Clunkers

A few weeks ago I said that Cash for Clunkers is a wreck.  Now that the program has ended, let’s see the results.

The people responsible for Cash for Clunkers are hailing its success.  I’m still having trouble understanding what the goals of the program were beyond a “feel good” measure designed to make people think they’re getting something for nothing from the Obama administration.  By that metric, the program was certainly a success:  people will remember that Uncle Sam helped them buy a car.  Although they might be a little less enthusiastic when they realize that the $4,500 rebate is taxable.

Transportation Secretary Ray LaHood said that U.S. consumers and workers were “the clear winners” under the program:

Manufacturing plants have added shifts and recalled workers. Moribund showrooms were brought back to life and consumers bought fuel-efficient cars that will save them money and improve the environment.

Let’s take a look at those three “successes”:

“Manufacturing plants have added shifts and recalled workers.”  Surprisingly true.  But with car sales almost certainly going back to below pre-handout levels, I can’t imagine that those workers will be fully employed for very long.  Manufacturers will rebuild their inventories, find that people still aren’t buying cars, and then lay off the workers again.

“Moribund showrooms were brought back to life.”  Well, yeah.  But with no more giveaways, those showrooms are going to be empty of customers yet again.

“…consumers bought fuel-efficient cars that will save them money and improve the environment.”  This one is full of specious reasoning.  According to press reports, the most popular new vehicle purchased under the program was the Toyota Corolla.  So let’s use it for a little thought experiment.  But first, let’s construct our “average” purchaser under the program.

We’ll assume that the “average” person drives 40 miles to work and back each day, plus cruising around here and there.  Give him 300 miles per week.  Also assume that his clunker was paid off and it got 10 miles per gallon.  So he’s burning 30 gallons of gas a week.  At $2.50 a gallon (current price in the Austin area), that’s $75 per week in gas.

A new 2010 Toyota Corolla lists for between $15,350 and $20,000.  I’m going to assume that the cars were bought from dealers’ inventories and that there was a relatively even mix of feature packages, so the average price for a car was $17,500.  With the $4,500 rebate, the price of the car is $13,000.  I’m going to ignore other incentives  and tax, title, and license, figuring that they’d likely cancel each other out.  And since the car will be destroyed, there is no trade in value.  By the time everything’s said and done, the buyer owes the dealer $13,000 for the car.

The new Corolla gets an estimated 35 MPG on the highway and 27 MPG in the city.  Let’s be generous and assume that the guy will average 30 MPG in all of his driving.  So at 300 miles per week, he’s burning 10 gallons of gas a week at a cost of $25.  Quite a savings over the $75 per week he was burning in the other car.  So his monthly outlay for gas is now $100 rather than $300.  Such a deal!

Except we forgot to pay for the car.  If he pays that $13,000 balance in cash, it’ll take him 65 months (almost five and a half years) to make up the difference with his $200 per month savings in gas.  If he gets a loan for that $13,000 (figure 5 years at 5.25%), his monthly payment is $250.  So he’s saving $200 per month but it’s costing him $250.  That new car that was supposed to save him money is costing him $50 per month.  Oh, and don’t forget the $1,000 that rebate is going to cost on next year’s tax return.  That’s another five months of “savings”.

Granted, there’s some savings for maintenance because the new car is under warranty.  But that savings will be easily offset by the increased cost of insurance on the new car.  I’ll call it a wash.

I purposely was very generous with the numbers here in an attempt to make it look like a good deal.  I just couldn’t make it work out.  In general, you will not come out ahead by buying a new car in the hope that it will “pay for itself” by saving on gas.  Unless you drive a lot more than 500 miles per week.

The claim that the new cars will “improve the environment” is wishful thinking.  At best, driving the new car will cause less harm to the environment than will continuing to drive the new car.  And that statement is based only on the differences in fuel efficiency between the two cars.  It does not take into account the environmental costs of manufacturing the new car or disposing of the old car.

There’s no doubt that the Cash for Clunkers program stimulated some economic activity.  Whether that was good is another matter entirely.  They say that $2.8 billion in incentives were passed out.  We’ll round that up to $3 billion to include the cost of administration and other expenses that were incurred but they’re not telling us about.  Reports say that almost 700,000 new cars were purchased.  If we figure an average price of $20,000 (lots of Camrys were purchased under the program), that $3 billion resulted in $14 billion in direct economic activity.  But if we assume that the average loan on those cars was $15,000, then there is $10.5 billion in new consumer debt out there.  Not a good thing, in my opinion.

Certainly there are people who benefited from the program:  car dealers and manufacturers got a boost, as did those workers who got recalled to the manufacturing plants.  Companies making auto loans couldn’t be complaining.  But it’s not all roses.  Car salvage yards are grumbling a bit because their margins have been slashed:  apparently dealers are paying less per car to have them hauled off.  And used car sales have plummeted.  Only 700,000 cars using one-third the gas probably won’t affect gasoline retailers much.  But if it was seven million, I can imagine that convenience stores that depend on gasoline purchases for a large part of their profit would feel the squeeze.

Those who supported Cash for Clunkers can go ahead blindly believing that it was unquestionably a good thing.  I’m skeptical.  As I showed above, the “deal” almost certainly didn’t result in a savings for most buyers.  More importantly, I disagree with the idea that it’s government’s responsibility to prop up a sagging industry.  I also don’t believe that the immediately visible positive effects of this program will in the long term offset the negatives that I’ve outlined.