FYI: Time is running out for the bull, says Scott Minerd, a founding managing partner and global chief investment officer for Guggenheim Partners, the New York-headquartered investment firm, which manages $295 billion. Minerd sees upside for U.S. stocks, before a recession arrives in late 2019 or 2020 that will derail this mighty market and prove painful for bonds, as well.
Minerd, 58, based in Guggenheim’s Santa Monica, Calif., office,oversees client accounts invested in a broad range of fixed-income and equity securities. Guggenheim’s taxable fixed-income mutual funds are in the top decile of their respective Morningstar categories for the trailing three- and five-year periods.
In a recent chat with Barron’s, Minerd also explained the perils facing municipal bonds, given the new tax law’s restrictions on deductibility of state and local taxes. Two things he’s bullish about: international stocks and active management, especially in fixed income.
Regards,
Ted
Comments
This should make tax free munis bonds even more attractive in high SaLT states.
You're right that the cost of lending just got lower for high tax states. He doesn't discuss this. What he says is that Connecticut and NJ are losing their tax base as high income earners flee (at least in NJ this has been happening for some years thanks to NJ's rising property taxes).
The loss of SaLT deductions, effectively hiking taxes for these states, accelerates the trend. This in turn lowers property values (reducing state & local revenue) and income tax revenue, putting bond ratings at risk. For good measure, he threw in Illinois.
Completely separate, he's predicting a GDP growth of 2.5%, up from 2%, due to companies being able to immediately write off of capital expenditures (instead of amortizing).
NJ: 1st highest property tax rate: 2.31%
https://www.usatoday.com/story/money/personalfinance/2017/04/16/comparing-average-property-taxes-all-50-states-and-dc/100314754/
Highest average property tax for a town in Mass: Weston, MA $18,059
http://realestate.boston.com/luxury/2017/02/14/like-live-weston/
Highest average property tax for towns in NJ:
Millburn $23,327 ($1M average home value)
Loch Arbour $22,323 ($1M average home) - hardly counts, just 189 people
Tavistock $21,689 ($1.7M average home) - only 4% as large, just 8 people
Alpine $20,910 ($2.7M average home) - property tax rate a relative bargain for NJ
Tenafly $19,866 ($800K average home)
Mountain Lakes $19,775 ($800K average home)
Rumson $19,146 ($1.3M average home)
Glen Ridge $19,045 ($500K average home)
Mendham Township $18,752 ($900K average home)
Essex Fells $18,743 ($900K average home)
https://www.app.com/story/news/investigations/data/2017/07/31/highest-property-taxes-nj/487845001/
Let say this process of home "loanership" is a 30 year adventure...a decent career for you and a time spread for all your kids to get out on their own. Half of us will have divorced and need additional resources to somehow make two households work.
In Milburn, a $1M home will require a $200K down payment to avoid PMI...good luck with that as you are just out of college with $200K in student loan debt. An $800K mortgage (P&I @ 4% for 30 yrs) will run you about $3800/ month. Add almost $2K/M for taxes and $200/M for insurance and as a "home loaner' you will need $6K/month or $72K/YR to hang your hat. I have not mentioned the lifestyle costs nor the $250K/kid costs you will encounter...I did mention the likelihood of divorce.
Over 30 years the cumulative cost of property taxes alone will equal or exceed the $800k mortgage. So the banks gets paid...the city gets paid...the ex gets paid... the dentist gets paid...the utilities get paid...you get screwed.
You get to wake up everyday and try to prove to your boss that you are worthy of this rat race salary so you have the privilege of getting clipped to cover all these costs plus the ongoing cost of maintaining the properties (after the divorce your property is a little smaller and a little outside of Milburn, but still costly) and other monthly bills.
Welcome...Home Sweat Home...here's to a simpler time that we threw away:
Rates mean little when they're just the "official" figures. The state rates given in the USA Today article were "effective" rates, i.e. actual percentages after exemptions, abatements, whatever chicanery goes into one's tax bill. For example, the official rate for California is 1% (Prop 13), while the effective rate in the article is 0.77%. That's because Prop 13 caps annual increases, so the effective rate of each home is reduced over time. (California is the oddball state where property taxes are standardized.)
Geographically, you must be right on the Weston border: "Danoff my neighbor in Weston"
https://mutualfundobserver.com/discuss/discussion/comment/92578/#Comment_92578
Nevertheless, the numbers, which you went through in gory detail, still boggle the mind.
You got it. You took issue. Perhaps I should have done as you subsequently did and omitted 'very'. Also made it clearer that it is some suburbs, not all. Gosh, I wonder if that is true in NJ too.
What will prove interesting is if there is flight from eastern Mass.
>> Rates mean little when they're just the "official" figures.
Yes, you got that too.
[something about California here]
>> Geographically, you must be right on the Weston border: "Danoff my neighbor in Weston"
Yes, you got it: Wayland. A hat trick for you tonight!
I have never tried to obscure that. (I also use my real full name. You, or anyone, can look it all up.)
It must always be good for one's online soul to get a monthly dose of finger-wagging, warranted or not.
In any case please let us know how your NJ friends are feeling about their taxes these days after you ask them. For NJ, emmigration has been a problem for over a decade, even if your friends are staying. https://regentatlantic.com/File Library/Tax paper/Exodus-on-the-Parkway-2-25-14-FINAL-VERSION.pdf
I'm pretty sure that Danoff doesn't care what his taxes are. The fact that some of your neighbors are inured to rising taxes doesn't mean the other 99% take them in stride.
Weston median income (2015): $201K (from Census survey).
https://www.bostonglobe.com/metro/2015/12/18/town-town-look-income-massachusetts/cFBfhWvbzEDp5tWUSfIBVJ/story.html
(CNN thinks it's over $600K, but you can't trust everything you read on the web.)
https://www.njpp.org/budget/the-exodus-is-more-like-a-trickle
>> gut feel based on a sample size of one?
too funny
>> The fact that some of your neighbors are inured to rising taxes doesn't mean the other 99% take them in stride.
Right again. If you went to town meetings in the expensive suburbs you would know that many do not take them in stride at all, although of course the very wealthy, many of whom do take it in stride, tend not to speak about it at town meetings. I'm a believer in taxes but the tensions among class diversification, fair compensation of public employees (average Wayland teacher salary is $94k or so, well above Weston), and tax burden often seem intractable.
Look at the graphic showing the primary exodus states for NJ. Missing is where NJ stands relative to these states. According to the Tax Foundation (source cited by graphic) NJ had the third highest tax burden in the country; so except for NY, all of the exoduses shown were to lower tax states.
It's actually funny to see the piece lead off by arguing that Mass. has a comparable tax burden to NJ. Funny because the Tax Foundation source talks about a 1% difference in tax burdens not being significant, while the difference between NJ and Mass reported is double that (12.2% vs. 10.3%). To put it differently, NJ's tax burden is 19% higher than Massachusetts'. (I'm just repeating data from or cited by pages you gave.)
The piece says that a "substantial majority" of the emmigration is offset by immigration as though that were to diminish the exodus. What it really means is that a significant minority (about 20%, per CBPP article cited by the piece) of the emmigration is not offset. In fact, between 2010 and 2015, New Jersey had the "third largest net domestic out-migration, behind New York and Illinois and just ahead of California." (Those are four of the six top states in tax burdens, according to the Tax Foundation page. Mass. is #12)
Some parts of the piece sound like a sales pitch: "These valuable assets and others are what make New Jersey an attractive place to live, work and raise a family for almost 9 million people." Though taken at face value, all this does is give a reason why net emmigration is not even higher. It doesn't lend support to the argument that high taxes have no effect on how "sticky" New Jersey is to residents.
The second piece starts out acknowledging that "A new study finds that the wealthiest Americans are less mobile than lower income workers, but those who do relocate are looking for a tax cut." So despite all those valuable assets, the motivating factor for moving, if people can maintain their income levels elsewhere, is high taxes.
Getting back to the njpp piece, it notes that "More importantly, the amount of new revenue gained from the [income] tax change dwarfed the tax payments that would have been made by those few who left."
The aforementioned CBPP piece says something similar: "policymakers in most relatively high-tax states still have considerable room to increase income taxes on the affluent before they should worry about the potential effects on migration." Emphasis added.
Two takeaways:
1) Normally, when a state raises or preserves high income taxes it may net greater revenue albeit on a declining tax base. However, when people pay more in taxes (due to eliminating SaLT deductions), the state only loses revenue as its tax base erodes. That was the point of the Barrons article, and nothing here has refuted it.
2) New Jersey is different from other states - CBPP acknowledges that there are a few high tax states where increased taxes would have a worrisome effect on migration. My guess is those few states don't reach past the top ten for tax burdens. That would certainly explain your local observations.
Talk to your friends in New Jersey. Let us know their impressions.
For kicks, here's what may be the most detailed, quantified analysis of tax migration effects, national and NJ-specific, that I've found. It was prepared by staff of the NJ Treasury Dept. in 2011.
http://www.state.nj.us/treasury/gsef/Tax Migration Study_with tables.pdf
Like the CBPP paper, it states that "Clearly, our results do not suggest that tax-induced migration would come anywhere close to eclipsing the immediate revenue gain from an income tax increase". But also that "average marginal tax rates had a small but significant effect on migration decisions in the U.S. and in New Jersey. We estimate that higher New Jersey income taxes [2004-2008] was associated with a reduction of more than 20,000 taxpayers and a loss of annual income of at least $2 1/2 billion."
Nevertheless, Summit has the lowest effective tax rate in the county. (Effective rate meaning rate on actual property values, as opposed to assessed values that may not represent the actual values). A "mere" 1.85%
http://www.state.nj.us/treasury/taxation/pdf/lpt/gtrunion16.pdf
I find it Interesting that Hawaii also has some of the highest property values and some of the lowest property tax rates in the country.
https://www.linkedin.com/pulse/watch-out-effects-tax-reform-migration-fiscal-conditions-ray-dalio/
CT is made up of 169 Fiefdoms (local town boards) that have had little interest in promoting regionalism, or affordable housing. Most of these towns like to keep their public...private through higher hurdles of entry (high home prices) and (high taxation) and lack of affordable housing.
I'm sure a Greenwich or Darien or Cos Cob or Rowayton taxpayer would agree that there public school rival many private schools in CT, but mention the notion regionalizing and merging these high achieving public schools with "out of district" inner city kids and see how public they feel.
I think that [new, due to the new tax cuts] tax emigration could well happen, although I doubt there’s been a stampede so soon. Even without the new deduction issues, a fair number of people leave their high property tax towns once their kids leave the school systems [while staying in-state]. This has been true for a long time. That’s in part because rates vary extremely widely between counties and even between towns within counties. And of course no shortage of people retire and head south, because of both lower taxes and the climate. Nothing new there. This must be true in Massachusetts, no?
He pays well above $20k in property tax and will downsize to a condo in a couple of years, he says.
So, there's a long term pattern of migrating from high taxes (a study I linked showed this going back to 2004 if not earlier); a good chunk at least just reflects normal migration (e.g. Florida retirements); hard to break down how much is spurred by taxes.
New tax law could likely accelerate "tax migration" (assuming that at least part of current migration is already motivated by taxes), or create "tax migration" (assuming it does not already exist).
But all of those links, whether you thought them solid or less so, are from well before the new tax laws, of course, so your last sentence must surely be true.
A local 'voter network' newsletter that tracks town finances closely arrived today with 'Wayland properties with high values and high annual tax bills (over $20,000 annually) generally take far longer to sell.'
So the hit to pricing here and in NJ may be just a (short) matter of time. That would be something, though not helpful for high taxes, really.