When Will Travel Stocks Recover?
The travel and hospitality industries have suffered greatly from the Covid-19 pandemic and economic crisis. They are part of the lower limb of the k-shaped recovery. As the vaccine rollout gains momentum we can hope to see the pandemic recede. How soon will that happen and when will travel stocks recover. Specifically, when will financials look better for airlines, cruise lines, aircraft manufacturers, and those who support the travel industry and when will their stocks recover?
Covid-19 Pandemic and the Travel Industry
Although science has miraculously provided us with vaccines within a year of the Covid-19 outbreak, there are variants of the virus appearing as mutations. At a certain level, there will be a race to get vaccines into people’s arms before mutations create new strains that require new vaccines. Our assessment of when travel stocks will recover is based on the assumption that the current vaccines will continue to work and that vaccination will progress as fast as or faster than we have seen so far.
Airline Stock Prices
As an example, United Airlines Holdings (UAL) fell from $85 a share to $21 a share at the onset of the pandemic. The stock has come back to the $43 range but in the fourth quarter of 2020 UAL reported a loss of $1.9 billion instead of the $641 profit they reported in the same quarter in 2019. They are paying on debt and not flying enough planes full of people. According to an article in Forbes, United Airlines says they need 70% occupancy in order to break even. They are nowhere near that at this time so the recovery in stock price is a measure of investor optimism instead of a response to improving financials.
Herd Immunity and Full Airplanes
KHN reports that the US could reach herd immunity by summer. “Herd immunity” is when more than 70% of the population has been immunized or already had the disease and recovered. The experts at Moderna say they expect Pfizer and Moderna vaccines to be administered to enough people by mid-summer to significantly reduce the spread of the disease. Their prediction does not appear to include the Johnson & Johnson vaccine expected to be available in February or any other vaccines that may become available.
It is worrisome that the new Biden administration reports that their predecessors did not have a plan for vaccine rollout and that they are starting “from scratch.” Nevertheless, it would appear that the mid-summer prediction is solid. That situation will lead us to full airplanes, renewed profits, and a cascade of economic improvements.
Investments for a Recovering Travel Industry
Airlines like Delta, United, and Southwest are likely to recover to pre-pandemic levels when we reach herd immunity and they can fill all of their planes again, probably before the end of the year. Orders will pick up at Boeing. Cruise lines like Carnival will resume operations with full boats at least by next winter. Hilton, Marriott, and others will start filling their hotels again, and companies like Expedia will resume their normal level of activity connecting passengers with travel opportunities.
There will be two key factors in this recovery. Companies are burning through their cash and many will be severely damaged by the time they could have resumed normal operations. Those with healthier reserves will probably become dominant in their sectors as others struggle to compete, are taken over, or simply go out of business. The other issue is how companies will adapt to the post-Covid-19 world. Unless the Biden administration is able to stimulate the economy, there will be less money for travel. And, companies have learned that work from home and teleconferencing work just fine, thank you. This, by itself, could reduce some of the volume of business travel which will affect airlines, hotels, restaurants, etc. Those that more-successfully adapt will do better over the longer term. And, eventually, share prices will be determined by quarterly financials and not the expectation of recovery.
Why Invest in Banks?
Why invest in banks? Banks are generally a good avenue for value investing, dividend stocks, and intrinsic stock value. When the economy goes into a recession, bank stocks fall in price. However, when you look at their intrinsic stock value, these investments are generally bargains. This is because, over the years, banks are money-makers. They are usually dividend stocks as well. And, if you are interested in investing in Canada, Bank of Canada, Bank of Nova Scotia, Canadian Imperial Bank, and Toronto-Dominion Bank have all been paying dividends without fail for more than a century.
Value Investing in the Banking Sector
Investopedia offers a useful discussion about value investing in the banking sector. Value investments are secure with steady growth potential. Because banks pay dividends, you will have steady income. Because banks tend to be undervalued when the economy weakens they sell at bargain prices for the long term. A good example is Wells Fargo which sold for $1.27 a share forty years ago and sells for $32.78 today during the Covid-19 recession. This stock sells for $50 to $60 a share during normal times. And, it provides a 1.22% dividend yield.
What Is Value Investing and Why Apply It to Bank Stocks?
Investors who choose stocks with strong long term earning potential but low share prices are engaging in value investing. They look past the fear and greed-driven market sentiment of the day to the money that a company will generate over the long haul. These investors, like Warren Buffett, tend to buy when others are selling and bail out of the market when others are pushing it to extreme (and temporary) highs.
Because bank earnings are sensitive to interest rates, their earnings and stock prices fall during a recession. However, banks have reserves and tend to survive difficult times. Then, when interest rates go up, they become money-making machines again. The value investor can see this and will invest in bank stocks when rates are low only to see their investments double and triple in value when the economy and interest rates come back.
Investing in the Banking Sector
Retail banks, investment service firms, and insurance companies have a huge impact on the economy. They provide the credit that helps drive modern commerce. And, they make money on the interest they charge on loans and for various services. A well-managed, successful bank pays dividends to reward its investors and will commonly continue dividend payments even when stock prices fall. It is important to recognize that a failing bank may have a very high dividend rate so that can be a warning sign as well. Nevertheless, banks can be good long term investments and will be especially good when you pick them up when prices are depressed during an economic recession.
Can You Time Your Investments in the Banking Sector?
You can invest in solid banks when their stock prices are depressed and sell when prices go up. But, if you have money to invest on a regular basis, a better approach may be dollar cost averaging. With this approach you will be buying fewer shares when prices are high and more shares when prices are depressed. If you adhere to this approach you will also avoid having fear and greed drive your investment decisions. To the extent that you want to time investments in the banking sector, use intrinsic stock value as a guide and buy when intrinsic value is substantially greater than the current stock price.
Investment Implications of Biden Agenda
What are the investment implications of the Biden agenda? President Biden will introduce a stimulus plan aimed at defeating the covid-19 epidemic and driving the US economy to an impressive recovery. How will it affect your investments? Because the Democrats will control the White House and both houses of Congress, we expect initial Biden proposals to pass. We have written about investing during the Biden administration and the potential for a Biden bull market. Now that the next President has laid out his plan with the details, there is speculation that foreign direct investment in Asia may rotate back to the USA and that infrastructure, ESL investing, health care, and especially clean energy investments will be the greatest beneficiaries.
Investment Winners from the Biden Stimulus Plan
Business Insider looks at Democratic control of Congress and the Presidency and Biden’s programs to turn back the covid-19 crisis, heal the economy, and set a new direction going forward. The first order will be to send the remainder of $2,000 to individuals and extend protections against evictions, etc. Like the stimulus last spring, this will help families across the country and put much-needed cash into circulation to the benefit of businesses small and large. But, Biden intends to go farther by promoting long-needed infrastructure spending with American companies and workers having first shots at contracts and jobs. There will be a push for a $15 an hour minimum wage and attempts to redo the tax code so that 90 of the largest American companies don’t get by without paying any Federal income taxes. Small businesses will be the first focus for much of the proposals. Green energy, health care with strengthening of the Affordable Care Act, and tech startups with increased regulation of today’s big tech will all be beneficiaries. America is likely to become a magnet for foreign capital again as the world’s largest economy begins to remake itself.
ESG Investment Boom Will Continue under Biden
Yahoo Finance writes about how ESG investing has boomed during the covid-19 crisis. These folks expect to see that trend continue, especially in regard to green investments and impact investing. Biden will rejoin the Paris climate agreement as soon as he assumes office and companies in this niche like Digital Turbine, Enphase Energy, and Tesla are likely to continue to benefit from this situation. Companies like Blackrock continue to invest in the ESL niche, driving stock prices higher and higher.
Investment Capital Will Rotate Out of Asia and into the USA
Following foreign direct investment is always a good way to spot investment opportunities. As the USA struggled with the covid-19 crisis and Asian nations had greater discipline and success, investment capital has flowed into emerging markets in Asia according to CNBC. They note that JPMorgan expects this trend to reverse as Biden’s proposals become law and the long-needed emphasis on US infrastructure takes hold.
According to James Sullivan, head of Asia ex-Japan equity research at JPMorgan :
“Most investors were very positive on Asia and emerging markets relative to the U.S.” before details of the latest rescue package were announced, Sullivan told CNBC’s “Street Signs Asia” on Friday.
“We’ve seen over 18 consecutive weeks of fund inflows into Asia ex-Japan over the course of the last couple of months,” he said, adding that it is “highly likely” that funds start to rotate out of emerging markets in Asia back to the U.S. as a result of the boost to economic growth from Biden’s plan.
Not only will Biden’s plan help us through the covid-19 crisis and shorten it but his proposed measures will provide much needed stimulus to accelerate the US economy and put it on a healthier track in the long term.
With Biden’s $1.9 trillion plan now coming in at more than twice the amount expected by JPMorgan, the analyst said it will be a “positive surprise” for the market as well as for overall levels of economic growth in the U.S.
The folks at JPMorgan expect to see China be the first affected by these changes.
High Tech Regulation and Your Investments
The tradeoff between free speech and social responsibility may come to roost on high tech this year. How will high tech regulation and your investments do? Donald Trump is furious because Twitter closed his account for good. Parler was closed down by Amazon who terminated their hosting services. Concern has been growing for some time about the controlling effects of big social media companies and high tech on our lives, civil discourse, and freedoms. The new Congress may very well take up these issues in consideration of regulating or breaking up high tech companies.
Trump Capital Assault
It has become apparent that there was a huge amount of “chatter” on the internet building up to the demonstration and subsequent attack on the US Capital by Trump supporters who wanted to keep Biden from assuming the Presidency and keep Donald Trump in office. There is already a huge amount of fallout in regard to authorities not anticipating what happened. This event will probably be a focal point when investigations move forward. But, the underlying issue for many is the huge power that social media has gained in the USA and the world. The basic discussion will be how much oversight is needed in this new realm of public discourse and how much needs to be allowed to flow without discouraging free speech. We expect to see the comparison to calling “fire” in a crowded theater to be used when discussing what is free speech and what is incendiary.
Regulation versus Breakup of High Tech
The concerns about the effects on society by tech-driven changes in communication have gone hand in hand with concerns about high tech monopolies that exert huge control over their sectors. The Conversation discusses the rationale for breaking up big tech companies.
The chief executives of Amazon, Apple, Facebook and Google testified before Congress on July 29 to defend their market dominance from accusations they’re stifling rivals. Lawmakers and regulators are increasingly talking about antitrust action and possibly breaking the companies up into smaller pieces.
The author points out that today’s big tech companies are not the old Standard Oil that was broken up because it controlled the majority of oil production, refining, gas stations, and more. Tech moves so fast that other companies could supplant today’s leaders as technology changes. The bigger issue is data and how big tech gets users to “pay” for cheap or free services by giving up more personal data than they should have to.
Another issue is the projection of national influence across the globe allowed by US tech companies in competition with their Chinese counterparts. The US national security apparatus will probably oppose any major breakup as threatening long term US defense and security needs.
Nevertheless, there will probably be pressure to do some sort of breakups of big tech and investors should be aware of the risks.
Regulation is another issue as discussed by PWC is likely to come due to the huge access to data by these companies and their importance in societal discourse and safety. Those companies that pay attention and become part of the solution will survive and flourish.
Scrutiny of the tech sector continues to intensify. Policymakers are likely to address concerns over antitrust, data usage, consumer privacy and content moderation, among other issues. With their concentration of superior talent, vast troves of data and transformative products, tech companies are well-positioned to propose regulation that advances innovation and growth. To be part of the solution, however, they must proactively collaborate with peers, policymakers, consumers and other stakeholders to ensure participatory regulation that benefits all stakeholders. They must also embed government relations into their overall strategy.
Regulation will come and those who prepare will likely not get hurt, nor will their shareholders.
High Tech Regulation and Your Investments
There are two issues hanging over share prices of big tech these days. The first is the collection of market forces that bring about a substantial correction. These include a healthier economy and higher interest rates and renewed vigor of the travel and hospitality industry drawing investors into opportunities there. Tech has been highly priced because it keeps making money but also because investors don’t see anywhere else to put their money. A perceived threat to their collective earnings could trigger a sell off.
The other issues are regulation and breakup and these issues will have two effects. One is that the threat of breakups or huge regulatory changes may cause a shift in the market. The other is that if such events come to pass they could drive investment values down or up. For example, when AT&T was broken up, anyone who kept their resulting shares in the baby bells ended up with more value. Because the infrastructure was in place, the baby bells were making money from day one. This could also be the case with a breakup of Alphabet, Facebook, Amazon.com, or Microsoft.
Our opinion is the national defense establishment will stand in the way of anything that is perceived to threaten US national security interests and that will slow down or even block any major changes until such time as China is not seen as a threat (never).
High Tech Regulation and Your Investments – Slideshare Version
Investing During the Biden Administration
The prospects of investing during the Biden administration changed dramatically when Democrats won the two senate seats in Georgia. Now the bulk of legislation including another stimulus will progress unimpeded, at least in the beginning. A lot has been written about Biden stocks to buy and stimulus stocks to be in the run up to the election but there was always the likelihood of a fight with the Republican controlled Senate. Although every vote in the Senate may require a tie breaker vote by Vice President Harris as President of the Senate, Biden will start his term being forced to govern by executive order as Obama and, to a degree, Trump were.
Biden Stimulus Stocks to Buy
On Christmas Day The Motley Fool wrote about stimulus stocks to buy with your $600 stimulus payment. The same arguments can be applied to what will likely be a $2,000 stimulus check that comes with a massive Covid-19 relief bill during the first days of the Biden administration. The Fool suggests Bank of America, Teladoc Health, and Fastly. The basic argument for BOA is that banks get downgraded during recessions and return to being money making machines as the recession goes away.
Teladoc Health is the leading provider of remote health care services. The industry has learned during the pandemic that this is an efficient way to provide health care to lots of people who only need to talk to the doctor and don’t necessarily need an exam.
Fastly is a fast-growing tech company that is an up and coming cloud service provider. Our concern with this one is its volatility over the last year.
Biden Stocks to Buy
This group is a more important one to focus on for longer term investors. The issue here is not just what stocks may benefit from a stimulus or stocks you can use your stimulus money to invest in. Socially responsible investing may do quite well as the government pivots to favor green investments. Like with the stimulus stocks, the “Biden” investments got a big boost when the Democrats took both Georgia Senate seats.
We will likely see a lot of infrastructure spending with the intent of fixing things and creating jobs. This is an ideal time to borrow to fund these projects with interest rates nearly at zero.
We will not see a big move back to being friends with China but some of the foolishness related to the trade war will go away. We will also see an attempt to rebuild ties and get into trade deals with allies which Trump gave away in the early days of his administration. These efforts will hopefully help US industry and US agriculture and provide related investment opportunities.
Investing Tips for Biden Years
There is a lot of enthusiasm right now that the Democrats will have control of both houses of Congress and the Presidency. But, that has happened before and the party fell to infighting and did not accomplish much. Our take is that there will be a lot of focus on following Biden’s lead for most of 2021.
Once the pandemic has subsided and a degree of normalcy has returned to our political discourse, we can expect to see groups splintering off into different interest groups within the Democratic Party. What happens to the Republicans will be another matter. There is a strong possibility of the “Trump” wing splintering off without their standard bearer in the White House. If Trump has to deal with serious legal problems after he leaves office that could also alter the equation. A weakened Republican party could extend Biden’s influence for years and even into a second administration.
Investing During the Biden Administration – Slideshare Version
How High Will Bitcoin Go?
Bitcoin is on another rally. The one in 2019 ended in a crash. How high will bitcoin go in 2021 and then what will happen? A year ago at the start of 2020 bitcoin was valued at $7,347 and today it has risen to $31,646. The bulk of the rally has been since October 2020 when bitcoin sold for just over $10,000. This is similar to 2017 when it finished September in the $4,000 range and nearly passed $20,000 in December. The questions today are not only how high will bitcoin go but how far it will fall again. Bitcoin enthusiasts need to remember that following the $20,000 peak of the cryptocurrency three years ago it eventually fell to the $3,600 range!
What Determines the Price of Bitcoin?
The Bitcoin.com site simply states that supply and demand drive the price of bitcoin. But, what drives demand for bitcoin besides the belief that its price will rise? Investopedia broadens the explanation by noting that Bitcoin is not a stock that produces profits or a currency that is backed by a central bank. They list these reasons for variation in bitcoin price.
- The supply of bitcoin and market demand for it
- The cost of producing a bitcoin through the mining process
- The rewards issued to bitcoin miners for verifying transactions to the blockchain
- The number of competing cryptocurrencies
- The exchanges it trades on
- Regulations governing its sale
- Its internal governance
While this list gives us more information, the crucial part for bitcoin price is demand and the belief that bitcoin is destined to rise in price. Is that likely to be true or will this rally turn out to be another pump and dump that robs latecomers of their money?
Will Bitcoin Hit $100,000?
The Irish Times reports a prediction that bitcoin will hit $100,000 before the end of the year. Unfortunately, the “prediction” is being made by the CEO of Luna which is a London-based cryptocurrency exchange. Marcus Swanepoel bases this assessment on “current trends.” If we apply same logic to Tesla which has gone from $90 a share a year ago to $740 a share today, we would predict a price of 8 x $740 = $5,920 a share by next January. Any long term investor knows that markets, equities, and currencies rise and fall. Anyone who experienced the rise and fall of bitcoin in 2017 dearly wished they had taken a little “off the table” as bitcoin hit its peak and certainly before it fell back to the $3,500 range. Although bitcoin could eventually reach $100,000 its history of ups and downs is such that a bit of caution is advisable.
How Much to Invest in Bitcoin?
History has shown two things with bitcoin. Its price rises over time and rallies are followed by corrections. A long term investor may choose to put some money into bitcoin and wait. A short term investor may try to time the market to reap spectacular rewards. In each case, how much to invest in bitcoin needs to be considered. How much should not be a dollar amount but rather a percentage of your investment capital. Due to the potential volatility of bitcoin, the money you invest should not be money that you may need in the short term.
Is Bitcoin a Scam?
There are, indeed, bitcoin scams and risks with some bitcoin exchanges where you could lose all of your assets due to hacking. However, there are people who have gained impressive wealth so having an interest in bitcoin is a rational thing. The scam part of bitcoin, in our opinion, is the hype generated by bitcoin exchanges and others who stand to profit from rises in the bitcoin price. This is especially important because all that an investor can do is speculate about price rises as there are not quarterly financial reports, products, or services to analyze in making your investment decisions.
Reclaiming Your Bitcoin Profits
Bitcoin is very popular but the total value of all bitcoin is around $500 billion. By comparison the total market cap of all US companies traded on US exchanges is $36 trillion and the total value of currencies traded daily on Forex markets is about $6.6 trillion. Since bitcoin has only now come to the $500 billion range, it has been “small potatoes” for the regulators. Bit by bit that is changing. As we noted recently, the IRS bitcoin trap will force every US taxpayer to pay capital gains on realized bitcoin earnings. Payment of capital gains taxes will be due if you cash out and put the money in the bank or if you pay for something with bitcoin (as was the original purpose of bitcoin).
How High Will Bitcoin Go? – Slideshare Version
Long Term Effects of a K-shaped Recovery on Your Investments
The economic recovery from the Covid-19 crisis is turning out to be a classic “k-shape.” In a k-shaped recovery different parts of the economy recover at different rates or perhaps not at all. The question of investors is what are the long term effects of a k-shaped recovery on your investments? This year tech giants like Apple and Microsoft have done very well as the world pivoted to working and staying at home. Travel and hospitality businesses have done poorly and are not recovering anytime soon. What does this situation tell us about the long term for investing?
What Is a K-shaped Recovery?
Investopedia explains what a k-shaped recovery is and why it matters. During a recession, economic performance generally falls across all sectors although some sectors may be hit worse than others. And, when the economy recovers, all sectors tend to join in at varying rates. What makes a k-shaped recovery different is that some sectors promptly begin to recover like the tech sector in 2020 while other sectors like hospitality and travel continue to fall. The questions for investors are if the climbing sectors will continue on their path and when the falling sectors will recover, or if they ever will.
What a K-shaped Recovery Means for Your Investing
Those who stayed in, or purchased, big tech in early 2020 have done very well during 2020. Extremely low interest rates have helped as has the pivot to working at home and social distancing brought on by the covid-19 pandemic. Going forward, there should be some concern about how long big tech can continue their current rate of gains. We are seeing increasing concern about big tech monopolies that could lead to breakups. And, when interest rates start going again, it will tend to put a damper on rapid stock market growth. For the falling sectors of the market, the general expectation is that there will be an eventual recovery. But, companies without sufficient reserves or credit may simply go out of business or be taken over for pennies by their competitors. Investors will need to accurately pick the survivors who will benefit from a world free of covid-19 and renewed economic growth. That will require more than glancing at a k-shaped recovery graph and the use of intrinsic stock value as a guide going forward.
Economic Stability or the Lack of It for Your Investments
The Financial Stability Board issued a report regarding stability and the covid-19 crisis.
Global financial conditions have overall continued to ease since the G20 meeting in July on the back of the decisive policy action taken earlier this year. However, risks to global financial stability remain elevated. Financial conditions may remain vulnerable to sharp shifts in investor sentiment. Deteriorating credit quality of non-financial borrowers poses risks to the financial sector. The intensification of the pandemic, together with the resulting necessary government containment measures as well as greater uncertainty about its duration, is increasing vulnerabilities in the non-financial sector.
Loan losses experienced by banks will affect future credit availability and investor sentiment may swing to the negative if investors believe that the stock market party is over. The huge amounts of government debt coupled with “zombie company” debt create investment risks going forward. Investors who have profited from the tech rally in 2020 may benefit from taking a little off of the table while those who have avoided dull consumer goods stocks and utilities may benefit from accepting lower investment returns in order to provide a little investment security.
Long Term Effects of a K-shaped Recovery on Your Investments – Slideshare Version
Long Term Effects of a K-shaped Recovery on Your Investments – DOC
Long Term Effects of a K-shaped Recovery on Your Investments – PDF
Investment Risks 2021
Investors have grown accustomed to putting money in the stock market and seeing it grow. But, there are investment risks 2021 poses that may change that. Low interest rates have a market driver for a dozen years. When the economy gets back on track, rates may go up and end up driving stocks down. And, the recent Covid-19 mutation in the UK reminds us that nothing is secure in the world of infectious diseases and their effects on the economy. After taking into consideration investment risks 2021 may still be a good year but as bit of foresight might be a good idea.
Vaccine-induced Market Euphoria
As the miracle of modern medicine brings out vaccines to fight the pandemic, stocks have rallied. Unfortunately, it will be half a year or more before the virus is under control providing that more vaccines come on line and the vaccines work as promised. Assuming that all goes well with the vaccines, there are still a couple of risks that investors need to consider. One is that policy gridlock will continue on Capitol Hill and the other is that economic recovery will bring on higher interest rates.
Economic Recovery, Inflation, and Higher Interest Rates
In a recent interview on Wall Street Week, Lawrence Summers said he expected to see inflation edge up above 2% by the end of 2021 or early in 2022. The Fed can be expected to rotate from preventing an economic disaster to controlling inflation again. And, higher interest rates will drive stock prices down. The other issue is that the tech sector is relatively overbought, even considering low interest rates. We can expect to see a minor tech correction on top of that caused by higher rates. Other stocks in the travel and hospitality sectors will probably see a boost because they have been driven so low. But, government policy is a sticking point here.
Control of the U.S. Senate and Governmental Policy
The Democrats will have the Presidency and have retained control of the House of Representatives. However, the U.S. Senate is still up for grabs. Republicans currently have 50 seats and Democrats have 48. And, there are runoff elections in Georgia for the two remaining seats. If the Democrats take both seats it will be a 50-50 tie and Vice President Harris will have the deciding vote. If the Republicans keep one or two of the seats, we can expect to see Mitch McConnell who runs the Senate return to his policy of obstructing anything that the White House and Democratic House want.
We wrote about the potential for a Biden bull market but all of that depends on congress and the White House working together and the not being continual obstructionism.
Vaccine Rollout Success
The middle of 2021 is a realistic time to see about half of the US population vaccinated. That will let us see some degree of normality return to our lives and the economy. For the poorer countries of the world, it will take longer. Thus the global economy is going to be sluggish for longer than the USA, Europe, Japan, China, and places like New Zealand which is now Covid-19-free.
Geopolitical Tensions
As Trump exits the White House the troubles with China will not go away. The general consensus is that the US, Europe, and other democracies need to stand up to China’s ambitions for global cultural, economic, and military dominance. And, after the Russian hacking of historic proportions, we can expect to see tension on that front for the foreseeable future. The re-strengthening of traditional US alliances is sure to happen and there will likely be an acceleration of the “anywhere but China” movement. Some of these will be helpful to investments in the long term but may cause problems in 2021.
Investment Risks 2021– Slideshare Version
How Can a Stimulus Help the Economy?
The Covid-19 pandemic sent the US economy into the worse fall since the Great Depression. Things have still not recovered and whole sectors of the economy suffer substantial, lasting unemployment. Congress is haggling over stimulus measures. How can a stimulus help the economy? Although there is a legitimate concern about borrowing more money on top of an already-huge Federal deficit it did not seem to bother anyone when they passed the Trump tax cuts. And those did not result in a substantial increase in hiring or wages. We look at the issue of stimulus payment in its various parts. The first distinction to be made is the difference between relief and stimulus.
Relief vs Stimulus Payments
The pandemic has caused many businesses to close and workers to lose their jobs both short and long term. People who need to stay at home to help reduce the spread of the virus often need financial help as their life goes paycheck to paycheck. Short term payments in terms of cash, unemployment payments, rent relief, and protection from foreclosure are all relief measures and are important to help get us through the crisis. But, these measures are generally not designed to stimulate the economy. The prospect of a “K-shaped” economic recovery is real. Internet-related work has not suffered so much as person to person contact work. Computer programmers can work from home but waitresses get laid off. Both may be helped by relief measures but only control of the virus will get the waitress back to work, buying groceries, and paying rent. Over the long haul, other stimulus measures will be those that create jobs and opportunity. Think infrastructure improvement. This encompasses roads, bridges, ports, mass transit, and airports. It also includes things like moving to a nation-wide 5G network.
How Can a Stimulus Help the Economy?
The Covid-19 pandemic has sucked trillions out of the US economy and threatens to send millions into life-long poverty before vaccination measures take hold by the middle to end of 2021. While short term relief is critical for many, stimulus measures to recreate jobs, create new industries, and provide for better pay with greater security are essential. Stimulus measures need to be designed to reward people for working more and spending more. Such measures will drive the economy higher and create new jobs.
Specific stimulus measures that would help include aid to state and local governments, support for businesses, further unemployment insurance, rebates to households, and specific aid to affected industries. At about $2 trillion these measures would get us through until vaccines create herd immunity. The Congressional Budget Office estimates that measures in this range would allow the economy to get back to its pre-pandemic level by the middle of 2021.
Over the longer term, Buy American measures, infrastructure projects using American labor, tools, and materials, and wholesale retraining to adapt the American workforce to the rest of the 21st century are needed to move the economy forward and protect America’s economic, political, and security position in the world. Because interest rates are currently at or near zero, this is the best time to borrow and stimulate the American economy. While we can sympathize with lawmakers who worry about borrowing more money, we are currently more concerned about millions of Americans whose only recourse for getting food are the dwindling resources of food shelves and for whom Christmas presents for the kids are a distant memory. A greater concern right now than fussing about the budget is to stimulate the American economy to create jobs that pay well, create strong consumer spending, and energize the country.
How Can a Stimulus Help the Economy? – Slideshare Version
IRS Bitcoin Trap
The IRS tax form for 2020 will ask if you bought, sold, or had any financial interest in any virtual currency. You will need to answer yes or no. This IRS bitcoin trap is another step in the Internal Revenue Service tracking down those who did not report money gained from buying and selling cryptocurrencies. The question will be near the top of Form 1040 and hard to miss. It appears that the IRS is going to be treating hiding cryptocurrency gains like they have hidden offshore bank accounts.
IRS Bitcoin Trap
The precise language on Form 1040 will be this:
At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?
You can only mark yes or no as answers. The obvious concern here is that if you say no and are later found to have had cryptocurrency gains, you will be in trouble for tax evasion for not having paid and for perjury for denying any gains on your Form 1040. Any problems might not come right away but now that the IRS gets reports from cryptocurrency dealers, they will probably find out in the long term.
Cryptocurrencies as Capital Assets
Although the details of cryptocurrency investment regulation are still being worked out, the IRS has considered cryptocurrencies to be capital assets since 2014. This puts your Bitcoin investments in the same category as stocks and bonds. As such, gains are taxed as short term capital gains or long term capital gains depending on how long you held the asset before selling. Incidentally, money you make mining cryptocurrencies is also subject to taxation.
IRS Access to Cryptocurrency Info
Coinbase is the largest virtual currency custodian in the world. In 2018 the IRS forced them to turn over information about thirteen thousand account holders. We can expect the IRS to continue to pursue this course of action with the goal of eventually having access to all cryptocurrency accounts. That will especially be the case as Bitcoin and others move into the mainstream and are subject to regulation similar to regular currencies. For the 2019 tax return, the IRS listed the same question on Schedule 1 for reporting adjustments to income and additional income. Because many people do not file a schedule 1 form the question was not answered. It will be now that it is on the first page of Form 1040.
Should you choose to report cryptocurrency transactions, holdings, and gains, Form 1040 will provide instructions. The tricky bit is that people who use cryptocurrencies as they were originally intended, as a currency for day to day transactions, will have a good many transactions to figure out and decide if they had a capital gain or loss and if the gain or loss was short term or long term! Then you will be reporting on Schedule D of the 1040 form.
Do I Get Taxed for Holding a Cryptocurrency?
If you were fortunate to have purchased Bitcoin years ago and still have several, you have an “unrealized” gain and are not subject to taxation. However, you will be subject to IRS reporting requirements on Form 1040. The sticking point is if you cashed out Bitcoin that you purchased for $100 for $19,000 and did not report a taxable gain, you probably should consult a tax accountant or tax lawyer and decide how to deal with the issue.
IRS Bitcoin Trap – Slideshare Version