Zombies, Blackouts and Taxes

  • Pandemic zombies? U.S. cities on the brink 
  • Jim Rickards on peak urbanization 2019
  • All the problems, none of the benefits
  • The brain (and wealth) drain
  • Assessing the California Wealth Tax
  • A reader on the “new urban exodus”… Another wonders when NYC landmark real estate goes on the market… And a depressed reader on pandemic grief (the struggle is real)

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“Junkies and the homeless, many of whom are clearly mentally ill, walk the palm-lined streets like zombies,” says a Daily Mail dispatch from Los Angeles — “all just three blocks from multimillion-dollar homes overlooking the Pacific…

“Los Angeles is a city on the brink. 'For Sale' signs are seemingly dotted on every suburban street as the middle classes, particularly those with families, flee for the safer suburbs, with many choosing to leave LA altogether.”

We pick up this morning where James Altucher left off yesterday — with the exodus not just from New York but from other struggling big cities.

It’s true, as we observed last month, that the exodus was well underway pre-pandemic. But between the lockdowns and the looting, it’s only accelerating.

California — and not only its urban centers — is a special case.

Last fall we took note of how some people were already fleeing the Golden State. For them, the final straw was the planned power outages by PG&E — a crackpot remedy for decades of failure to properly trim tree branches in the vicinity of power lines. Cutting off the juice was how the power company prevented wildfires during instances of strong, dry winds.

This summer is bringing another round of planned shutoffs, but for a new reason: California’s shift toward renewable energy sources can’t meet electricity demand during an epic heat wave.

Natural gas plants that could have kept up with the load were mothballed. “That leaves fewer options when the sun sets,” according to Bloomberg News, “and solar production wanes.”

Among the consequences of this year’s planned shutoffs — 50,000 gallons of raw sewage spilling into the Oakland Estuary last weekend. A planned power shutoff triggered a pump failure at a wastewater treatment plant. “Boaters were being warned to stay away,” reported the Bay Area’s NBC station.

Is it any wonder California is set to lose a congressional seat in the next round of redistricting? That would be a first since statehood in 1850.

Meanwhile, here are some numbers that shed additional light on the bind New York is in.

“For New York state, income tax collections are running nearly 50% below last year while all categories of revenue for the state are down 42% versus last year,” investment banker Christopher Whalen writes in The American Conservative.

Then there’s New York City, where a domino effect is underway. “First and foremost, the city’s ability to generate sales taxes for the state, much of which is reallocated back to NYC, has been crippled. The performing arts, tourism and other public activities are prohibited under New York’s draconian approach to managing the COVID-19 pandemic…

“The COVID-19 pandemic has also greatly damaged the physical assets of New York, the office buildings and apartments that comprise a huge part of the city’s tax revenue base. As vacancy grows in commercial and residential buildings, the rental offerings are falling in a Darwinian battle for fewer and fewer tenants…

“As rental rates fall, the value of New York commercial and residential assets will also decline. The owners will start a process of reassessing the value of real estate, which will have the effect of shrinking the city’s tax base further.”

“Life in our major cities has always been a trade-off,” says our Jim Rickards.

Jim was a decades-long denizen of Manhattan before he settled on Connecticut’s Gold Coast a few years back… ultimately retreating to mountainous territory further north in New England.

“On the negative side,” says Jim, “you have high rents, high taxes, traffic congestion, noise and some crime. On the positive side, you have a rich cultural and social life with museums, theatres, great restaurants, clubs and excellent sports teams. You are surrounded by like-minded individuals in what can be a highly educated and creative milieu.

“Today, all of the problems remain, but almost all of the benefits are gone. The high taxes and high rents are still in place (and the crime is much worse), but the sports teams, theatres and concerts are all shut down, waiters are wearing masks and everyone who can is working from home. Now it has occurred to people that if they can work from home, then they can work from anywhere if they move their homes.

“Professionals, young families and retirees are all fleeing the major cities and moving to suburbs or even further out in the country. They are finding good schools, lower taxes and good internet connections where they can keep their jobs without dealing with the riots and murders that are the new norm in many major urban areas. Moving van companies are booked solid, and many who want to move are finding waiting lists for those movers.”

Perhaps 2019 marked the year of peak urbanization in these United States.

“In 1790,” says Jim, “approximately 93% of the American people lived on farms or in small towns while only about 7% lived in larger cities such as Boston, New York or Philadelphia.

“One of the reasons for this was the labor intensity of agriculture. It literally took 93% of the population to feed 100% of the population. City dwellers were the exception and lived off a relatively small agricultural surplus.

“Over the next 120 years, the trend was all in favor of the cities. Agriculture became more productive, especially with the invention of harvesters and tractors in the late 19th and early 20th centuries. This allowed larger agricultural surpluses so more people could move to the cities to pursue jobs in manufacturing, transportation and the professions.

“Today, the U.S. population is less than 20% rural (and only about 3% live on working farms) and over 80% urban or suburban.”

But how much longer?

“The financial implications are enormous. Those who leave cities are generally the wealthiest and most talented,” Jim continues.

“Many have second homes or can easily afford to buy new ones. They have skills in law, medicine or engineering that are easily transferable (and indeed welcomed) in new localities. Importantly for the cities themselves, those leaving paid the most taxes. This leaves the cities with heavier burdens from welfare and crime without taxes from the rich to pay for the bureaucracy and social services.

“We’re looking at not only a social collapse but also a financial collapse that will put many major cities at or near bankruptcy in the next year or so. Investors should steer clear of municipal bonds that may still retain high ratings but are subject to rapid and precipitous downgrades and defaults once the full impact of this new urban out-migration is felt.”

Back to California — where state government appears determined to make the departure of “the wealthiest and most talented” as difficult as possible.

Lawmakers, with support of the government-employee unions, have introduced a bill labeled simply the California Wealth Tax. If passed, it would be the first such tax in the nation.

Amid the corona-crisis, “Asking these well-resourced Californians to give a little more to keep our people working and support our most vulnerable is the right thing to do,” says the bill’s sponsor, Assemblyman Rob Bonta (D-Oakland).

Apparently it’s not enough that Californians earning more than $1 million a year generate 19% of adjusted gross income in the state but generate almost 40% of personal income tax revenue.

Anyway, the tax would add a 0.4% levy on any net worth exceeding $30 million. And yes, that would apply to assets held outside California, too. Bonta estimates the tax would affect fewer than 31,000 Californians.

But get this: “The bill contains a special formula to apply to anybody who has lived in the state within the last 10 years,” writes Scott Shackford at Reason, “though the tax burden will slowly drop over time for each year they don't live in California.”

Heh… The golfer Phil Mickelson shoulda gotten out while the getting was good.

As it happens, Gov. Gavin Newsom is lukewarm on the bill; after all, a lot of Silicon Valley gazillionaires helped get him where he is now. But consider it a straw in the wind…

“The important economic point about this new urban exodus is that it’s not easy to reverse,” Jim Rickards concludes.

“Moving is a big deal and there is always some resistance to the idea. But once you cross that bridge and decide to move, you don’t look back. These are the kind of decisions that will not be reversed for 10 years or maybe never.

“Those moving out will find a better lifestyle. Those who remain will be trapped in declining cities with more trash, fewer services and out-of-control crime. The damage to the economy is not temporary; it is permanent and the first effects are just being felt now. It will get much worse before the exodus is complete.”

“Thank you, James,” begins today’s mailbag — and a flurry of replies to James Altucher’s reflections on the impending demise of his beloved New York City.

“Your detailed description of the impacts of the shutdown of NYC can be applied to every major city in the U.S.

“Maybe smart people have it all figured out. But the implications of the shutdown are clear. Thanks for your explanation.

“We will be discussing the implications… emotionally and financially for a long time.

“It’s depressing. I grieve for my children… in their 50s, and my grandchildren, recent and soon-to-be college graduates.”

“Somebody with a very long time horizon is going to make a killing on NYC real estate. But we don't know who and when,” writes another reader.

“If it's as bad as James says it is, then there will be huge discounts on landmark buildings, and the city will come back someday. But there will be a lot of pain along the way.”

Along those same lines, a longtime reader but first-time correspondent writes: “I grew up in Connecticut and loved visiting the city. For a couple of years I even drove a truck in Manhattan. What a wonderful place.

“My oldest son had been looking for a better-paying job; two weeks ago he landed a great one in NYC. He's working remotely from his apartment in Nashville.

“Over the years I've read a few articles describing how cities can be engines of economic progress. The bigger, the better. What effect will working remotely have on businesses? I suspect that the lack of a face-to-face team, one sharing a common local culture, will be a net negative.

“In the short term I don't feel particularly optimistic about the Big Apple. Long term, I think it has to come back. From personal experience, I don't see large-scale telecommuting being viable.

“Any thoughts?”

The 5: For whatever it’s worth, the suits at Amazon appear to agree with you.

On the front page of today’s Wall Street Journal is word that AMZN plans to add 3,500 employees in six large cities. Some of them are growing interior cities like Dallas and Phoenix. But more than half of those jobs will be in the building that once housed Lord & Taylor’s flagship department store on Fifth Avenue in Manhattan.

The Journal article says while companies are by and large pleased with how readily their personnel adapted to working from home, “many have come to see the downsides of remote work as well, including challenges with training new workers, barriers to collaboration and lengthier timelines for some projects.”

We hinted at some of that “downside” last month. We speculated the new legion of telecommuters might become captives of their current employers for the next couple of years.

Put another way, we’ll learn how easy it is to job-hop when you don’t have the chance to meet new colleagues face-to-face and absorb the culture of a new employer in person.

Judging from the Journal story, it’s starting to look like an uphill climb.

As you might be aware, your managing editor has lived the telecommuting life for a few years now from a remote spot in the Upper Midwest. But I can pull that off in large part because I put in nearly a decade of face time at our firm’s Baltimore headquarters, cultivating relationships with publishers, copywriters and marketers.

If Amazon’s “Manhattan project” pans out — and given all the uncertainties right now, there’s no guarantee — the people who come aboard might turn out to be a new breed of pioneer. We shall see…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. So yes, the S&P 500 closed at a record high yesterday. We don’t really have anything to say about it other than what we said on Monday — when we reprised an episode of The 5 from three months ago!

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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