New York’s Empire Continues to Crumble
New York might have deserved their self-appointed title of being the empire state in bygone days, but the empire is falling before our eyes as politicians continue to play their fiddles.
New York has been the capital of the United States as far as wealth goes for a very long time, and even though, like everywhere else, it has had its ups and downs, it easily has kept this title. Times change though, and as far as New York’s stature goes, times are really changing now.
2020 has not been a good year for either the city of New York or the state. The state’s population declined for the fifth straight year, and it’s not just the number of people leaving, it’s the amount of money that they are taking with them, fleeing the state’s high taxes for friendlier pastures such as Florida.
New York and Florida are a tale of two very different states and two very different political climates. The weather is of course much more agreeable in Florida, where it’s like summer in New York all year round and people are spared of New York’s comparatively harsh winters.
New York is famously described as a rat race, and Florida is where the a lot of these rats escape to, especially in retirement where it no longer makes sense for them to endure the harsher conditions and the considerably higher cost of living that the Big Apple extracts from them.
Among those still working, New York has simply been where the money is, among the highly paid, a city built during a time where having people physically located together was virtually essential. This is what has held so many people hostage, although the combination of improvements in technology and the additional motivation to pursue it that the year of the coronavirus has prompted that has New York in such a precarious position now.
It didn’t have to be anywhere nearly this bad though. New York has long been the world’s capital of capitalism, but the combination of socialism and authoritarianism that now rules the New York political landscape is tearing it down more and more, a trend that is set to continue.
A big part of New York’s ransom has been their higher taxation levels, and as the state has become more and more socialist, the price that they are extracting from the wealthy continues to climb. As more and more leave, the state is doubling down on their attack, and their response to their fiscal mismanagement has been to seek to raise these ransom demands even further, which just serves to throw gasoline on an already raging fire.
This comes at a time where the country is rethinking its traditional approach to the workplace, where in many cases it no longer makes a material difference whether employees are located in the same physical space when they can interact with each other just as effectively from remote locations, and often even more effectively as the internet completely transcends physical limitations where no one has to travel anywhere to meet anymore.
We have shared our excitement about this in previous articles, as remote workplaces are an idea whose time has really come, and the fear of physical contact that people have had this year is just serving as a nudge to wake people up more to the benefits of this new approach. Remote working is a lot more efficient, especially if it allows people to escape the harsh inefficiencies of working in New York City, with its high costs, and flee to more efficient areas of the country, wherever they like in fact.
Only certain jobs lend themselves to this though, but they tend to be the higher paying ones. All cities need enough troops on the ground, those who interact with the public, but among those who only interact with each other, there’s far less reason to have them congregate in big cities, an arrangement that costs both the employers and the employers considerably more.
Whenever we see big changes like this, there are always winners and losers, and no one has a bigger target on their backs quite like New York does, the capital of this inefficiency. With taxes already so high and likely to go higher, along with the draconian lockdowns that the state has become so famous for continuing to persist in spite of all the evidence we have that these things only do great harm, this is not helping things, but the problem is much deeper than this.
For a long time, New York has been smugly complacent about the coming changes, and this has been on the horizon for quite a while, a time where technology usurps the need for physical congregation in the workplace.
When you take more and provide less, when your taxes go up but you no longer enjoy the perks that New York is so famous for, it’s restaurants and entertainment, this is a lot like charging more for rent and at the same time requiring you to lock yourself in, something that a lot of wealthy New Yorkers can no longer suffer.
It’s not that New York is unique in its seeking to particularly punish the wealthy with high tax rates, and California is actually the king of this, but people are leaving California in droves now as well. Even Hawaii is seeing a population decline now, another state with high taxation, and even the idyllic climate and way of life of Hawaii apparently has a price, and one that is being seen as too high.
New York is Chasing Away Their Cash Cows and Don’t Care
The states that people are fleeing to from these Democratic states with higher taxes are, not surprisingly, Republican states such as Florida and others who have much lower taxes. If you are subject to paying a lot more tax, and in the case of New York, paying a lot more for just about everything, and you can now work from whatever state you choose, many are going to choose states other than New York, and that’s exactly what we are seeing.
The state of New York’s population has now dropped enough that they may be losing a seat in the House, where competitor Florida may finally surpass them in seats for the first time. This is not the real concern though, it is the state and the city driving away so much of its tax base at a time where spending has spiraled so much out of control that is the bigger gorilla to be wrestled with.
Socialists don’t generally think very practically though, when doing so goes against their mission, which is to seek to redistribute from the rich to the poor, consequences be damned. Facing the prospects of an $8 billion cut to education and social services, instead of realizing that people are already fleeing their tax rates in droves and trying to fix the problem, the state is now planning on raising these taxes even further and digging themselves an even bigger hole as a result.
Wealthy people tend to be far more mobile than those of more modest means, and many do not even have the means to move even if they weren’t chained to their jobs. The prospect of packing up the car and heading across the country into the great unknown is entirely different than an executive choosing to move to Florida and work in the comfort of their new homes there, which may be desirable enough in itself even if the cost of staying doesn’t go up and the reasons to stay doesn’t keep declining.
New York doesn’t just punish high earners with higher state income taxes, taxes in general are well above average in New York. The cost of commuting to work that is standard with all big cities is also magnified in New York, where this either costs you a lot of time each day or be faced with paying a huge premium to reduce it. As the grass continues to brown in New York, greener pastures become even greener in comparison without even changing color.
New York was already in trouble before this year, but things have been going downhill a lot faster now, and while eventually removing all the restrictions that are in place now will certainly help, the problem runs much deeper than this. When your spending is this much out of hand and your revenues are set to continue to decline, that’s not a good position to be in.
When it costs more and more to run the farm and so many of your cash cows are leaving, this does not bode well for the farm. New York relies on revenue from high income earners more than other states do, and chasing more and more of them away is not the way out of the mess that they are in.
It used to be that all you had to do is to attract business to your city or state and the people will come. That is the part that is really changing and is set to change a lot more in the coming years, where the advantage and even the necessity of this is being rethought, where you can move your people out of the skyscrapers and just send a lot of them home, and home is anywhere you want it to be provided you have an internet connection.
This is appealing enough to workers that this is used as the main thrust for a lot of get-rich-quick schemes, where the ability to work from wherever you want stands alongside the fancy homes and cars that are used to persuade people to part with their hard-earned money in pursuit of these dreams, dreams substantial enough for even common sense to be suspended.
Both the city and state are in serious trouble now, and investors who hold municipal bonds that have the name New York written on them at all need to really take heed. It’s not that munis are good investments at the best of times, but with New York munis, these are not the best of times and far from it.
Munis only pay peanuts as far as returns go, not enough to account for any risk actually, comparatively speaking that is. People tend to view investments too much in isolation, using what we consider to be risk free rates of return, treasuries, and then seek to decide whether the risk premium that they get over this return is worth the additional risk.
This creates a false dichotomy, which we can readily see when we compare these bonds with stocks, the Nasdaq for instance. Investing is at least supposed to be about return versus risk calculations, but you’ll never learn these things unless you look. The muni shills don’t want you to know that their bonds have the same beta number as the Nasdaq, meaning that the risk is identical, because you would be left to compare their returns and their investments would get hammered.
MUN, the benchmark municipal bond ETF, has had a total return of 40% over the last 10 years. The Nasdaq 100 has returned over 600% over this time. Munis aren’t just uncompetitive, they are fantastically uncompetitive. When you add in the additional default risk that New York City munis are now facing, and this would not be the first time this happened, that just makes justifying holding them all the more bizarre.
Discussions about New York City going bankrupt have been going on for a few years now, but this was before work from home became so popular. New York gets half of its tax revenue from the top 1%, and while more and more of this segment leaving is a big concern, an even bigger one is what will happen to the city’s property tax base which relies on property values growing faster than the rate of inflation to sustain its spending.
As this new frontier plays out, the bubble that we call the New York real estate market is surely going to take a big hit, as demand declines, which sends values nosediving. The typical New York solution of taxing more and spending more will only serve to make this worse, and this could cause a downward spiral that will make bankruptcy a very realistic possibility, and at best, will leave the city rescued but badly wounded.
The Fish Always Rots from the Head On Down
Governor Cuomo and Mayor De Blasio at the helm aren’t the sort of people to steer New York away from the rocks, and are more likely to steer their ships even more toward them at even greater speeds as they make course adjustments to fuel their socialism that will have them in deeper and deeper trouble.
The ships are still in the water now but the seas have become choppier and their sense of fiscal responsibility has become more and more reckless. Just like they are locking things down again, in the face of how hideous these approaches have proven to be, they continue to do lasting damage to an economy that was already very much sick in the hospital. Much of the losses will be much longer lasting than their exercise in self-strangulation as a lot of the places they forced out of business will stay closed after the dust from this economic demo job settles.
Their performance overall has been so atrocious that we have to think hard on how they could possibly manage to screw things up more than they already are. They are going to be facing some tough choices, particularly when it comes to their already unsustainable spending on social programs, but they likely will cling to them the best they can to the bitter end as sure as Nero clung to his fiddle. Their very discordant tune is not one New Yorkers or anyone with money bet on New York should ever wish to tolerate.
Pretty much everything is subject to the market forces of supply and demand, and as each change, both suppliers and consumers are affected in some way. It’s not like New York is dying, but they are getting sicker and sicker and local and state governments don’t have the means to the nearly unlimited borrowing that the U.S. treasury has.
The Feds will have the piper come calling one day when the country finally exceeds the willingness of the world to lend to them, but the ability of state and local governments to borrow is far more limited, and New York City already sat across the table from this piper back in 1975, as close as you can come to becoming bankrupt and survive.
The story behind this brush with death should sound familiar. New Yorkers were unhappy, many left, while the city continued to overspend and overborrow. Mayor Abe Beame was an accountant by trade, but not a very good one. The state jumped in to help out the city, but only if the city agreed to adopt austerity measures. It will come to this again at some point, but it’s a lot harder to imagine much belt tightening with Andrew Cuomo in charge, as having he and Bill De Blasio work together on austerity is like asking two drunks to head a temperance campaign.
The efforts of then Governor Hugh Carey ended up being too little too late, and one day he called Mayor Beame to inform him that the jig was up. Beame met in the basement of Gracie Mansion with attorneys to file the bankruptcy as well as planning for the much bigger cuts in spending that the bankruptcy would require.
New York, in desperation, begged the Teachers Union to lend them more money, but the teachers did not want to throw more good money after bad. A bond default was imminent, and people started lining up to get the between 2 and 4 cents on the dollar that these bonds were expected to bring. The shock of this reverberated throughout the financial world and it was believed that this would bring down at least 100 banks who held massive amounts of these now virtually worthless bonds.
While some fingers were pointed at the Ford administration for failing to bail the city out, many fingers were pointed at New York for its mismanagement. As the clock ticked down in the final hours, the city’s last hope was to get the Teacher’s Union to change their minds and lend them the $150 million that would allow the city’s finances to live to fight another day.
In the end, the teachers decided that making the loan was the lesser of evils compared to all the layoffs and pension money to be lost, and New York was rescued from default in the final hours. The city ended up keeping it together, by the skin of their teeth, and while today’s New York City is nowhere near the judgement day as they were 45 years ago, the current threat might be further out but is on a scale that may dwarf the mess of 1975.
That year did at least show us just how much damage an exodus can do. The flight from New York was nothing like we are seeing now though, as this was more of a matter of people leaving for the suburbs than leaving the state altogether, and doing it in such great numbers.
They didn’t have these insane lockdowns and other measures we have this year to deal with, and while just about all states agreed to mutilate their economies in a pretentious and misguided effort to stop the spread of an airborne virus that clearly cannot even be slowed down this way, the extra helping of pain and suffering that New York chose is the last thing their economy needed, already being in such a weakened state.
Investing in municipal bonds is a pretty crazy idea anyway, but still remains popular due to the sheer lack of thought that goes into these investments by individual investors. The ads trumpet their tax-free status, and people just line up for this, not even bothering to do any sort of valid comparison with other investment options.
Not surprisingly though, New York municipal bonds are a special kind of bad. The benchmark Vanguard New York municipal bond fund has seen its beta rise to 1.15 over the last 3 years, which not only means that they are riskier than the average stock with a beta of 1, this takes them into Apple territory, with Apple sized risk without anywhere near the Apple sized returns.
Crustier investors may toast to their 4% a year they are getting from these bonds on average, but when you can invest in something that has similar risk but returns over 20 times as much, and you prefer 20 times less return, you simply have had way too much to drink. You probably have to get them to drink much more, perhaps to the point of putting them in a stupor, to get them to set aside their delusions enough to see what should be pretty clear to anyone not under the influence.
It’s not that conservative investors are going to be up to putting all of their money in Apple stock over bonds of any sort, and diversification does have its merits in reducing risk, but it is important to realize that both Apple stock and these munis benefit from the risk reduction strategy of diversification. Comparing Apple and NY munis is not comparing apples to apples, it’s more like comparing apples to garbage, as they are similar in risk but as divergent as things get when it comes to returns.
The idea of going with the Nasdaq 100 instead provides the best of both worlds, where this index is both less risky and also delivers many times the returns. People have little trouble understanding that the Nasdaq delivers much higher profits, it’s the risk part that they butcher, mistakenly thinking that their bonds are far less risky than this index. This is where they go off the road.
If you are a bank with billions to put into play, your situation is entirely different than individual investors with much smaller amounts that need to be invested, which allows you to cherry pick with your investments. There is generally someone to lend to everyone, and banks can make a lot of money from sheer volume, taking them to places way beyond where investors should ever go, and it makes about as much sense for individuals to hold munis as to lend money to their neighbors for car loans.
Without exception, leave the bonds to those who trade in billions, all the bonds, including munis, and especially munis issued by those that face such great trouble such as any with the name New York written on it. Bonds in general are a pig in a poke for us, especially pigs that are as sickly as New York’s, and it pays to have a good look at any pigs before we buy them.
Editor, MarketReview.com
Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.
Contact Andrew: andrew@marketreview.com
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