The release last week of CPI data that showed that May’s annualized inflation rate was 5% got a lot of media attention as well as rebuke from inflation hawks and my conservative brethren. If it were to continue for a whole year, 5% inflation would far exceed the Federal Reserve’s forecast and would be a big change in assumptions going forward. However, a deeper dive into the components of the data shows that things may not be as bad as the banner headline number indicates. Specifically, according to the US Bureau of Labor Statistics, almost all of the increase in May’s inflation reading was due to a rise in energy costs, which had been extremely depressed a year ago due to Covid. The Federal Reserve believes May’s 5% inflation level (as well as April’s 4.2%) is “transitory” and will be normalized once more of the economy opens up and energy production returns to pre-pandemic levels.

Base Year Effect

If you are comparing data from one year to the next and your prior or “base” year’s data was anomalistic, then you have what’s known as a base year problem. That’s what we have here with energy prices. 12 months ago we had the entire energy sector shutting down due to the pandemic economy. Recall that people weren’t driving to work or flying on planes and thus were not using gasoline or jet fuel. Recall also that during April 2020, May 2020 oil futures fell to below $0 because storage was full and producers needed to offload their production. Now, West Texas Intermediate Crude is trading at about $71, which is an incredible increase from just above $0 12 months ago but not that much higher than the $50 to $60 range that held during much of 2019, before Covid. And this is without worldwide production having reached full or near full capacity, as US production is down in part due to changes in government policy. The BLS data show that annualized inflation in energy components was 25.1% in April and 28.5% in May, compared with a year ago when producers were paying buyers to take oil off of their hands. Last year was an anomaly and we are hoping that the Fed is correct that we should be on more normal footing going forward.

Other Components More Normal

The BLS groups data into several components in addition to Energy, such as Food (in several subcategories), furnishings, apparel, medical care, sporting goods (?), and used cars and trucks. Of these, the only one (other than Energy) to have had an abnormal increase was used cars and trucks, which were up nearly 30% (annualized) in May. Ok, but again we had negative inflation a year ago (due to Covid) and supply chain issues with all automobiles. Specifically, the auto industry is going through a shortage of semiconductors. A lack of semiconductors means fewer new cars are being built, which means prices are up both for new and used cars. Assuming semiconductor production ramps back up (it will, right?), we should see auto prices leveling off. I can’t believe that car companies won’t try to take advantage of the increased demand for cars if they are able to do so. Food sector inflation is actually down from a year ago, from 4% to 2.2% currently. Remember meat plant shutdowns due to Covid a year ago? That’s not as much of an issue now and so food inflation is trending in the right direction.

IMO

This analysis leads me to believe that perhaps the Fed is more right than wrong and that the inflation Cassandras are more wrong than right. Though the US population is substantially vaccinated, that is not so for the rest of the world, including developing countries. Increased worldwide vaccination rates will mean greater production which will mean supply goes up and prices level off or go down. Bond investors appear to agree with this thesis as the yield on the 10 Year US Treasury has stabilized in the mid 1.5%-range. Let’s hope we are all right and inflation remains at an acceptable level.

Today is June 11. Don’t forget to pay your quarterly estimated taxes on or before June 15, which is next Tuesday. “Wait a minute! I thought my taxes aren’t due until April 15 next year”, you might think. That is correct, if you are a regular employee, someone who receives a Form W-2 at the end of the year. If you are a W-2 employee (as I call them), you likely don’t have to concern yourself with making quarterly estimated tax payments, unless you have a lucrative side gig. For most other people, however, making your quarterly estimated payments is an important thing. This includes gig workers, independent contractors, and anyone else who isn’t on a company’s payroll and who receives a Form 1099 at the end of the year. Although the 2020 tax return date was delayed until May 15, 2021, there has been no delay in the due date for 2021 taxes, so June 15 remains the next due date for quarterly estimates.

Growing Numbers

According to this posting in Forbes from a year ago, 28% of workers claim to be self-employed and 14% claim to be independent contractors. Earlier postings show the independent contractor percentage to be 8% to 10%. A lot of people signed up to be Uber drivers in the 2-3 years prior to 2020, and all of them are independent contractors. Both self-employed workers and independent contractors are subject to paying quarterly estimated taxes.

Safe Harbor

How much should you pay to avoid a penalty? The IRS provides a somewhat confusing (is there any other type for the IRS?) Safe Harbor rule, which is that you can avoid a penalty if you pay 100% of your tax bill from the prior year (in quarterly increments), or 110% if you made over $150,000. Your state will also have its own Safe Harbor rule that may or may not match up with the IRS’s rule. For instance, in California, where I live, the 100% rule is in place but the timing of the payments is accelerated such that 70% of the payment must be made by June 15. California penalties for underpayment are steep, so make sure you are aware of your own state’s rules – unless you live in a no state income tax state.

IMO

Paying a penalty is the pits, so please pay attention and make your estimated quarterly payment by next Tuesday if you are self employed or an independent contractor. Other links to read if you have time on your hands:

IRS page on independent contractors

TurboTax article reinforcing the same arguments I make here

Back when there used to be plays and musicals on Broadway and elsewhere, one of my favorites was “Wicked”, which is the fun musical that is the “preqel” to The Wizard of Oz. One of the bring-down-the-house numbers in Wicked is titled “Popular”, in which Glinda, the Good Witch, tries to get Elphaba, the future Wicked Witch of the West, to accept and become what is popular. Good song; funny song, but to no avail as it turns out. When I watched a recent piece about what are called Meme Stocks, I made a mental connection with Wicked, and though I’m not from Boston, I see Meme Stocks as “wicked popular”. Perhaps this is a good connection in an artistic sense, but are Meme Stocks a good investment for you? In my opinion, no financial advisor worth their fees could in their right mind recommend that someone invest a substantial sum in Meme Stocks. Yet, part of the piece I saw (which aired on a “wicked popular” financial news network) described how companies are now trying to figure out how to become Meme Stocks. Why is that? Because Meme Stocks tend to go up and become unhitched from their fundamentals, which is all good for the management of Meme Stock companies.

What are Meme Stocks?

“Meme Stocks” is the term used to describe stocks that get caught up in discussions on Reddit, Stock Twits, or other social media forums and get substantially bought up by retail investors as a result. Gamestop was an early example of this phenomenon, followed by others such as AMC Entertainment, Bed Bath and Beyond (?!), and perhaps Tesla and Blackberry. Each of these has seen a significant upturn in ownership by retail investors, abetted by commission-free trading on platforms such as Robinhood, in addition to the Reddit discussion, which may or may not be a form of collusion. Combatants in the Meme Stock battle buy positions because they believe they are “sticking it to the man”; the man being perhaps a hedge fund, bank, or an otherwise wealthy character of despicable reputation who may have a short position in the stock. The hottest, most wicked popular meme stock right now is AMC, which owns movie theaters. AMC’s CEO, Adam Aron, has become a mini-celebrity as well as very wealthy as a result of the stock’s run-up this year. Good for him, but I think his good fortune has been a result of luck much more than skill.

Should You Play?

Let’s take AMC as an example. Before the Pandemic, AMC was a sleepy stock trading in the $10-range, and subject to significant headwinds. AMC needs people to go out to its theaters to make money, and even before the pandemic, this was becoming more troublesome because of aging demographics, alternative options for watching movies (think Netflix or other streaming services), and crappy offerings by the Hollywood studios. Not a great business model in my opinion, and investors agreed as AMC stock to stay above $10. Then the pandemic hit, forcing the complete closure of AMC theaters, which are struggling to reopen to this day. At the start of this year, AMC traded in the $2-range. Things looked bleak. Then, sometime in late January, AMC became wicked popular in chat rooms, and retail investors started to buy. AMC’s float was pretty weak (i.e., it was thinly-traded), and this played into the hands of the chat roomers. Now AMC is at $56. I ask you: Do you think the headwinds I described above are better or worse from AMC’s standpoint now that we are emerging from the pandemic as opposed to prior to the start of the pandemic? I’ll use the Socratic method here to give you my answer. Has our population gotten older or younger on balance as the pandemic has raged? (Sadly, perhaps it has gotten somewhat younger, but for the wrong reasons, as Covid deaths have been disproportionately among our elders). Do you think potential movie-goers are more or less inclined to go out and watch a film in the theater now with all of the other streaming options available? And do you think the shutdown of filming as a result of Covid will cause more or fewer movies to be produced? In short, I see AMC’s headwinds as much worse now. So what possible justification can I find to buy AMC at $56 when I didn’t like it at $10 or $2? Corporate reorganization aside, AMC is not an asset-rich company, and don’t see AMC being worth $56 under any scenario.

IMO

When a stock becomes a wicked popular Meme Stock, be very skeptical. True, retail investors can take advantage of a short or a low-float situation and cause a run-up in a thinly-traded stock. However, retail investors are fickle, and their attention spans can be quickly altered when the next great opportunity emerges. Though it is a growing segment, only a very small percentage of investors participate in chat rooms, and while their power may seem large when confined to a single stock, it is not broad enough to sustain any fundamental change in a company. Unless you really have money and time to waste, don’t play in the wicked popular Meme Stock carnival.

I just read through another “Best Places” list. This one was the Top 25 Tax-Friendly States to Retire, by Yahoo News. If you have too much time on your hands, you scroll though the article and envision yourself in one of these states. If your currently live in a high tax state (as I do in California, which is not on the Yahoo Top 25 list), you think, “Wow! I could drastically cut my tax bill and give myself a big raise if I moved to one of these states!” However, before you call your real estate broker to list your house and Bekins Moving to move your stuff, there are a lot of factors to consider aside from taxes when you decide where you want to live during retirement.

Should I Move?

The first consideration is whether you should move at all. If you have lived in the same house or the same community for many years and you have family nearby, to up and move away might save you some taxes but likely won’t make sense from a family or quality of life standpoint. Having deep roots is important and digging up those roots is not to be taken lightly. If you move to a new state, is it worth it to have to form a whole new social circle just to save some money on taxes? If you have family nearby, perhaps they can help you out in situations where you otherwise would have to pay out of pocket in a new community for that same help. Maybe your kids can help you paint a room or fix something broken, or even get groceries or take you to an appointment. Would you still see your grandchildren if you move a thousand miles away? All very important things.

The Weather

Having lived in the Northeast while growing up, I get that cold winter weather is no fun and moving south makes sense if you are sick of shoveling snow. People have been “wintering” in the south for years, but although some people make the move permanent, others go the “snowbird” route and travel back and forth each year, seeking the best of both worlds (winter in the South, summer in the North). If you are a snowbird, where do you plant your flag as your “permanent” residence? Consider in which one you spend the most time. You may not be able just to pick the state that has the lower tax rate.

Your Current State

There are legal issues to consider. New York State, for instance, makes it very difficult for someone who is a current NYS resident to move out of state if they keep property or businesses or jobs in the state. You cannot, for instance, keep your job in New York but move to Florida and say you are working remotely and are now a Florida resident. The NYS Department of Taxation and Finance will track you down and you will have to prove to them that you are completely gone from NYS. I have read of other states (California!) starting to be more aggressive in tracking down state-tax avoiders. Check with your CPA before you make a decision.

Your Current Home

Is your current home or apartment conducive to living if you weren’t as healthy as you are now? Stairs become real obstacles as you get older and your joints creak more or you put on more weight. If you live in a split-level or a multi-story townhome now or if you live in an upper apartment that is lacking an elevator, you may need to move at some point because you can no longer manage the stairs. What about the size of your house or the maintenance needed for your yard? You may think you want to retire and devote more time to your garden, but consider if it is manageable or not as you get much older. A tip: keep it small.

Health Care

You may be tired of living in a dense area, but denser areas tend to have better health care alternatives available to those who live there. Your need for quality health care will grow as you get older. Before you opt to move, make sure you are comfortable that you can go to good doctors in good facilities in your new community. You might save some money on taxes, but if you can’t get the cancer treatment (for instance), what is the point of having money on taxes?

Take Out Your Calculator

Ok, you want to avoid paying taxes, but you should at least calculate how much tax money you really will save. For instance, here in California we have Proposition 13 which restricts the amount my property taxes can be increased each year. For me to sell my house and buy another one in another state, I need to calculate how much I can pay for a house and keep my property taxes the same as they are now. The most likely case for me is that I will need to buy a less expensive house in a new state because its tax rate will be greater than my current Prop 13-advantage rate. Another issue is your income post-retirement. Don’t look at your current income while working and compare the tax rate on that vs. your tax rate on your retirement income. Instead, look at what money you plan to have coming in once retired, and calculate what taxes you would pay on that in your current state vs. your new state. Probably a CPA or a planner should help you out. You may conclude that you won’t really be saving that much and it isn’t worth it to move. Or maybe not!

IMO

Saving money on taxes or living in a new community and starting a new life once you retire has some romantic appeal but there are a lot of other things to consider when you think about moving to a lower tax state. I understand and sympathize with wanting to avoid state taxes, but you may be better off in the end if you pay a little more in taxes but are therefore able to call on family or long-standing friends to help you out in a pinch. I strongly recommend you work with your CPA or a financial planner such as me when you go to make such a big decision.