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April 18 Is Tax Day, Extend But Don’t File Late

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The deadline to file 2021 federal taxes for most people is Monday, April 18. You can forget special Covid extensions this year, but why April 18th? It turns out that April 15 is Emancipation Day, a holiday in Washington, D.C. So the IRS is giving the nation a an extra weekend. Late tax returns incur penalties, and they can be big. Late payment triggers other penalties. That’s right, the IRS penalizes you if you file late, and penalizes you again if you pay late. What’s more, filing late can draw extra scrutiny. That’s right, filing late could make you more likely to be audited. Talk about a triply whammy, so be careful. But should you rush to file your taxes on time, or should you go on extension to October 15? If you extend, it is automatic on request, and incredibly easy to do. But should you take advantage of the extra time?

If you extend, do you increase your odds of audit or decrease them? Millions of extensions are processed every year. Everyone can automatically get until October 15 by filing (electronically or by mail) a tiny form. It doesn’t even require a signature. Careful, the extension is to file your tax return, it is not an extension of time to pay. Thus, you need to pay by April 18 what you expect to owe when you actually file your taxes later in the year, anytime up until October 15th. But are there good reasons to take the extension? Perhaps the best reason to extend is that going on extension encourages reflection and due care. All tax returns must be signed and filed under penalties of perjury. Many returns filed right at the deadline are filed in haste, some carelessly. That will probably be true this year, perhaps even more so than usual, and that can bring on an audit.

Extensions can allow time to gather records, consider reporting alternatives, and get professional advice. It is best to file accurately so you don’t have to amend later. Amended returns often come about because people are in a rush. Amending isn’t necessarily bad, of course. There are times you may want or need to amend your return. But try to use amended returns sparingly. For one thing, amended returns are much more likely to be scrutinized. File once correctly so you do not need to do it again.

The IRS doesn’t even have to approve the extension. It is automatic, and there is no discretion involved. You automatically get the extra six months, period. You may not need all that time, and once you extend, you can file whenever you would like between April 15 and October 15. That time comes in useful in other ways too. For example, going on extension also allows for corrected Forms 1099 and K-1. You may be waiting for Forms K-1, gathering documents or seeking professional advice.

If there are debatable points on your return, such as whether a legal settlements is ordinary or capital gain or if your lawsuit settlement is taxable at all, take the time to get some professional advice. Besides, even if you have all your forms ready, what if you receive a Form K-1 or 1099 after you file? It happens a lot, and the earlier you file your return, the greater the risk you will receive corrected forms that may make you need to amend. Going on extension makes it less likely that you will be surprised by a tardy corrected Form K-1 or 1099. You may as well file once and file correctly.

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There appears to be no hard evidence to prove whether extending reduces, increases or does not impact audit risk. There is no evidence that there is an increased audit risk if you go on extension, but given all the advantages of an extension, I believe that an extension can actually help reduce your audit risk. All taxpayers worry about IRS audit risk. The IRS does not release data about whether going on extension increases or decreases your chances. But I still say extensions encourage reflection and care, and that alone reduces audit risk. To extend, you can submit a Form 4868, ask your tax return preparer, use commercial software, or do it yourself electronically. For more guidance, check out IRS tax topic 304, covering extensions of time to file your tax return.

Finance

Will There Be War Over Taiwan – The Next Spy Thriller

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I usually go through a rhythm of reading one or two serious books, followed by a few works of fiction and with summer on the way I wanted to highlight a few of both. In that regard I have just finished Laurence Durrell’s ‘White Eagles in Serbia’, an old-fashioned espionage thriller where the hero Colonel Methuen is dropped behind enemy lines in post war Serbia (he speaks excellent Serbo-Croat) and becomes embroiled in a violent plot to overthrow Tito.

The book is a warm-up to reading Durrell’s ‘The Alexandria Quartet’, a work that nearly won him the Nobel Prize. Durrell was part of an interesting Anglo-Irish family, who largely considered themselves Indian – his brother Gerald, the naturalist and writer, touches on this in ‘My Family and Other Animals’.

Thrillers

Though I am not an expert on these matters, I found ‘White Eagles’ a more realistic account of espionage than much of what we see in the media today (Mick Herron’s ‘Slow Horses’ is good), and overall it is a tale of derring-do that is more in keeping with the work of the founding fathers of the genre – Eric Ambler, John Buchan, Erskine Childers and Ted Allebury for example.

It also made opportune reading given what seems to be an epidemic of espionage – with reports of the Chinese hacking group APT40 using graduates to infiltrate Western corporates and notably the admission by the head of Switzerland’s intelligence that Russian espionage is rife in that country (notably in Geneva – for which readers should consult Somerset Maugham’s ‘Ashenden’ as background material).

These and other trends – such as the outbreak of a heavy cyber battle last week (against Lithuania and Norway for instance) and the increasingly public ‘clandestine’ war between Israel and Iran (they have just sacked their spy chief) point to a world that is ever more contested and complex.

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Secret World

One of the new trends in the space is cyber espionage – both in the sense of stealing state and industrial/corporate secrets, influencing actors (such as the manipulation of the 2016 US Presidential election) and outright acts of hostility such as the hacking of public databases and utilities (i.e. healthcare systems). Here, if readers are looking for some serious literature I can recommend two excellent books – Nicole Perlroth’s ‘This is how they tell me the world ends’ and ‘Secret World’ by Christopher Andrew.

I am personally more intrigued by the difference between a spy and a strategist. A spy’s work could well be described as the pursuit of information about someone who is acting with a specific intent, as well as a sense of their reaction function. There are plenty of examples – from Christine Joncourt (‘La Putain de la Republique’) to Richard Sorge (see Owen Matthews’ ‘An Impeccable Spy’).

In contrast a strategist may try to plot trends and the opportunities, spillovers and damage they may cause. The US National Intelligence department is good in this regard, becoming the first major intelligence agency to publish detailed warnings on the side effects of climate damage.

Spies and strategists might work together, but history is full of examples (LC Moyzisch’s ‘Operation Cicero’) where intelligence fails to make it through the strategic process or is simply ignored for political reasons (might the early warnings on the invasion of Ukraine be an example).

Asia next?

In the spirit of the Durrells and Flemings of the world, what issues might be of interest in terms of digging into unknown knowns and unknown unknowns. Here are a few ideas, most of which are Asia focused (we might see an uptick in Asia focused thrillers).

On the diplomatic front, an interesting recent development was the visit of Indonesian president Joko Widodo to Ukraine, and then Moscow. It was a rare visit to Ukraine by an Asian leader and potentially marks the emergence or at least aspiration of Indonesia (population 273 million) as an emerging world diplomatic player. What has intrigued me so far is that there has been little coordination by the populous emerging (largely Muslim) nations (Nigeria, Indonesia, Pakistan) in the face of high energy and food prices, and that potentially Widodo could play a unifying role here.

Then, still in Asia, but on a more deadly footing, if the Western commentariat is to be believed, China is preparing an assault on Taiwan, and looking to learn from Russia’s military errors in this regard. Other countries are reacting, and I suspect that there will be much intrigue around Taiwan’s ability to acquire sufficiently powerful ballistic missiles that could strike the coastal cities of China, and relatedly how long might it take Japan to produce nuclear missiles (my sources say they could very ambitiously do it in five months!).

So, whilst the espionage literature of the 20th century has tended to be focused on Geneva, Berlin and London in the 21st century we may find ourselves reading about ‘behind the lines’ exploits in Jakarta and Tanegashima.

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Crypto Minsky Moment Now Happening

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During the second half of the twentieth century, economist Hyman Minsky provided a set of guidelines to identify what makes financial markets fragile and economies unstable. It is the midpoint of 2022, and a crypto Minsky moment is underway.

Investment professional Paul McCulley coined the term “Minsky moment.” He did so when describing the dynamics of an earlier financial crisis, the Asian Debt Crisis of 1997.

Minsky actually died in 1995, and so was not alive either to witness for the 1997 Asian currency crisis, or to see his name used in a catchphrase for economic instability. Nevertheless, the term “Minsky moment” has stuck.

Here are three facets of the crypto Minsky moment that is ongoing.

1. At the beginning of 2022, Bitcoin BTC was trading at $47,743, and closed on June 30 at $19,986, down 58%. The market value of Bitcoin comprises the lion’s share of the entire crypto-market; therefore, as the value of Bitcoin goes, so goes the value of the entire crypto asset class.

2. Hedge funds are shorting shares of Tether USDT , a stablecoin that is not so stable and beginning to wobble. Notably, Tether is the major “coin of the realm” for the inter-crypto market, the exchange of one crypto-asset for another. Another stablecoin, TerraUSD, did worse than wobble: it collapsed in May.

3. The crypto-lender Celsius is now fighting for its life.

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In February 2022, Bitcoin was trading in the neighborhood of $44,000. At that time, I warned that crypto-investors needed to pay attention to how the issues Minsky studied applied to cryptocurrency markets. Now that these markets are experiencing a Minsky moment, let me just recapitulate in hindsight what I warned about in foresight.

Minsky’s framework features about a dozen major components. Below are six that just leap out.

1. Fringe finance: This was the term Minsky applied to what Paul McCulley — and now the rest of us — call “shadow banking.” Shadow banks are financial institutions that operate outside the central banking system, and do not have the central bank as their lender of last resort. Crypto-markets are a perfect example of fringe finance, as they operate at the fringe of the global financial system.

2. Speculative and Ponzi finance: Minsky warned about debt finance in which the source of the funds for making interest payments and repaying principal is price appreciation rather than cash. Prudent debt finance, Minsky was very clear to say, is based on hedge finance, where cash generation, not price appreciation, provides the funds for borrowers to fulfill their obligations to lenders.

Minksy warned, very loudly, that when market participants are gripped by euphoria, they shift from hedge finance to speculative and Ponzi finance. The stability issues associated with Tether and TerraUSD UST stem from the riskiness of the portfolios which back the stablecoins they offer, or in the case of TerraUSD offered. The concern is that these portfolios are weighted towards speculative and Ponzi finance. In 2021, a group of entities including Tether reached an $18.5 million settlement with the office of New York States attorney general. The office had accused these market entities of making several public misrepresentations regarding the dollar reserves which back them, especially the Tether stablecoin.

3. Asset pricing bubbles associated with financial innovation: Those wondering what an asset pricing bubble looks like need only look at Bitcoin’s history. Those wondering what financial innovation looks like, need only look at how DeFi has evolved to produce assets like Tether and lending institutions like Celsius.

4. Excessive leverage: Celsius has an assets-to-equity ratio of 19-to-1, much higher than 9-to-1 for the average North American bank in the S&P 1500 Composite index. Assets-to-equity is a standard ratio measuring leverage: the higher the ratio, the higher the leverage.

5. Bank runs, beginning with the commercial paper market: Tether is concerned about a run on its stablecoin, as investors rush to sell their Tether coins en masse. There are rumors that the assets backing Tether include highly risk commercial paper issued by Chinese entities. Tether denies the rumors, but that has not stopped hedge funds who are shorting the Tether to express their concerns that this is the case.

6. Too big to fail: Minsky asserted that during a financial crisis, governments would engage in what he called “contingency socialism” and rescue firms that are too big to fail. At this stage, there appear to be no firms large enough to qualify as too big to fail. TerraUSD certainly did not so qualify.

I am not saying that cryptocurrencies have no fundamental value, and in fact I believe that they do. Economists call the concept “value in use,” which they contrast with “value in exchange.” The problem is that there has been a large gap between crypto value in use and “crypto over-value in exchange.”

Crypto investors might believe that they are making bets on crypto-fundamentals; and indeed they might be doing so, to a small extent. The thing is to a large extent, most of what they are betting on is sentiment. Minksy warned that euphoria will surge during economic expansion, at least until the Fed raises interest rates to address inflation. Then investors’ sense of euphoria collapses, and with it asset prices.

As Yogi Berra once said, and might have said again in connection with Minsky’s perspective and crypto markets: It’s deja vu all over again.

Crypto euphoria is in a state of collapse, which is why crypto markets are experiencing a Minsky moment. Down the line, a crypto phoenix will rise out of the ashes, with less euphoria, similar to the way that the dot-com sector emerged from the dot-com bubble. Until then, investors of all stripes would do well to pay attention to what Minsky taught.

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Stock Market Investors: Don’t Fear Inflation – Embrace It

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The inflationary trend is now self-perpetuating, but that doesn’t mean investors cannot earn excellent returns.

Start with today’s inflation:

The three underlying causes are:

  1. Too much money
  2. Too low interest rates
  3. Inflationary actions/reactions being taken by businesses, other organizations, employees, consumers, investors and Wall Street

Number 3 is the reason an inflationary trend is so hard to stop. It’s a chain effect of “sellers” pushing prices up at least in line with cost increases and “buyers” attempting to hold back the inevitable.

Therefore, don’t expect this Fed to subdue inflation with a “soft” landing. Inflation well above the Fed’s 2% target likely is here to stay and even increase until the Federal Reserve and political leaders accept the need to take drastic, unsavory actions.

Okay, that sounds dire and distressing. So, where does the happy investor part come in?

How investors can win from the inflationary growth periods

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Remember, inflation is rising prices. On the surface, that means company revenues and earnings get an inflationary boost, producing stock price gains for investors.

However, industries and companies get affected differently. Therefore, succeeding in the coming inflationary bull market means adjusting strategies and expectations for the altered environment.

How to adjust strategies and expectations

The conditions to understand and accept are:

Inflation – Expect a rising cycle of higher highs and higher lows as organizations and consumers get into the swing of it

Interest rates – Realize they are still well below the level capital markets would set without Federal Reserve interference. So, consider this a bonus inflationary period where the Fed says it is tightening, but it actually is only reducing the loosening already in place. In other words, there is a long way to go before conditions truly get tight.

Economic growth – Until there is a recession, “real” (inflation-adjusted) GDP growth will remain positive. That means “nominal” (not inflation-adjusted) growth will be increasing at a higher clip as prices rise.

Company growth – Here is where things get interesting. An inflationary environment creates winners and laggards. Therefore, do not expect yesterday’s winners to be tomorrow’s in this new environment. Most likely, a significant shift will occur. And that brings us to…

Company stocks – As the financial, economy and business conditions transform, so, too, will Wall Street. Expect to see new strategies, selections and valuations based on inflation-based rationale. And that means the biggest change ahead is probably…

The shift to actively-managed funds from index funds

The inflationary growth period will push “outperformance” to the top of investors’ wish lists. No longer will matching the whole market’s middle-of-the-road results be satisfactory. As active managers charge ahead, investors will begin jumping aboard.

Skeptical? Don’t be. The combination of new, different and outperformance will be like meat to today’s malnourished investors. It’s a bull market cycle driven by extraordinary conditions that will replace the worry refrain of inflation-interest-and-recession (Oh, my!)

Note: Like many stock market periods, the reasons and results come from a combination of conditions and actions – not one simple explanation. Therefore, be sure to read my previous article, “Exceptionally Good Conditions For Stock Bull Market Launch In July.” In it I list four actively managed funds in which I have invested.

MORE FROM FORBESExceptionally Good Conditions For Stock Bull Market Launch In July

The bottom line: Multiple conditions build inflation trends, so ignore simplistic commentaries

Many (most?) media reports link simple explanations to results. Ignore them. They are written by reporters on a deadline with no time for analysis. Just think back to the gyrating explanations for each daily (or intraday) stock market move. The reason cited is normally a coincidental occurrence. For example, “8.6% inflation!” Or, “Consumer sentiment at a new low!” Or, when a simple reason is lacking, something like this from The Wall Street Journal (June 27) – (Underlining is mine)

“U.S. stocks slumped Tuesday, giving up early gains and falling for a second consecutive day as investors parsed fresh economic figures for clues about the pace of monetary-policy tightening.”

No, the market didn’t fall because investors were parsing for clues about anything. In fact, most short-term market moves are noise, often reversed a day or two later. A better short-term period to watch is a week, because the weekend market closure has day traders sitting on their cash.

Instead, follow economic, business and financial developments without trying to tie each to a stock market move. A beneficial approach for linking everything together is quarterly analysis. Why wait three months? Because each quarter contains all the earnings reports (and management outlooks), followed by the quarter-end reporting and analysis from active managers. Moreover, examining a trend quarter-by-quarter does away with all the in-between gyrations that can produce more uncertainty than understanding.

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