"The Wall" IPO?
The Stay Invested portfolio was UP today: $215.21 (+0.21%)
Overall GAIN/LOSS YTD: +$681.64 (+.66%)
Our benchmark index, the S&P 500 is UP Year-To-Date +3.57%
"The problem of social organization is how to set up an arrangement
under which greed will do the least harm, capitalism is that kind of a system. "
― Milton Friedman
Today's Buys
This morning I bought a full position in Constellation Brands (STZ) with a limit order of $156. I've placed a $225 price target on the stock which is 44% above our buy price. I had set the limit order while researching the name for the bull pen and it triggered before I could finish. That's okay, hopefully the stock will pull back again as it may be a while before we get better news in this name. Right now my main thesis is that the $4 billion dollar stake in Canopy Growth has been offered up for free during the recent sell off in STZ.
Before the close I am considering taking small positions in Independent Bank Corp (INDB) and First Community Corp (FCCO). Both of these regional banks have triggered buy signals.
The Wall Public as a Public Company
Recently a member of an investing forum suggested that President Trump is going to take the border wall public, its stock exchange symbol will be MYWL.
I laughed, and then considered doing a deeper dive on the idea of using market forces at our borders to see what the outcome might be, where revenues could be used and might there be other social and economic benefits or negative outcomes. The first question to ask is; "Is a border a financially lucrative business?"
Is a border a financially lucrative business?
There are 350 million documented border crossings a year at 48 entry points each year. The fee to cross varies due to exchange rates, but it’s roughly $20, or about $7 billion gross annually. When compared to the $3,000-$4,000 average fee charged by Coyote smugglers, the $20 fee for legal crossing is a bargain, if you can cross legally. At the southern border there were 303,916 apprehensions that can be viewed as ‘Non-Paying Border Crossings’. In addition there are revenues that come from seizure of assets; for this exercise I’ll just count liquid cash assets not the assets that have to be sold at auction. It’s a little tricky to separate out the budget costs for the Southern border vs the Northern border, but if I use agent staffing as a measure of expense I think we get close. There are 19,437 Border Patrol Agents in the U.S, roughly 85% of those work on the southern border. Looking at numbers from the Department of Homeland Security, the breakdown of agents working the southern border within other agencies (ICE, Customs, Immigration) roughly account for 85% in those groups as well. For this exercise I’ll assume that 85% of the annual budget can be attributed to the southern border operations. Overly simplistic, but probably not far off. The 2019 budget for US Customs and Border Protection is $16.690 billion, and US Immigration and Customs Enforcement have a budget of $8.816 billion for a total of $25.506 billion. The southern border should end up spending almost $21.7 billion of this budget.
Southern border Expenses: $21,680,100,000
Apprehensions expense: $ 6,078,320 non-paying crossings valued at $20 each
Sub Total $21,686,178,320
Seizures Revenues: $ 5,169,593
Current Revenues: $ 7,000,000,000 paying legal border crossings at $20 each
$ 7,005,169,593
Total Loss ($14,680,930,407)
From this quick, back of the envelope analysis, tax payers are on the hook for $21.7 billion in operating costs that by year end actually cost $14.7 billion, a $7+ billion dollar difference. By that analysis the president got his $5 billion for the wall, plus an extra $2 billion. In fact the $5 billion being fought over now could come out of current revenues since tax payers are already footing all the operational expenses plus annual increases. From this data it would appear that the southern border is not financially lucrative, but with efficiencies it could be.
If I were an activist investor the southern border would be a takeover target.
Are Estimates Correct?
It’s my own personal issue, I question everything, and when the government says it, I question it twice. A commonly quoted number for illegal immigrants living in the U.S is 11.3 million people, a little over 3%. I’ve often wondered how that estimate was arrived at, it just seems low. For instance, I’ve seen other research that tries to estimate how many people evade paying taxes, how often do you lie, or how many illegal IV drug users there are? How do you accurately measure a group that actively seeks to avoid detection? Turns out the MIT Sloan School of Management had the same issue and conducted their own study and published their findings in 2018, very timely.
“The commonly quoted estimate of 11.3 million is extrapolated from population surveys. We read that [the previous estimates] were based on surveys, but surveys may not be the most appropriate method for measuring hidden populations”
“The research found that the number of undocumented immigrants living in the country is about 22.1 million, nearly twice the most prominent current estimate of 11.3 million. Even using extremely conservative parameters, the study estimates a population of 16.7 million undocumented immigrants, nearly 50 percent higher than the widely-accepted population figure”
If in fact the population estimates are between 16.7 and 22.1 million versus the commonly quoted 11.1 million, this could have a profound impact on policy decisions because the reported crime rates related to illegal immigration would be much smaller and the Total Addressable Market (TAM) for border crossing revenues would be much higher.
Total Addressable Market (TAM)
When thinking about the border as a publicly traded company we have to consider what the total addressable market (TAM) is to arrive at a revenue projection. For the border wall the TAM should be potential crossing per year. Remember this is all feasibility stuff, we’re not trying to prove statistics here. The total addressable market is made up of people who have a desire to cross the border. Every trip I make to Mexico ends with me be really sick, I’m clearly not motivated to go there. However someone in the US with family and work ties to Mexico and vice versa would be included in the TAM. We can simply look at current data on the number of crossings to arrive at a reliable number, but given that the population living in the U.S illegally is higher than previously thought means the TAM is higher. What’s more important to this exercise is that the number of fee payers is much higher than originally thought and the total addressable market for a whole variety of revenue streams is significantly higher. For the rest of this exercise I’m going to take the middle value of 20 million and add that to our total addressable market or potential border crossings to arrive at 370 million crossings per year (350 + 20). I’m assuming the 20 million in the U.S are only making two trips a year.
Efficiencies in Operations
In order to fix part of the short fall we need to get the operations much more efficient. In fact the current director has been doing just that and so have the authorities in Mexico. The time to complete a border crossing varies substantially by time or day, season, citizenship, a variety of background checks that vary by individual and whether you are walking across or driving. Walkers fill out an entry form, drivers do not; right away it seems logical to have a system where nobody fills out a form, U.S and Mexican authorities agree on that. Amazon has figured out how to let you walk into a store, pick up a head of lettuce or a can of soup, let you walk out the door and instantly your charged for those items in a seamless electronic transaction with no swiping of cards or standing in line. Given the opportunity I’m sure Amazon would love to solve border crossings too. Let’s imagine a world where there’s an electronic border that allows for the seamless, friction-less movement of people and goods across the southern border. Some would say we have that system now; I might agree except that it’s not friction-less and we’re not maximizing revenues. Now imagine that every crossing is charged a fee, just like crossing the Golden Gate Bridge. Recently our bridges have begun transitioning away from staffed toll booths to electronic toll collection. There is already a system in place to speed us all through airports and the southern border. Several Trusted Traveler Program card (NEXUS, SENTRI, Global Entry or FAST) or an Enhanced Driver's License enable travelers to cross the border more efficiently at all 48 crossings. Instead of a concrete or steel wall, let’s put up an electronic system that charges your account regardless of where you cross the border. Obviously a lot of other information would be collected at the same time for security purposes (let’s don’t get into that debate, it’s outside the focus of this post). Let’s simply imagine that if there is any conflict between the system and your identity, security vehicles are rolling to deal with that situation. A simple mandate that everyone get one of these passes would be a good step forward. Let’s add a fee to all active U.S Passports and average the total fee per year over the life of the passport. We can't assume a 100% response rate so let's assume that 90% of active passports will want a Trusted Traveler upgrade, let's call this "Border-Prime".
Border-Prime Fee: $100 ($10 per year for 10 years)
Active US Passports: 137,500,000 x 90% adoption rate = 123,750,000
123,750,000 x $10/year = $1,237,500,000 annually
As a trusted traveler with Border-Prime it’s reasonable that you should receive a discount for pre-applying and following the rules. So if you’re not a Border-Prime Member expect to pay a bit more at the border.
Non-Member Fee: $40 per crossing
Active US Passports: 137,500,000 x 10% = 13,750,000
13,750,000 x $40 x 2 = $1,100,000,000 annually (assumes 2 trips a year)
Let’s see what the budget looks like now:
Southern border Expenses: $21,680,100,000
Apprehensions expense: $ 6,078,320 non-paying crossings valued at $20 each
Sub Total $21,686,178,320
Seizures Revenues: $ 5,169,593
Current Revenues: $ 7,000,000,000 paying legal border crossings
Border-Prime Revenue: $ 1,237,500,000
New Non-Member Revenue: $ 1,100,000,000
Sub Total $ 9,342,669,593
Gross Profit/Loss ($12,343,508,727)
Obviously this isn’t good enough, investors won’t put capital into an operation that loses over $12 billion dollars a year. What is cool to consider is that just a couple of simple improvements, using systems that are already in place and policies that the CBP already wants to change have reduced the operating cost from $21.7 billion, to $12.4 billion.
Let’s take this a step further and imagine that the electronic border security and payment system is in place at all 48 crossings, and at areas where most illegal crossings occur. In theory we should be able to reduce a large portion of the staff. Employees are the most expensive part of any business as they require wages, health insurance, vacation days, sick days, space, equipment and training to do their jobs. Plus they make mistakes, we’re only human….right. So let’s imagine that through advanced automation we can reduce the number of employees and improve operating efficiencies further.
With electronic systems in place we no longer have 6 million dollars of non-paying crossings, so that figure can be removed from expenses as they are now revenue generating crossings. The $6+ million dollar expense is roughly 303,916 crossings per year, but I'll round down to account for some ongoing illegal attempts. Since these people are no longer trying to cross undetected, let's add that to our revenue stream at 2 crossings per year, but assume they don't want to be members just yet. Since border crossings are now more efficient and require fewer manual inspections we can reduce staff by say 10%.
300,000 x $40 = $12,000,000 ($40 is a bargain to someone who was paying $4,000 to a coyote)
Southern border Expenses: $ 21,680,100,000
10% reduction: $ 2,168,010,000
Sub Total: $19,512,090,000
Seizures Revenues: $ 5,169,593
Current Revenues: $ 7,000,000,000 paying legal border crossings
Border-Prime Revenue: $ 1,237,500,000
New Non-Member Revenue: $ 1,100,000,000
New Non-Member Revenue: $ 12,000,000
Sub Total $ 9,354,669,593
Gross Profit/Loss $ 10,157,420,407
As operational efficiency improves and more experience is acquired using these systems we can assume that some of the smaller border crossing facilities can dramatically reduce their staff. In some cases we might just be able to have a response team that arrives as needed. Also with greater freedom to travel back and forth let’s assume an increase in the number of border crossings by including the 20 million people that have been trying to remain undetected. Let’s reduce staff by say 20% and increase crossings by 40 million (20 million people 2x a year). Let’s also remember that we’re dealing with the U.S government, if your credit card has expired, or check bounces or you cross without your electronic ID, there will be a fee. So let’s assume that 10% of crossings are problematic, but can be handled by existing staff so these fees are in fact revenue.
Southern border Expenses: $ 19,512,090,000
20% reduction: $ 3,902,418,000
Sub Total: $ 15,609,672,000
Seizures Revenue: $ 5,169,593
Increase Revenues: $ 8,000,000,000 400 million legal border crossings
Fines & Fees: $ 800,000,000 assumes 10% rate of problem crossings
Border-Prime Revenue: $ 1,237,500,000
New Non-Member Revenue: $ 1,100,000,000
New Non-Member Revenue: $ 12,000,000
Sub Total $ 11,154,669,593
Gross Profit/Loss ($ 4,455,002,407)
Okay, MYWL is doing well as a startup by continually improving operating efficiencies and generating more revenue by improving technology, reducing overhead costs and expanding the total addressable market. We might imagine that MYWL starts an ad campaign to increase border crossings for tourism. We can keep looking for improvements until this turns a profit, but for MYWL that isn’t necessary because all funding comes from Congressional appropriations of tax dollars anyway. So let’s look at it this way, reducing operating expenses is an improvement in the use of tax dollars; so any revenue received can be used to pay shares and dividends to shareholders (everyone) and increase the assets of Social Security, Medicare and Medicaid. MYWL doesn’t have to be profitable, it just needs to cost a lot less, but profitability is in sight. Using existing systems and technology we reduced the $21.7 billion budget to roughly $4.5 billion.
I think it’s time to take this to the next level.
The Wall Initial Public Offering symbol MYWL
MYWL needs to raise capital for additional infrastructure projects, more electronic devices to close off all the gaps that let revenue leak out and to begin development of a northern border system of electronic devices and operational efficiencies. Since the border fees and fines are essentially a tax, let’s look to the capital markets to raise the money needed to expand.
Let’s also try to imagine a CBP Director and Congress that have their eye on using all this new found success to solve bigger problems and further expand the U.S economy. That’s a stretch, even for me, but it’s my post I can dream anything I want.
Former Federal Reserve Chairman Alan Greenspan (once my dad’s TA in finance at New York University) has talked at length about the cost of Social Security, Medicare and Medicaid; not just in terms of real dollars and the growth rate of these programs but also in terms of lost investment capital. One way investment capital is measured is by the savings rate, if money is on the side-lines, it’s not invested and it’s not productive capital. Greenspan shows in his latest book Capitalism in America that the cost of Social Security, Medicare and Medicaid are directly tied, dollar-for-dollar to capital investment. Basically as the cost of these programs go up, the amount of capital invested goes down by an equal amount. Greenspan has discussed that this is the source of our productivity woes. I think the public offering of MYWL offers an opportunity to address this issue.
As Capital Investment dollars dry up we see a dramatic decline in the number of publicly traded companies.
Social Security, Medicare and Medicaid are the third rail of American politics, nobody wants to touch these programs but everyone seems to agree that the cost is unsustainable under the current system. In very simplistic terms it’s about population and demographics. Nobody has a personal social security account, we all pay into a system that passes through our dollars to current retirees. The notion that someone working today will never see that money is absurd, but so is the idea that we can birth and employ enough people to close the gap on the number of baby boomers who are retiring. I will retire before my kids are done with college, so we need a new way to pay for what we want.
When MYWL goes public our innovative CBP Director and Congress will enact a new benefit for every American. Under the new plan the amount we pay into Social Security, Medicare and Medicaid will be ever so slightly reduced and an equivalent amount of shares in MYWL will be deposited to your brokerage account. Don’t have a brokerage account, you’re going to get one automatically with this new system at any firm you choose. The fundamental change is that now every American will have a bank account and a brokerage account so that they are all participants in the U.S capital markets. In one quick move we eliminate the separation between an investor class and everyone else; and get everyone participating.
Currently social security benefits are only transferred to a spouse at the higher rate of the two and are not transferred to heirs. That’s kind of ridiculous when you think about it. What is John and Jane worked 40 years and John only lived for three years into retirement, he left a lot of cash on the table by dying early. If John Smith receives $1200/month from social security and his wife Jane receives $600/month, Jane will receive $1200/month when her husband passes away. But under this new system the survivor will receive the shares, dividends and the higher monthly payment. Because shares of stock are transferred at a step-up cost basis, the beneficiary also receives a lower capital gains tax when they sell those shares. In 2018 the maximum taxable earnings for social security tax deductions was $128,400. Given the dire state of this program it seems reasonable to remove the cap and tax every dollar earned. If you like taxing the rich that will feel good I guess. The point is, why are we capping revenues and looking to raise the tax rate when instead we can create a system that can actually create more wealth when everyone pays on every dollar earned.
Since the deductions only impact wage earners and not benefit recipients, there is no impact on social security recipients. Since the distributions are sent to personal investment accounts there is a tremendous amount of float where additional revenues can be earned by the Federal government to help fund Social Security, Medicare and Medicaid. Float is money in the banking system that is briefly counted twice due to delays in processing checks. Float is created when a bank credits a customer’s account as soon as a check is deposited. However, it takes some time for the check to be received from the payer’s bank. Until the check clears from the payer’s bank, the amount of the check appears in the accounts of both the recipient’s and payer’s banks. By intentionally managing the float MYWL can generate interest payments of 1-2%. Since distributions of shares is not particularly time sensitive, MYWL could simply issues distributions on a Monday and have the transaction cleared by Friday, generating 4 days of interest income on the float.
We simply can’t tax enough to cover these programs but we can invest in ourselves to fund all current needs and future needs. In just one generation the U.S could have enough people earning dividends and appreciation of their share value that the actual cash payments from Social Security could be as much as 50% less than they are today. The compounding effect of dividend payments could provide for as much as 50% of the average workers retirement needs without adding additional taxes to wage earners.
In the U.S the average annual salary is $56,516. The individual social security tax deduction rate is 6.2%; or roughly $3,503 per year, or $292 per month. Let’s assume that instead of paying the $292 per month to Social Security you instead paid it directly into an interest bearing account. Over long periods, 10 years or more the average savings rate is 5.2%, I’m using 5% in my calculation but also allowed for variance above and below this amount. The power of compound interest is stunning, and compared to what most people expect to receive in Social Security payments it’s a much better deal with a likely outcome of about $627,000 for the average wage earner who begins working at 18 and retires at 65. Even at 3% this system generates over $352,000, and at 7% a return of over $1 million dollars is reasonable. Obviously we can’t make a hard switch and put all $292 into an interest bearing account. The transition needs to occur gradually over time where contribution purchase dividend paying shares in MYWL. Young people just starting out would be smart to re-invest dividends, while those 40 and older would probably want to let dividends pay out in cash and earn compounding interest. Starting the account early and tapping it as late as possible are the key points.
Social Security is largely a pay as you go program. Most of the payroll taxes collected from today’s workers are used to pay today’s recipients. In 2016, the Old-Age and Survivors Insurance and Disability Insurance Trust Funds collected $987.5 billion in revenues. Of that amount, 87.3% was from payroll tax contributions and reimbursements from the General Fund of the Treasury (see they don’t steal it, it gets paid back) and 3.4% was from income taxes on Social Security benefits. Interest earned on the government bonds held by the trust funds provided the remaining 9.2% of income. Assets increased in 2016 because total income exceeded expenditures for the benefit payments and administration expenses. Logic suggests that increasing the trust fund assets is an easy way to keep the program operating at or above expenditures.
The U.S Economy Improves
As discussed earlier, Greenspan showed us that every dollar saved is a dollar taken out of investment. As current wage earners see their retirement accounts growing with shares and dividend cash they will have more cash available to spend and invest. Since half of benefits are paid by employers, companies will find they have extra cash to invest in their business operations further improving productivity. Congress would be smart to produce a bill that encourages greater investment, particularly in total market index funds and bonds.
Conclusion
Hopefully my readers know that this was an exercise and an attempt at humor, not a political statement. Metaphorically building a wall actually makes financial sense for the U.S, Mexico and Canada. I'm not suggesting a fence, steel slats or a concrete wall; but an electronic wall that opens the landscape, allows for wildlife migration and invites visitors and immigrants. Opening up borders is a symbol just like the Statue of Liberty.
Markets would open up, government spending would be reduced, social security, Medicare and Medicaid would receive the funding they need, and the growth rate of these programs would be dramatically slowed. Keep in mind that tax revenues would increase as well. Now that everyone can be tracked employers hiring these workers would simple scan their travel pass to pay workers and the IRS would collect taxes from both the employer and the worker.
Every American and visitor or immigrant would participate in the growth of economy. Citizens would have a retirement account that is theirs and grows with the markets. The positive sentiment alone could increase family household formation and new business formation, which are at the very core of what makes a nation’s economy thrive. The political football about building walls and border security would go away. Providing a strong retirement account for everyone would also lessen the burden on families and society, if you’ve ever paid for the care of an elderly family member you know what I’m talking about. Freeing up those resources to enjoy retirement and to continue investing would have significant positive impacts on the global economy as more people are able to shop and travel.
I think the bigger picture of this exercise was to see that the solution to a number of social and economic problems facing America can be found in using our greatest strength, imaginative market solutions. We can’t tax the rich to get everything we want. We can't tax corporations and small business enough to get what we want. If we take the wealth of every American we can't pay for all the things we want. Taxes reduce capital investment which reduces job creation and wealth creation for all. To narrow the income divide and deliver the American dream we need to create more opportunities for capital investment, invest in education as a national imperative and stop looking for a group to blame for the woe de jour.
The pie is not finite, it’s infinite, we just need to have the imagination to see new solutions.
Stay Invested,
Clay Baker
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S&P 500 declines to 2,350 or more (1-3-2019)
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Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:
STZ, AMZN, NVDA, BCRX, GS, BDSI, VEEV, VTI, GLD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.
