The Deficit, Repo Markets, and the Stock Market.

One of the most under-reported economic stories of 2019 was the problems with the Repo Market and ‘Not QE’.  This article does as good as job of any as explaining whats going on.  This is a complicated topic, which is why it hasn’t been covered outside of the financial press, but it seems to me this will have huge implications in the coming years.

Starting in October, largely due to all the government securities being issues, the Fed stepped in and became a net buyer of Treasury securities. Wall Street & the banks treat treasury securities like liquid assets – the problem now being there are so many treasury securities in the market, the appetite is dwindling. Banks are stuffed with treasury securities, foreign interest is stalled. It seems everyone who wants to own a treasury bill has one.

Prior to this, starting in late 2017, the Fed had been (slowly) trying to drain off all the debt it added over the last 10 years. One could argue this was a major factor in the stock market ending down in 2018, with its low in December when the Fed raised rates, and signaled more to come in 2019. In January, the Fed reversed course and signaled lower rates, juicing the stock market to new highs. Now that the Federal Reserve is keeping rates low, they added fuel to the fire by injecting (printing) more money into the system, which has the effect of ending up in the stock market directly. It would seem this is what might be fueling the recent highs in the market.

Another longer term ticking time bomb is all the retirement assets accumulated by baby boomers. As boomers quit accumulating wealth (or die), and they become net sellers of financial assets, that money will be passed back into the economy, flooding the economy with all these T-bills that have been hoarded in these retirement funds. I think this may finally lead to the inflation that has been long predicted by economists when government runs large deficits. Once that money leaves the hands of old savers, and into younger spenders, a lot more money will be chasing the same goods which is a recipe for inflation.

Historical economic theory would assume that rising federal debt would lead to higher interest rates, as supply of debt exceeds demand. So far that hasn’t happened. I think this has been distorted by the huge Baby Boomer appetite for savings, and recent Fed policy is distorting markets by ‘hiding’ this debt on the balance sheet. And because it appears to the public and politicians that ‘deficits don’t matter’, there is no appetite to reign in all the federal debt. So far, its working. But I believe deficits do matter. How long the government can continue to print paper to cover these debts is anybody’s guess. At some point one can assume markets will care? And what will happen when markets do care? That is a question that will be have to be answered sooner or later.

Azure Oddity

I have been working a lot in Microsoft’s Azure platform, and for the most part it has been a relatively smooth transition. Lots of new things to learn, a fair bit of code refactoring and adapting to the new cloud environment.

Recently, I ran into a odd problem at a client of mine that runs on Azure. My client came to me regarding a January email that was supposed to go out at the beginning of the month, and the January email showed December data.

So I dug into this, and verified the report was scheduled to run on the First Wednesday of every month, and verified that the emails were inserted into our outgoing mailbox a minute after midnight on Wednesday January 1st. I spot checked a few of the emails, and indeed they did have (incorrectly) December information. I looked thru the code, and the sql server stored procedure and still could not find a reason.

Finally, I looked at the job run log and found the problem:

The job that was supposed to run at midnight was kicked off at 11:59:57 by Azure’s job trigger. When the report runs, if checks to see the current month year of the run to choose its data, and in this case, it was December.

It’s curious to me that the scheduler is that imprecise. For years networks have had a common time synchronization service which pretty much guaranteed times across servers, but apparently there is a discrepancy between Azure services. I will have to get use to the idea that these cloud services provided by Azure my be loosely coupled, and these services may be more autonomous than my previous windows network world.

My work around for this is simple. I can delay the run of this job a couple hours, so the job will run at 2:00am instead of midnight. My assumption at this point is 2 hours should be safe. But in this brand new cloud world, there is always something to surprise you.

2019 Solar Year In Review

Time for my 5th annual solar power progress report.  This is the fifth year of my solar production experiment (for the full story click here), and so far things are still OK.  For 2019, the panels produced 3525 kilowatts of power, down almost 2% from the previous year.   Below is a chart of my 4 years of production by month:

I do believe I am starting to see degradation in the panel performance, as each year production seems to average down.  However, as shown in the chart – our summer in the Pacific Northwest was much cloudier than normal, hitting my peak production months pretty hard.  I forecast an increase in production in 2020, as the weather was abnormally bad during those summer months.

Payback Update

As I have mentioned in previous posts, I had originally penciled out a 6 year payback when I made the decision to move forward with this plan.  Last year after detailed analysis I knocked it back to 10-13 years payback.  This year I have dug a little deeper and have a much better payback analysis.  

My current payback analysis shows I should get my original investment amount back sometime in 2028, which works out to a 13 year payback.  This analysis assumes two major factors:

  • Drop in Incentives.  My installation incentives do appear to expire on 6/20/20.  This will be a huge hit to my return, although I had factored this in to the original estimate.  If I had one more year of incentives, that would have moved my payback to around 8 years, so it is a significant hit.  I believe there are incentives for new installations in 2020, but if you are considering installing panels,  make some rough calculations and make sure you do a payback analysis.  
  • Electricity rates stabilizing.  My current payback analysis assumes that electricity rates will stabilize, rather than continue dropping.  This drop in rates over the last 5 years is probably most responsible for me not meeting my original payback estimate. I have given up with any assumption that electricity rates will increase, all I can do now (from a producer point of view) is hope for rates increasing).

This year I did a projected rate of return for the first time.  Assuming my panels keep producing roughly the same amount of power through 2030, my rate of return on this investment will be around 1.03% a year.  While that is low, its not a disaster.  Also, at the end of the the payback period I will still have functioning panels and the meter infrastructure from the original investment.  So if was to upgrade my panels in 2030, and start the investment process all over again, the installation would be much cheaper and I would get a significantly better payback.

Solar panel prices dropped a bit more in 2019, down to $0.77 a kilowatt, and I look for continued drops throughout the 2020’s.

Power Use Report

Last year I started recording my power use, as I often get asked what percentage of my use do I generate.  In 2019, my power use was down 4.2% from the previous year.  I attribute this to two factors – less air conditioning during the summer, and a full year of a new energy saving refrigerator.  In 2019, my solar installation generated 47.64% of the overall electricity I used.  

I still think residential solar / utility scale wind and solar is the power model of the future.  However, given the current incentive structure I am not sure its economically feasible in many locations in the northwest.   So if you are considering an installation, it will be important for you to estimate your annual production correctly.  If you have any questions regarding a payback analysis, feel free to leave a question in the comments and I can get back to you.

 

My Hue Lighting Experiment

A while ago, I bought a Hue light and bridge to experiment with. Hue Lights are a smart home light that can be automatically turned on and off via a timer or event trigger. I decided to start experimenting with Hue, because they have a pretty easy API to use that allows fully flexible integration with other sorts of devices or data.

I could of gone the simple route and just used IFTTT.com to integrate my hue lights with other devices. For a few years now I have been using IFTTT.com, and for the most part I could handle all my geeky smarthome needs using IFTTT. However, I don’t find it as flexible as just coding it myself. IFTTT does have the ability to use its custom language platform, but after looking at it I decided I didn’t have the energy to learn another proprietary language/structure, so I have decided to do more with building my own custom logic in C# and using Microsoft Azure. I will still use IFTTT for most the simple things, but my goal is to start integrating everything into my own custom platform to manage devices.

So my first ‘Hello World‘ application using the Hue API and Microsoft Azure platform was to turn a light on every morning, varying the color of the light by the weather forecast for the day. So if it is supposed to rain the light will be blue, if it is to be sunny the light will be yellow.

There were numerous hurdles to doing this, primarily because I was trying so many new things. Learning the base Hue API for internal access was by far the easiest, I was able to run commands from my local network in under an hour. After that, I tackled the logic to call the weather API, which also turned out to be pretty easy. It turns out the National Weather Service has an API that you can call to get the days weather –
https://www.weather.gov/documentation/services-web-api. Pretty simple authentication, and once I got past that I found the endpoint to call and in an hour or so I had logic built to pull the days forecast. Thinking I was close to achieving my goal, I was feeling 90% done with my project. Of course, as with most programming projects, it turns out the last 10% of the project consumes 90% of the time. Here is where it got complicated:

  1. Hue remote API access.I want this program to run out at Microsoft Azure, so that I don’t have to have my PC have to wake up at 6AM to run the job. So I had to configure my Hue bridge to take requests from outside my home network. Hue uses OAUTH to communicate security credentials, and my understanding of OATH flow was not that current (I am an old username / password guy..) so I had to first re-conceptualize the whole authentication / refresh token flow and figure out how to support it. Once I figured all that out I had to figure out how I wanted to store my tokens, so I had to build a subsystem to manage that whole process. I made this work more complicated than I needed to of course, because I made it flexible to handle future APIs that use Oauth. So I burned several hours getting an understanding of the workflow, and building out all that. But now I think I have a platform ready that will make my next Ouath integration easier.
  2. Azure Functions and .NetCore.  This is a great example of how software projects go way over deadline. Because I am in charge of the scope for my little experiment, I decided to expand it a bit. I wanted to set up a new Azure function to handle all my future IOT needs. Microsoft’s Visual Studio now comes with a nice template to build Azure Functions for Azure, so I decided to use it. I also decided to build it using .Net Core, which is the newest and most efficient .net framework. .Net Core allows to run .net on Linux machines, so in the future if I want to run these or other programs locally on a Raspberry Pi, that sets me up to do that in the future. It turns out I seriously underestimated the time it would take to build this out using .Net Core. The biggest hurdle was all my utility class libraries are built in .net Framework 4.7, which is not compatible with .Net Core. So I had to reinvision my future architecture for my class libraries. I experimented with .Net Standard (a compatibility standard), and threw that out. I ended up just standing up parallel utilities in .Net Core, which at this point I will use for all my IOT projects. I think it was the right thing to do, but this probably tripled the time I had budgeted for this project. Once I got all this build out and plugged into the new Azure functions project. I was easily able to publish this project to Azure, and my project was live! Each day at 6AM the program wakes up at Azure, and turns the light on in my house.

My first few days of testing happened to be rainy, so the light was always blue. I got tired of that pretty quick, so I decided to add logic to vary the color of the light by ‘raininess’. Using this code, I now can vary the light color by approximately the forecast for the day:

string shortforecast = p.shortForecast.ToLower();
int rainScore = 100; 
rainScore += (shortforecast.IndexOf("rain likely") >= 0) ? 155 : 0;
rainScore += (shortforecast.IndexOf("chance of rain") >= 0) ? 100 : 0;
rainScore += (shortforecast.IndexOf("occasional showers") >= 0
           || shortforecast.IndexOf("slight chance rain showers") >= 0            
            || shortforecast.IndexOf("light rain") >= 0          
             ) ? 50 : 0; 
if (rainScore == 100 && shortforecast.IndexOf("rain") >= 0)
        {          
             rainScore += 25;
        } 
int sunScore = 100; 
sunScore += (shortforecast.IndexOf("sunny") >= 0) ? 155 : 0; 
sunScore += (shortforecast.IndexOf("sunbreak") >= 0) ? 100 : 0; 
sunScore += (shortforecast.IndexOf("partly cloudy") >= 0) ? 50 : 0; 
if (sunScore == 0 && shortforecast.IndexOf(" sun ") >= 0)
      {
         sunScore += 25;
      }

I then build the color for the hue light of the rain and sun intensity. Note that I am using one of these ridiculously expensive color hue lights (around $50), which gives me the flexibility of using a vast array of colors.

So for now my experiment is complete, and I am enjoying a quick glance at the light to see the days weather forecast. This has been an interesting (though over budget) experiment, leading me to even more ideas for the future. Please don’t think I am an idiot for spending $50 for a light that changes color based on the weather – I consider this is an experiment and the first step in building out a fully integrated smarthome.

Expedia – After The Drop

In September I made an ill-timed move into Expedia stock, just in time to see the stock drop by 30% in November. The drop was primarily due to a bad earnings release – revenue number lower than expected and and EPS miss by $0.43 a share. In addition, the market is spooked by Google getting into the vacation rentals space in this already competitive environment.

So what to do now? Do I bail or buy on the dip? Arguably, its too late to bail on the stock:

6 month Expedia stock price

So I need to see if it makes sense to add to my position – because if I liked it at $132 I should love it at $94. Looking at the forward estimates does’t paint a great picture:

For the last year for Forward Twelve Month estimates (FTM) have been consistently dropping, at even after the drop the forward price earnings growth (PEG) metric is historically high. So that explains the nervousness about the stock.

However, if you believe the nervousness that Google will keep squeezing Expedia is overdone, and they can stabilize EPS growth, I think there is some opportunity here. Short term I think the drop is overdone. This is still a stock that is growing earnings at 50% per year, with a PE below market. Not that I am super bullish on this stock long term, I just think its OK to play for a bounce on this. So in my case, I added to my position in late November to get by cost basis break-even lower. I think this will be a short term (1-2 month) trade, with the assumption that I will lighten up on my Expedia holdings after a month or so, and take the short term tax loss on my initial purchase. My valuation and technical model is positive on this stock for the month of December, so I would guess the majority of the bounce will happen in the next 30 days. After that, I will have to wait and see because my model doesnt forecast past 30 days.

Long term, I am not sold that Expedia will dominate the travel world, but I think its worth a 30 day trade to assume that everybody who was going to sell has already sold.

Another Microsoft Access Bungle – ‘Query is corrupt’

Another example about how little Microsoft cares about its Microsoft Access product appeared to me today when a client of mine ran into a problem with their Microsoft Access database. Suddenly they started getting ‘Query is corrupt’ messages in the application.

Since I hadn’t made any changes to this application in a long time, I did the usual compact and repair assuming that would fix it. After trying all my usual tricks, I finally went to google where I found the culprit.

According to this support article from Microsoft, this problem was introduced by an office security update that was automatically installed on my clients computer. Comically, the article provides a byzantine workaround to fix the problem:

If you encounter this issue before the fix is available, the recommended workaround is to update the query so that it updates the results of another query, rather than updating a table directly.

For example, if you have a query similar to:

UPDATE Table1 SET Table1.Field1 = “x” WHERE ([Table1].[Field2]=1);

You can create a new query (Query1) defined as:

SELECT * from Table1;

And update your original query to:

UPDATE Query1 SET Query1.Field1 = “x” WHERE ([Query1].[Field2]=1);

I applied that fix to the various spots in my application where I update tables, and that got me through the day. Since someday somebody will stumble across this code and think I am an idiot, I made sure to reference the article in my comments as to why this is coded so ugly.

What amazes me about this is the casual approach Microsoft is taking to fixing the problem. Their plan is to fix it December 10th, almost a month after introducing the problem. My question is, how many small businesses are running mission critical Access apps, and don’t have any Access developers on hand. I know of a few companies in that situation, and I guess once they download this update, they will have to find a workaround.

Curiously Access users on the Office 365 platform will get their fix on November 24th. That is still 2 weeks out, and it may foretell that customers running older versions of Office software will be considered second tier customers.

I have said before that I have concerns about Microsoft’s ongoing commitment to Microsoft Access. This latest development only reaffirms my position that even though there are still many active Microsoft Access applications out there, Microsoft must think they are not important.

Billionaire Philanthropy

The recent 2020 campaign discussions on billionaire taxation are bringing about an interesting discourse, but I wish someone would bring up problems with current philanthropy rules. It seems to me an easy step for someone to take would be to tighten the loopholes of big charitable giving.

This article does a great job discussing The Perils of Billionairre Philanthropy. It seems to me that charitable giving has surreptitiously become primarily a tax avoidance tool for the wealthy. A great stat from this article:

In the early 2000s, households earning $200,000 or more made 30 percent of all charitable deductions. By 2017, this high-earner group accounted for 52 percent of donations. And the total share of charitable deductions from households making over $1 million dollars grew from 12 percent in 1995 to 30 percent in 2015, according to IRS data.

Why the change? A couple reasons in my opinion.

  1. Donation of appreciated stock. A hidden gem of tax avoidance for anybody who has stock that has greatly appreciated. When you donate stock to charity, you get to take the charitable donation credit on the full value of the stock, without taking the capital gain. A couple great examples here. Bill Gates donated $4.6 billion dollars of stock to his foundation in 2017 without paying any capital gains. Lets assume his cost basis on that stock is near zero, and he is in the tax bracket that would pay 20% capital gains tax. By doing this, he was able to avoid paying roughly $920 million in capital gains in 2017. In 2018, Warren Buffet donated 3.6 billion in stock to the Bill and Melinda Gates foundation. Using the same math, I count that as $520 million avoided in capital gains taxes. That’s $1.5 billion in lost taxes in these two examples alone. Yes the money goes to philanthropic ventures, but is that equitable? Now.. it is a pain to donate stock to charity.. which leads me to #2.
  2. The rise in Donor Advised Funds. Donor advised funds are a great tool to give to charity for the wealthy (and upper middle class) to get a tax break. The game here is instead of giving directly to charity every year, every few years to give a lump sum to a Donor advised fund, which is essentially a pool of charitable money that can then be distributed to a different charity at any time. By giving a lump sum, people who do not hit the threshhold for itemizing their taxes can now get a charitable tax break. An Example: Lets say a married couple earns $16000 in taxes, and gave $3000 in charitable gifts in a year. Given the standard deduction is over $20k it makes sense to just take the standard deduction and not take itemized deductions, thus losing your charitable deduction. However, if instead of giving $3k to charity every year, you give $15000 to a Donor advised fund every 5 years. This gives you a $12,000 write-off every 5 years for charitable contributions because you can itemize that lump sum every 5 years. The kicker of course is, if you have appreciated stock, you can contribute your appreciated stock (see #1 above) to the fund to further leverage your contribution and take advantage of tax rules. Then, thoughout the year you dole out your money to your favorite charities from your balance in your Donor Advised Fund. These funds are very easy to set up and use – but how many people can take advantage of them?

It occurred to me that companies that have a 401k must follow strict IRS guidelines to ensure their plan is equitable by ensuring employees participate from all income levels. These charitable donation loopholes have been around for years, so they likely have bipartisan support because they encourage charitable giving. But how hard would it be to look at the above issues to make them equitable? Either change the rules to either cap tax free contributions, or change the rules so people from all income levels can take advantage of these tools.

The Future of Windows

On Wednesday, October 2nd, Microsoft made some interesting announcements regarding new devices and notably, a new version of windows. This Windows Central article gives a great overview of how Windows 10 is being reimagined, and I think it looks intriguing.

Windows 10 in its current state is a big monolithic dinosaur, the accumulation of 10 + editions of the base windows 95 architecture. I can only image the spagetti code that exists inside windows 10, but the fact that every patch that is released for Windows 10 comes with headlines of issues, it appears that it is really getting unmaintainable.

So Microsoft announced Windows 10x, which appears to be a rearchitecture of the operating system to cover a wide variety of devices. Instead of a ‘one windows for all devices’ mentality, it is being modularized to only run the components that make sense for each device. According to the Windows Central article referenced above:

This new edition of Windows 10 is based on Windows Core OS, a modular version of Windows 10 that aims to modernize and componentize the OS for all kinds of device form factors such as HoloLens 2, Surface Hub 2X, and more. 

Initially, Windows 10x will only run on the new mobile devices they announced. This stripped down windows 10 assumedly will contain only the bare minimum of functionality needed, which makes sense for new mobile devices. To reduce Windows size and complexity, why not strip out printer support, win32 support and other ancient code needed to run older technology? Windows 10 still has code to run 1990’s era Visual Basic 6 on Windows 10 – is it necessary to port support for that to a new operating system?

I think Microsoft came to the conclusion that Windows 10 in its current state is unmaintainable, and it needs to be rearchitected. I give them alot of credit for thinking ahead and envisioning a better future for Windows. Here is a prediction – I think they will re-brand this before launch, dropping the 10x name and having a name not related to Windows 10 at all.

I have been pretty critical of Microsoft over the years, but I have to give them credit for turning it around. Since Satya Nadella arrived as CEO of Microsoft in 2016, things have changed much more than I expected. They are making smart decisions (mostly..), and really challenging the old ways of doing things. I knew that Nadella would be a huge improvement over the Ballmer administration, and so far I think Microsoft and Nadella have exceeded everybody’s expections.

Dispatch From Croatia

I just returned from a trip to Croatia, a country I (and likely most Americans) know little about. During my two weeks there, I learned alot about the history of Croatia, and got a decent sense for the country. Here are a few random observations I picked up.

I Started in Zagreb, the capital of Croatia. Not really known as a tourist destination, but I was pleasantly surprised with how nice it was. Large pedestrian zone in the center of the old town, nice walks in the city and cafes.

Radiceva St in Zagreb

Zagreb and Croatia as a whole was pretty inexpensive, so if you are looking to travel in Europe on a tight budget, Croatia would be a great option for you.

Thoughout the various destinations I visited in Croatia I noticed very few Americans. Thats not to say there were not a lot of tourists – there were – tourism is Croatias leading industry. Most the languages I heard from the tourists were British, German and Slavic, which gave it a nice international feel.

If you visit Croatia, consider skipping any city where the cruise ships visit, unless you want to do the sights early or late. When the Cruise ships dock at Dubrovnik and Split, the streets get flooded during the day with people. We started our trip through the town of Dubrovnik around 8am, and were done by 11am. As we left, the crowds where everywhere:

We got out of there quick. There are plenty of great stops where you don’t have to fight the waves of tourists.

Regarding tourism in Croatia, in talking with a few Croatians, I got the impression they are not happy about being a tourism driven economy. It seemed to me that they felt the fall of communism and the resulting Balkan war broke their country. Industries were privatized, and the high paying jobs associated with those jobs are gone. More than one Croatian lamented the outflow of immigration of Croatians to other countries in search of high paying jobs. Granted most the people I interacted with were in the tourism business, so this anecdotal observation may be slanted, but it felt pretty prevelant.

On our way back from Croatia we stayed over a day in London, primarily because it is hard to get direct flights to Croatia. This was my first visit to London, and found it interesting. I was surprised how dirty it was, walking through the streets there was lots of litter and garbage everywhere. I find most European cities to be pretty kept up so that surprised me. Also was surprised about the number of homeless in London. Not as many as in the states, but more than I recall observing anywhere else in Europe. I am not sure what that indicates, other than the problem is not specific to America.

In summary, Croatia is a great place to visit. If you go, take some time to learn about the history of Croatia, Tito and the fall of communism, and the rise of the independent Yugoslavian states. But also enjoy the scenery.

Renewable Energy Takes Charge

A minor milestone on the renewable energy front – renewable energy sources have taken over market share from coal for the first time:

This Ars Technica article has the full story. I see no reason why this trend won’t continue, as solar prices have been dropping and even battery technology is getting better.

This chart from the US Energy Information Administration also shows an interesting chart – total US energy usage, while up in 2018, has been relatively flat since the mid 2000’s:

https://www.eia.gov/todayinenergy/detail.php?id=39092

Given the rising market share, and the aging of the US population, it seems that petroleum share will have to start shrinking. The primary reason its share has been rising is the dramatic fall in oil prices since 2010. The price of crude oil is now roughly just over half of what it was in between 2010 and 2014. One would think that with the advances in Solar and Wind power lowering the costs of electricity, petroleum prices will have to continue to fall in order to maintain market share.