Biden’s Tax Proposal, Out-Of-Control Lumber Prices, And A Pick To Profit…
To move or not to move… and when? These are the questions my wife and I are pondering these days.
All around Austin, just about every spare tract of land is marked for development. A new billion-dollar Apple campus here… Tesla gigafactory there… Giant mix-use office and commercial developments down the street. Take a drive out of city limits, and there’s houses springing up all over the hill country like wildflowers.
This may sound exciting, but there’s just one problem… Locals like us who are looking to move are getting priced out of the market. Homes in our area are routinely selling for 15% above asking price. This has made it tough for folks like us… after all, how do you compete with someone moving here from, say, California who’s making an all-cash offer?
Chalk it up to the warm weather, the low taxes, the barbecue, or maybe all three. But they’re coming here in droves. And Austin isn’t alone in this… home prices are gaining steam everywhere.
A big reason for that has to do with lumber prices, which we discussed last week. And that’s why I want to circle back to it, because the situation is getting even worse (or better, depending on how you’re positioned). Also, we’re also going to hear from Amber Hestla, who has an interesting angle on the Biden administration’s capital gains tax proposal that you may not have considered…
Lumber Prices Spiraling Out Of Control
As I mentioned, the topic of soaring lumber prices is finally catching some big headlines in the media.
Take this piece from Fortune, for example:
Last week the price per thousand board feet of lumber soared to an all-time high of $1,188, according to Random Lengths. Since the onset of the pandemic, lumber has shot up a whopping 232%.
Home builders and DIYers don’t want to hear this, but the ceiling could be higher—maybe even a lot higher. On Monday, the May futures contract price per thousand board feet of two-by-fours jumped $48 to $1,420. That squeeze once again triggered the circuit breakers and caused lumber trading to halt for the day. Why would lumber yards and builders pay above market rates? Severe lumber scarcity has buyers on edge. They’re buying the sky-high contracts in order to ensure they’ll actually get the lumber they need for projects already under contract.
All in all, one expert quoted in the piece thinks the timber market is dangerously close to getting “out of control”. Regardless, it doesn’t look like the situation is getting better anytime soon, which means there’s still time for us to profit…
Up until recently, you might have been surprised to learn that one of the most profitable asset classes of the past century has been timber. In fact, according to one analysis our Top Stock Advisor research team found, it’s posted 11% annual returns from 1972 to today.
Here’s another interesting tidbit our research folks found… The average American uses enough timber products each year to account for a 100-foot Douglas fir tree. And although the timber industry has made great strides in improving the productivity of forests, there’s only so much they can do. You can’t accelerate the process of growing trees that were planted to replace lost timberland.
So how can you profit from this situation? Well, as you may know, my colleague Jimmy Butts and his Top Stock Advisor team made their call on lumber prices back in December – way before this was on any media outlet’s radar. They made the call as part of their report on investment predictions for 2021.
Jimmy and his team gave readers a few ideas in that report, and one of them is Rayonier (NYSE: RYN).
This company gets a little less than half its revenue from timber and owns 2.2 million acres, mainly in the U.S. The rest of its business comes from specialty wood products, such as cellulose and high-performance fibers. Unlike paper consumer products (which have little pricing power) or building products (which are dependent on home construction and improvement activity), these specialty products are technologically advanced and thus provide relatively high profit margins. RYN provides excellent income with a recent yield of 3%.
One caveat though: the stock is already up big-time and it’s not particularly cheap. And there are a few other choices out there.
Don’t Be Fooled, This New Tax Proposal Affects All Of Us
Stocks sold off last Thursday after reports indicated the White House was proposing increasing capital gains taxes. As investors, this is a story we can’t ignore — even if it’s not one that affects us personally.
The proposal emphasizes that the highest tax rate will only apply to the very richest families. I saw a report that just 0.3% of the wealthiest families would be affected. And while that sounds like a small number, there are nearly 121 million households in the United States; that means more than 36,000 households would be subjected to these tax increases.
These households that are located in high-tax states would face rates of more than 50%. This would obviously affect their decision making.
Let’s say one of these wealthy families is considering where to invest $1 million under a high-rate regime. Their adviser tells them they can expect a return of 7%-10% in the stock market. Assuming a 10% return, that $1 million will grow to more than $2.5 million in 10 years.
Selling at that point will trigger a 50% tax, for this example. The gain of about $1.5 million results in a tax of about $750,000. Not bad, the $1 million is now $1.75 million after taxes.
But inflation has reduced the buying power of that money over 10 years. Assuming we hit the Federal Reserve’s optimistic target of inflation of just 2% a year, the $1.75 million fortune will only be able to buy as much as $1.4 million in today’s dollars. That’s a 40% return after taxes and inflation.
Annualized, that’s a 3.4% return on investment. And that’s under the best-case scenario. There are risks. Stock prices could fall. Or they could deliver less than 10%. Inflation could rise. The returns could be lower, or higher.
Many wealthy families will realize that returns could be lower and that they can obtain similar or better returns in safe, tax-free municipal bonds. Or they might invest in other assets where gains can be sheltered. They may also consider strategies to avoid capital gains taxes, maybe by donating appreciated securities to charity.
Please note this is not tax advice, I am just thinking through the implications of the policy proposal.
The point is higher capital gains taxes will almost certainly affect capital allocation decisions. For example, if municipal bonds become more attractive, I’d expect local governments to issue more to take advantage of the increased supply. This will lead to less efficient allocation of capital compared to aggressive growth investments.
That’s the bottom line – higher rates could drive capital to less growth-oriented investments. That could lower the future rate of return on stocks, and that affects us. This is a long-term concern, of course, but it only adds to my worries about the long run. It’s one of the reasons I’m continuing to focus on the short run with my trading.
And it’s also why I’m such a fan of the low-risk income-generating plays my colleague Robert Rapier is showing members of his new service, Rapier’s Income Accelerator.
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