Smart Investing with Brent & Chase Wilsey

July 23rd, 2022 | Chip Manufacturing, 529 Plans, Solar Panels, Cryptocurrency, Canned Beverages, Tort Litigation System & The Semiconductor Bill

July 25, 2022

Chip Manufacturing
I for one am glad to see positive news from the Senate regarding a bill designed to boost US semiconductor competition. After a key procedural vote that passed 64-34, the stage is now set for final passage in the chamber either late this week or early next week. It would then head to the house for passage and finally to Joe Biden to sign the bill into law. The bill would provide about $50 B in subsidies to aid chip manufacturing. Some chip companies like Nvidia, AMD, and Qualcomm aren't as pleased with the bill as they say the bill does not do enough to support them and it favors manufacturers like Intel. Personally, I do not believe we need a bill to help chip design as that has been a highly profitable business many chip companies have focused on. The manufacturing side is not as profitable and is much more capital intensive. Manufacturing is where the major issues are as we have seen 48% of chip sales come from US companies, but just 12% of the manufacturing takes place in the US. This is down from 37% in 1990. I was also glad to see the new bill was stripped down from other versions that included other areas of focus like taxes and climate policy. I hate when politicians try and bundle a bunch of crap into one bill, especially when a particular area has bipartisan support.

529 Plans
I have been getting a lot of questions about 529 plans lately and I must say for the most part I don't believe they are worth it. Looking at the tax benefits I do not think they are worth the potential risk. To begin some states, allow for a deduction on state income taxes, but here in CA there is no deduction for a contribution. The other benefit is the funds grow tax free and withdrawals are tax free if used for qualifying expenses. The downsides here are that if the funds are not used for qualifying expenses there is a 10% federal penalty, CA imposes a 2.5% penalty, and the gains are subject to income tax. Also, the investment options are limited to whichever plan you decide to pursue and if you go with a broker advised fund, watch out for the sales commissions on the funds they are recommending. For the most part I recommend building your investments which then gives you the option to pay for college down the road if that is what you would like to do and you believe your kids deserve it. I will say there are some cases the 529 plan makes sense, but for the average person I'd say building your net worth is the better option.

Solar Panels
Apparently investing for green energy is not always going to work out well in the end. There has been a boom of buying solar panels for clean energy. Well now it is coming out that solar panels only last 20 to 25 years on average. After that many of these panels are being shipped overseas or end up in landfills because it turns out that to recycle them costs more than to manufacture them. You may be thinking wait a minute silicon is recyclable which is true but also mixed in with the silicone is cadmium and lead, and that is the problem.
The department of toxic substance control from the state of California has listed solar panels under the hazard waste title as universal waste. If you have panels that were installed 20 years ago, they also lose their efficiency by about a half percent per year. So, if your panels are 20 years old, you’re only getting 90% of the energy that you were when your first bought the panels. I would not want to be holding the public solar companies (SEDG, FSLR, MAXN) as I imagine in future years they will be blamed and be hit with lawsuits and penalties to clean up the mess.

Cryptocurrency
Some people like the idea that trading cryptocurrencies is not regulated by the government, but some people trading cryptocurrencies don’t understand how much risk is involved. Let me give you a couple of examples on Wall Street that don’t exist in cryptos. On Wall Street there are market makers, stock exchanges and brokerages that are separate due to conflicts of interest. That is not the case with trading crypto, it is possible for crypto firms to trade against their own customers or do something that is known as front running which means they sell their positions before the customers to get the better price. There is no prohibition against wash trading on crypto exchanges and also there is no best execution rules, and no standardized reporting exists. If you think crypto‘s are good or bad the trading system has many holes and room for fraud.

Canned Beverages
If you walk through the beverage aisle at the grocery store you may have noticed that some cans are getting skinnier and not using the barrel type cans. Do not worry as it is still the same 12 ounces, and it is not shrunk inflation. This is done for a couple of reasons; they take up less room on the shelf and in transportation which saves some costs along with now maybe standing out from the competition. There’s also a psychological benefit that because they are slimmer it tricks the brain into thinking they are healthier with less calories. Sounds silly I know but it’s true. There is one problem, you may have noticed which I have, is they don’t work quite as well in the cupholders in cars because the car cup holders are designed for the barrel type cans.

Tort Litigation System
I was shocked to learn that back in 2016, the tort litigation system cost the US 2.3% of GDP which is roughly $429 billion a year in the United States. My guess is this has likely increased even further in recent years. This number is so high because it is estimated that there are more than 40 million lawsuits filed each year. What is also interesting is that just 57% of the money was paid as compensation to the plaintiffs, while the remaining 43% covered the cost of litigation, insurance expenses, and risk transfer costs. Part of the problem I believe is because now about 95% of pending lawsuits never make it to trial, they are settled. This avoids the aggravation of going to trial plus the added expense, but it also makes it more rewarding for people to file frivolous lawsuits in the hopes of getting some free money. And if you wondering the United States is the most litigious society in the world.

The Semiconductor Bill
Just a couple of days I said I was excited about a semiconductor bill that was making its way through congress. Today after looking at more details, I am reminded of why politics is so frustrating. On top of the spending designated for semiconductor manufacturing, it could include $81 B would go to the National Science Foundation (doubles the present budget), $9.6 B would go to the Commerce Department's National Institute of Standards and Technology, $11 B would go to the Commerce Department's regional technology hubs, $50 B would go to the Energy Department's Office of Science, $4 B would go to the national labs, and you can't forget about the $1 B for "distressed" communities and labor markets. All this fluff is exactly why nothing gets accomplished in DC. You finally have something that has bipartisan support and add a bunch of other areas that do not.

 

Harrison Johnson, CFP®: “Understanding Internal Rate of Return (IRR)”

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