The SEC Wants to Ban Passive Income | Crypto Under Attack

Here, Grammits guides you up what's which, by the way, is my intro backwards. Today, we need to address a few unexpected curveballs that were just thrown at the markets. Because whether you're invested in stocks, cryptocurrency, retirement accounts, or even real estate, chances are this is going to impact you in one way or another.

And if you're wondering, "But, good! What is so important that I should watch this instead of the Andre Dick video posted at the exact same time?" Well, let me explain. In just the last week, Wall Street analysts have warned about the increased likelihood of a 10% pullback. The Buffett indicator now suggests that stocks are the most overvalued they've ever been in history. Cryptocurrency is under the microscope with the new tax regulation going into effect. Congress wants to tax certain Roth retirement accounts, candidate moves to ban foreign buyers, and tax empty properties.

Then, the most wild story from all of this: the most expensive home in America has now defaulted on their payments and is being taken back by the bank. So, given all of this happening at the exact same time, let's talk about what's going on.

Whether the stock market could be poised for a pullback, how the Buffett indicator could now be wrong, and then most importantly, how you could use this information to make money. All of that and more on this episode of "The Economy Makes Absolutely No Sense."

All right, so on the first order of business, let's talk about what's going on with the stock market. Even though we've been teetering at all-time highs for quite some time, some metrics point to a market that should be due for a 10% pullback any minute now. Wall Street analysts reported that the S&P 500 climbed 20% this year, with 54 record high closes along the way.

Although we have not seen a 10% pullback in more than 369 days, which is the longest stretch in more than three years. On top of that, we have something called the Buffett indicator, which measures the ratio between the valuation of our stock market and the national GDP. This was once said to be the best single measure of where valuations stand at any given moment. But today, it's alluding to a stock market that could be the most overvalued it's ever been in history.

Each time the market has been this high, it has resulted in a subsequent stock market drop. But critics now say that this chart is outdated, and instead, they point to several flaws which make it less reliable than we would hope. First, this doesn't take into account low interest rates, which would push valuations higher than normal. Just consider this: when interest rates were higher and bonds were paying a risk-free 7% to 15% return until 1995, what would you rather do?

Invest your money there without having to worry about a single thing, or throw it in the stock market, take your chances, and then hope for the best? I think the answer is pretty obvious. Now, with bonds paying next to nothing, the stock market is really one of the only few places to stash your cash, and that's leading us to what we're seeing today.

The second reason is that more companies are generating revenue overseas, and that's not reflected in our national GDP. That means as more and more companies begin to earn their income worldwide, the indicator begins to lose its accuracy because we're valuing a company based on their total net profit, not how much money they make within the U.S.

Now third, throughout the last 20 years, tech has dominated the market, and they tend to have much higher valuations. Keep in mind when the Buffett indicator was first invented; companies like IBM, AT&T, Exxon Mobil, Shell, and GE dominated the market. They were capital intensive and had low margins compared to the Apples and Facebooks and Googles, who could raise a hundred million dollars at the drop of the hat just by turning on an extra ad or two.

Fourth, even Warren Buffett has scaled back with using this as an indicator, believing that it should only be used in conjunction with other charts as well. So, in terms of the Buffett indicator showing that we're 95% overvalued, I think it's certainly something to consider. But it shouldn't be taken too literally without accounting for everything else.

However, as for being overdue for a stock market correction, I would actually tend to agree with this. Price drops like these are actually a healthy sign for the market. In fact, since 1920, the S&P 500 has seen, on average, a 5% pullback three times a year. On average, a 10% correction happens every 16 months, with an average loss of just over 15%. So if we see a drop, we should most likely all do our part to buy the dip.

But I don't think we can mention the dip without dipping into what just recently happened with cryptocurrency. Write this: El Salvador officially embraced Bitcoin as legal tender. The entire cryptocurrency market sold off, wiping out about 400 billion dollars in a matter of minutes. But that's not what we're talking about today because that's old news. Literally, in YouTube, more than two days is like ancient.

Instead, we have two new cryptocurrency topics under discussion, and they have to do with both taxes and SEC regulation. Sorry, I just threw up in my mouth a little bit. Anyway, this all began when Coinbase wanted to issue a product called "Lend" that would pay users 4% interest for holding the USDC stable coin on their platform.

In theory, you would essentially lend your digital dollar to Coinbase. They would guarantee the amount that you deposit, and then anytime you want to opt out of earning 4% interest, they'll give your money back. Now, of course, you might be wondering, "Wait a second, Graham, who are they lending this money to, and how could they afford to pay me 4% when my own bank account can barely afford to pay me peanuts?" And I gotta say, that's a good question.

By loaning Coinbase your money, Coinbase could then go and lend that to somebody else at an even higher interest rate to pay you 4%, and they profit the difference, which in a way is exactly what the current banking system does. Anytime you go and deposit money with a bank, they can use that money towards the reserves needed to go and issue mortgages, auto loans, or buy treasuries while they pay you a wonderful half a percent in interest.

And this is where the problem begins. The SEC recently threatened to sue Coinbase over their USDC lending program, which they say is a security and not a currency. The SEC says the lending feature is not risk-free because they fund business operations by selling you an investment that promises a return on your money. The SEC references what's called the "Howie test," which clarifies the differences between a loan and a security, which Investopedia describes as an investment of money in a common enterprise with the expectation of profit to be derived from the efforts of others.

Now, of course, if you're anything like me and you're thinking, "Wait a second, isn't this exactly what banks are doing anyway?" The answer is yes! Except the only difference here is that all aspects of the banking system are highly regulated. A small little footnote was added into the Securities Act of 1933 that exempts banks from being securities.

So banks are protected from doing the exact same thing, but cryptocurrency is not. Because Coinbase is not a registered bank, right now we're in this really weird Catch-22, where cryptocurrency lending wants to operate like a traditional bank but better. Although in order to do that, they have to comply with current banking regulations, which is not yet adapted for cryptocurrency. In the big picture, I would certainly agree that it's definitely a gray area, and I do think that cryptocurrency should offer the same benefits of a traditional bank with better terms.

But the SEC is just years or decades behind the trend, and until they're educated on the nuances of cryptocurrency, it's probably going to be an uphill battle for crypto lending institutions. Although unfortunately, I hate to be the bearer of bad news, but it doesn't end there.

All right, so in terms of the topic of cryptocurrency, we can't talk about the SEC without mentioning the IRS. In wake of El Salvador declaring Bitcoin as legal tender, the IRS has doubled down, reminding everybody that cryptocurrency is treated as property. Therefore, if you sell it, transfer it to someone else, or use it to buy anything, that is a taxable event, and you are required to pay your fair share of taxes.

In the event the current infrastructure package passes into law, that could be expanded even further. That's because this new bill contains a provision that would require brokerages obtain social security numbers, addresses, and other information to automatically generate a 1099 and track who obtains what. Right now, this bill is written so broadly that it would also encompass individuals, NFT creators, and miners — not those miners, by the way, these miners.

But even if this bill is further clarified, essentially cryptocurrency brokerages would be the exact same as the stock market brokerage. Honestly, I have a feeling that's what we're going to have to come to expect at a certain point. There just isn't any hiding from the IRS; they're always watching. Yes, I'm looking at you! They know what you did last summer.

And if you want to buy and sell cryptocurrency or even use it as a hedge against inflation, that will be reported and taxed accordingly. As far as what I think about this personally, it doesn't really bother me that much. I mean, sure, the way it's currently written in the infrastructure package is absolutely terrible. The brokerages eventually will have to report what you buy and sell.

If you make a profit on something and don't pay your taxes, well, that's on you. At some point, this is just going to be the new normal and just like lending accounts, it’s going to be an uphill battle until eventually, the IRS wins. But wait, if you thought I was done talking about taxes, oh no, there's more.

As a way to help fund the three and a half trillion dollar infrastructure package, Congress is leaving no stone unturned, and lately, all eyes have been on my favorite retirement account of all time, and that would be the Roth IRA. This recently came to the spotlight when it was revealed how some wealthy individuals would use the Roth IRA as a tax shelter while making private investments that would later grow to a huge amount completely tax-free.

This was done by purchasing private shares of a company pre-IPO, and then as the company grows, so does your money and it's all completely legal. Congress, however, contends that the Roth IRA was never meant to be used for such sizable amounts, and as a result, they've alluded to a new proposal that would tax accounts with balances above 5 million dollars.

Now, it's unclear exactly how they would implement such a change, but it is evident that this is something they're willing to explore as a way to raise more money. Critics say that those changes would be very difficult to carry through with and would disincentivize risk-taking, with smaller companies receiving less investment. After all, if you knew anything above a certain amount would be subject to an additional tax, why take the extra risk for more money when you can play it safer instead?

Not to mention, it would be no different than investing two thousand dollars a year in Amazon stock when the Roth IRA was first introduced in 1997 and then having 25 million dollars of which would be subject to an additional tax for an investment that very well could have lost money. Either way, this is said to only impact one-tenth of one percent of all Roth IRA accounts, according to the IRS. But if this happens, it certainly sets the precedent that if it starts here, where does it end?

There's really no easy solution around this, but from the way I see it, these accounts are far from the norm. Very few of them exist, and I'm sure far more people have made investments like this and lost money than have made enough to be targeted by Congress with attacks on top of that.

Canadian Prime Minister Justin Trudeau just tweeted a potential solution to the insanely hot real estate housing market shortage, and it's just this: houses shouldn't sit empty when so many Canadians are trying to buy a home. So we're going to ban foreign ownership in Canada for the next two years and tax the existing vacant foreign-owned properties.

The issue stems from foreign money being funneled into Canada for the purpose of finding a safe place to store their wealth. For the last few decades, real estate in Canada has been a relatively stable economy. They've seen solid appreciation, and as a result, it has become a favorite for foreign investors who they say are driving a housing bubble.

It's currently said that on average, foreign buyers make up about 4.8% of all residential properties in Vancouver and 3.4% of properties in Toronto. In terms of vacancy, it was found that in 2016, 8.7% of all homes were empty, which is five times higher than the United States at just 1.7%.

Now, it's really important for me to mention that not all of that vacancy is due to foreign investment, and I could not find a single reliable source that details exactly how many foreign investors are keeping their properties vacant. However, one study did find that 70% of all single-family homes marked as vacant in 2014 were found to be waiting for a renovation permit, so take that with a grain of salt.

Either way, Vancouver has already implemented a 15% tax on foreign buyers, and even though a vacancy tax could be warranted, I have to say at the core, the problem is a lack of new development. Canada needs more homes built, and until they can solve the root of the issue, anything else they do is simply a Band-Aid on a much bigger problem.

Lastly, speaking of problems, the most expensive home in America, which was once listed for as much as 500 million dollars, just went into default for a 165 million dollar outstanding debt and is being taken back by the bank in an effort to recoup some of their costs.

Now, if you haven't seen the full house tour posted by producer Michael, I highly recommend that you watch it because I gotta say it's wild. But in this case, when the owner of the home was not able to make his payments, it goes back to the lender, who will then make the final repairs and try to sell the property to recoup some of the money that they've invested.

To me, this is literally the epitome of the saying, "If you owe the bank a million dollars, that's your problem. But if you owe the bank 165 million dollars, that's their problem." And that, I believe, is exactly what's happened here.

So with that said, you guys, thank you so much for watching. I really appreciate it. As always, make sure to like, subscribe, hit the notification bell, and feel free to add me on Instagram and on my second channel, "The Graham Stefan Show." I post there every day I'm not posting here. So if you want to see a brand new video from me every single day, make sure to add yourself to that. Thank you so much for watching, and until next time!