When does a loan, not feel like a loan? That is the idea behind one of the more exciting new concepts being floated by the financial technology community. It is an idea that is just catching on here in the U.S., but it could challenge traditional credit cards overtime.

 

Are you really going into debt when you buy something and pay it off in a set number of installments? Technically, yes, but it doesn't feel that way, especially if you are paying 0 percent interest on the installments. That's evidently what Square, a leading financial service, digital payments company believes when it announced this week it was acquiring Afterpay, an Australian-based Buy Now Pay Later (BNPL) company in a $32 billion all-stock deal.  

 

So why all the fuss over BNPL?

 

E-commerce companies are betting that younger Americans, who do most of their shopping on line, are not as excited as their parents and grandparents were with the benefits of credit cards. They may be unwilling, or unable to open credit card accounts. Instead, many millennials are following the example of Europeans, who have traditionally avoided credit cards and the debt that comes with them.

 

In Europe, where BNPL accounted for 7.4 percent of e-commerce payment methods last year, consumers are more willing to buy an item online, even though they may not have the full amount of the purchase available in their bank accounts. As long as they honor the terms of the installment agreement, everything turns out roses.

 

Here in the U.S., the idea is catching on. This holiday season, for example, I purchased a new Apple iPad for a loved one through PayPal Holding Inc. The company was offering a BNPL scheme called "Pay In 4" (installments) with no fees.

 

After reading the fine print, I realized that like so many of these offerings, if I missed a payment, I would be hit with penalties and fees and possibly damage my credit score. After researching the issue, I found out that nearly 40 percent of U.S. consumers who used BNPL have missed more than one payment, and 72 percent of those saw their credit score decline.

 

I am one of those people who pay off their credit card debt in full each month. I confess that I was so worried I would forget a payment, and incur a fee, that I ended up paying off the charge in two, rather than four, installments.

 

More and more retail websites, however, are now offering these services. The leading providers are Affirm Holdings, Inc., which just joined Apple in a BNPL deal in Canada, PayPal Holdings, Inc, Swedish-based Klarna and Afterpay/Twitter. It is estimated that in 2020, BNPL companies facilitated between $20 billion and $25 billion in U.S. transactions, but that only accounts for 1.6 percent of U.S. digital payments. The bet is that BNPL will grow as a result of online shopping and the culture clash around credit cards.

 

Let's face it, credit card debt in America has a bad reputation. Almost half of all Americans are carrying credit card debt. The average household credit card debt is $5,315. And while the percentage of revolvers (those who carry a debt balance on their cards) declined a bit during the pandemic, it still comprises 40.1 percent of all credit card holders.

 

But that has not stopped us from accumulating more and more credit card debt. Credit card balances increased by $17 billion in the second quarter 2021 (to $787 billion), according to the New York Federal Reserve's Household Debt and Credit report. While that is still below the $927 billion amassed prior to the onset of the pandemic, it continues to grow.

 

The optimists argue that younger American millennials don't want to be saddled with this kind of debt and fall in the trap of only paying down monthly charges forever and ever. Yes, BNPL is still debt, but only deferred and not forever, so there is little temptation to roll it over. The critics say that more than 40 percent of those using BNPL can't get access to traditional credit, either because their credit limit is maxed out, or they have poor or non-existent credit history.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

After the Olympic Games conclude on Aug. 8, Japan will still be tallying the final cost of hosting the games. Indications are that the final price tag could be more than $20 billion.

 

Was it worth it?

 

The most recent polling data suggest the answer is a resounding "no," at least as far as the Japanese are concerned. Over 83 percent of the people polled, who live in Japan, believe the Olympics should not have taken place this week. To the Japanese, it is not just the expense of the games, but the holding of this event while the country is in the midst of a resurgence in the Delta variant of the coronavirus. Many fear the games will cause a "super spreader" within the country and possibly the world.

 

In an effort to reduce those risks, the Japanese government banned spectators from the games in Tokyo, while announcing a state of emergency to combat the latest surge of COVID-19 cases. The nation has reported more than 118,000 cases and 14,800 deaths so far, which is not much compared to other countries, and they want to keep it that way. However, this week, the government announced the third day of record-breaking coronavirus cases. But the rate of vaccinations has also been hampered by Japanese government requirements that vaccines must be vetted through the Japanese medical regulatory system before being administered. As a result, only a quarter of the population has had at least one shot thus far.

 

As for the cost of hosting, it is well known that hosting Olympic games is one of the most expensive events a nation can organize. The average cost of hosting such an event is about $12 billion. Construction costs of an Olympic Village plus various arenas is the biggest single item. In Japan's case, construction will total about $3 billion. In addition, non-sports related costs can be several times the construction costs, if history is any guide.

 

The forecast when Japan originally bid for the games was $7.4 billion. Since then, however, the games were postponed for a year due to the pandemic. That added another $2.8 billion to the price tag.

 

Cost overruns have always been an issue in budgeting for the Olympic games. Tokyo was no exception. The question will be just how much over budget the costs turn out to be. Estimates range from 25 percent to 50 percent of the original estimate. The most recent official budget released by Japanese auditors set the price at $15.4 billion, but analysts believe that is way too optimistic.

 

Given the costs and problems involved, you might wonder why countries still compete to host the games? Many countries believe it offers a chance to show off their nation, while creating a sense of national pride. There is also an assumption that the Olympics can improve the host nation's global trade and stature, while also increasing tourism (therefore boosting local economies).

 

Unfortunately, the historical facts do not necessarily back up those claims. The 2008 Beijing Olympics, for example, generated $3.6 billion in revenues, but cost the host city much more. London generated $5.2 billion in sales back in 2012, but faced $18 billion in costs. Most host countries had similar economic experiences. Measuring other benefits has been difficult to quantify.

 

The financial impact of cost overruns and accumulated debt can also be far-reaching. It took Montreal 30 years to pay off the debt it incurred after the 1976 Summer Games. The 2004 Games in Athens were so costly that it contributed to the financial and economic debt crisis of Greece for a 10-year period between 2007-2017.

 

Unfortunately, this time around, thanks to the pandemic, the benefits to Japanese tourism will be far less than expected. Empty stadiums will cost the Organizing Committee of the Olympic Games more than $800 million in lost ticket sales. Advertising revenues will likely be lower. An estimated $2 billion in hotel rooms, meals, transportation, and merchandise will fail to materialize as well.

 

While a $20 billion hit to the Japanese economy is sustainable (less than 1 percent of Japan's Gross Domestic Product), it hurts nonetheless. The ruling Liberal Democratic Party government is already attempting damage control in the face of the voting public's unhappiness with holding the event.

 

At the same time, organizers are holding their breath as the number of new coronavirus cases increase. More than a dozen new cases were reported this week among Olympics personnel, bringing the total thus far to more than 150. A U.S. pole vaulter, Sam Kendricks, a world champion tipped for a medal at the Olympics, tested positive for COVID-19 and was forced to drop out of the games. Organizers had hoped to contain the spread of cases, but have been less than successful thus far.

 

You would think that with all of the above problems in Tokyo, the Olympic Winter Games might be in jeopardy, or possibly postponed. No such luck. China, the cradle of the coronavirus, is scheduled to host the winter games on Feb. 4, 2022, less than seven months away. Go figure.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Imagine opening your laptop or cell phone and catching a whiff of your favorite perfume. Scroll back to last summer's Maine vacation photos and smell the pine forest at your campsite. Digital scent technology can make that happen sooner than you think.

 

Digital scent technology, also called olfactory technology, is an engineering discipline that enables media, such as video games, movies, music and Web pages, to sense, transmit, and receive scent-enabled content. Simply put, the day when you can smell through the internet is almost upon us.

 

The market is tiny right now, with less than $20 million in sales, but it is expected to grow substantially by the end of the decade. Surveys conducting by research firms such as Ericsson ConsumerLab, indicate that consumers are expecting that by 2030, internet devices will be able to interact with their sense of smell. 

 

One big reason for the growth of digital scent is the fact that retailers, manufacturers, and advertisers already know that smell sells. That knowledge dates back centuries. Street peddlers in bazaars all over the world have used open-air grills to arouse hunger and entice consumers to sample their wares.

 

Today, companies as diverse as Burger King, Disney, Rolls Royce, and Nike have successfully used various scents and aromas in their brick-and-mortar stores and restaurants to improve traffic and generate additional sales. We remember that new car smell, for example, but may fail to realize how central that smell was in our decision to purchase a new car. But auto dealers understand that, as do supermarkets that spread the aroma of freshly baked bread through its aisles every day.

 

Credit for marrying our sense of smell to entertainment goes to a system called Smell-O-Vision back in the late 1950s. Aromas were released through hissing tanks or air condition vents in the movie theater. It quickly flopped quickly due to technology failures, but entrepreneurs kept trying and some were successful.

 

"Electronic noses," developed in 1982, could detect and recognize odors and flavors. In 2013, a wireless system was developed with the object of incorporating scents into movies, as well as other audiovisual experiences, but rarely used. Digital technology borrowed from these wireless systems. Over the last decade, two branches of digital technology, one focused on the digital detection and analysis of different odors, and the other on the digital transmission and re-creation of smells, have melded together. We were now ready to begin interacting between our human senses and the internet.

 

How does it work? The technology uses hardware devices consisting of gas sensors, which aid in sensing and generating different types of smells. That in turn enables the transmission of odor over the internet. There are other technologies that are pursuing touch, sight, taste and sound. It has been dubbed the Internet of Senses. To me, it's just more examples of how new data applications are changing our lives, now and in the future.

 

For now, sectors such as health care and military/defense are on the cutting edge of the digital scent scene. Clinical diagnosis, aromatherapy, and even the ability to detect cancer, are all areas where this technology is being employed by the medical community. The military and defense sectors are also using digital scent to detect and identify explosives in public areas, as well as in combat areas.

 

There are a number of innovative startup companies worldwide that are using a variety of scientific disciplines to mimic, recreate and/or identify smells and scents. Organic chemistry, silicon engineering, machine learning, photonics, as well as data science and software engineering, are creating ever more sophisticated ways to interact with this internet of the senses. Imagine, for example, if food companies could detect pathogens in their food supply networks before they could endanger human health, or lead to food spoilage. Some of this technology is already being used, for example, to screen for salmonella in packaged meat products.

 

Smell is important. It shapes many of our physical sensations that impact us deeply and directly. Companies are working diligently to further your sense of smell directly to the internet. And while your online experience today does not involve digital scents, it will in the next few years. You can bank on it.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Over the past several decades, investors, investing in China, have gotten used to the dichotomy of China's Communist-run, centralized government and its free-for-all stock market. That situation appears to be ending.

 

The latest (and most controversial) sign of China's increased interest in regulating and extending control of its largest companies came over the weekend. Fresh off the heels of a global $4.4 billion initial public offering, Didi, China's ride-hailing giant, was ordered to cease accepting new users, and to close down its app by China's internet regulators.

 

By midweek, the newly, U.S.-listed share price of Didi fell by well over 20 percent. But Didi wasn't the only Chinese-based tech company to feel the red hand of regulation this week. Two additional tech companies, Full Truck Alliance, and online recruiting company, Kanzhun, were also targeted. Regulators are probing whether these companies illegally collected and utilized personal data.

 

In the past year or two, these regulatory probes have been increasing. Chinese, megaglobal growth companies like Alibaba, and its wholly-owned subsidiary, financial credit giant, Ant Group, have been ham-strung by the Chinese government's initiative to exert control over social media and how they handle, collect and share data. Regulators in November 2020, for example, simply halted Ant Group's multibillion-dollar dual listing in Hong Kong and Shanghai at the last minute.

 

Behind this new regulatory crackdown is the realization by China's Communist Party (CCP) that these big technology firms could be a potential threat to their own autocratic control. Based on their vast collective ability to gather and harness data, someday (possibly soon?), these corporations could become a competitive, or even an alternative center of power in China.

 

This was made abundantly clear to President Xi Jinping and the Communist party during the coronavirus pandemic. The government discovered how truly immense these tech companies' databases are in their effort to control the spread of COVD-19 and its mutations. Officials found they had to depend on these tech companies' databases in order to introduce health-monitoring, and a variety of software-based quarantine applications.

 

Up until that time, these corporations (like their overseas counterparts) had a fairly clear path in developing their businesses. They had free reign to cut deals, cripple competitors and collect all sorts of user data (both personal and otherwise), from customers worldwide. That same business model is now the subject of litigation, regulation, and various fines within dozens of countries. In that respect, China is just one more country waking up to the so-called danger of social media companies. But with China, there is a difference.

 

The CCP, unlike most other governments, believes, and therefore demands, that all the data collected from its social media giants, e-commerce, and other businesses (including those foreign companies doing business in China), is the property of the state.

 

This data can and will be used in any way the party and its leaders decide, now and in the future. It is considered part of the nation's assets. To bring that point home, China watchers have identified a virtual blizzard of new antitrust and financial regulation brought by the State Council and Cybersecurity Administration, including the passing of a new data security law in June (that goes into effect in September). In essence, almost all data-related activities by whatever means will now be subject to government oversight and control.

 

In the future, data will ultimately control just about every aspect of human life. Food, medicine, weather, security, finance, etc. Who gets it and how, will all come down to who has the most data and how it is used. President Xi is reported to have said privately that "whoever controls data will have the initiative." I believe he is correct.

 

It seems clear to me that while investors decry the short-term stock losses caused by the heavy-handed actions of the Chinese government on publicly listed Chinese companies, they may be missing the forest for the trees. There are all the signs that these new regulatory risks are here to stay. In which case, we can expect more of them and as a result, a re-rating of Chinese securities (downward) would certainly be in order.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

 

The state and local tax cap, called SALT, has been the bane of many high-tax states since its passage as part of the 2017 Tax Cuts and Jobs Act. It created an effective tax hike for many high earners in high tax states, as well as many middle-class workers. That may be about to change, at least for some income earners.

 

Last week, the Senate Budget Committee, chaired by Vermont Sen. Bernie Sanders, presented a draft outline of a $6 trillion budget resolution. It included $120 billion for SALT relief over five years. Readers may recall that the controversial tax placed a $10,000 cap on the amount taxpayers could deduct from their federal income tax in state and local taxes. One of many unintended consequences was that it triggered a mass exodus of many wealthy residences from higher to lower tax states.

 

But don't break open the champagne just yet. The Sander's proposal falls far short of the cost of repealing the total tax. The Tax Policy Center estimates that in order to repeal SALT in full, the cost would be more like $460 billion over the same five years. 

 

Even so, the proposal is a victory for the caucus of 30 Republicans and Democrats from high tax states who have been lobbying for the repeal of SALT for years. They have their work cut out for them, however, in order to convince the various opposing factions between and within both parties to rescind the tax.

 

Progressive members of the Democrat Party view any change of SALT as a giveaway to the wealthy. They have a point, given that 57 percent of the benefits if SALT is repealed would fall to the top 1 percent of Americans. But what about the remaining 43 percent? Those are middle-income earners, who had fewer tax deductions as a result of the 2017 Republican tax cuts.

 

SALT also created some real fiscal problems for many states. The on-going migration from states such as New York, New Jersey, and California to places like Texas and Florida has drained the funds necessary to support schools, hospitals, police, fire, transportation and other basic services. To cope, higher tax states are forced to raise taxes even higher, which could cause even more residents to flee. Remember, too, that those large tax payments by the wealthy were largely used to support and expand social programs.

 

At the same time, receiving states, which at first applauded the tax cap that fell disproportionally on blue states, are now increasingly facing their own budget shortfalls. All these new residents expect the same basic services they enjoyed previously. These newcomers also increase the demands on existing infrastructure. Water, roads, bridges, hospitals, even the internet, may have to be upgraded as the population swells. This will cost money.

 

As a result, longtime residents of some states are suddenly seeing property taxes explode higher. Strapped for funds, legislatures, pressured by this influx of voters (many of whom are liberals), are being forced to introduce additional taxes to cope with this new demand for services.

 

A possible compromise solution to reduce the havoc caused by the 2017 tax act would be to repeal the SALT tax for those earning less than $400,000 per year. That could appease the progressive Democrats without alienating most Republicans. The cap would be lifted entirely for those under that threshold, while those over it would still be subject to the $10,000 cap.

 

There is plenty of motivation to compromise, at least among Democrats, since the cap caucus members (20 Democrats and nine Republicans) have pledged not to vote for any legislation that doesn't include a repeal of SALT. The SALT issue has already delayed the president's infrastructure plan and could hamstring his own tax plans as well. Since the Democrats cannot afford to lose even one SALT Democrat, given their slim majority in the Senate, I believe we will see some relief on the SALT taxes for at least some of the taxpaying population.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.