July 1, 2021
The Threat of Inflation
Inflation is that phenomenon where dollars buy less and less as time goes on. I’m sure you can see that the prices of food, gasoline and housing are rising fast. Unless you can do without those 3 items, your cost of living is going up, and the purchasing power of your dollars is going down. That is price inflation.
Inflation has risen 5.0% in the last 12 months, the highest level in 13 years (Source https://www.bls.gov/cpi, data through May 2020, the latest data as of this writing on June 18th). The last time inflation was above 5% for a calendar year was 1990, and that is why analysts are concerned about the potential of a return to double-digit inflation like we had from 1980-82.
Because the government wants to do things without raising taxes to pay for them, they instead quietly steal your purchasing power to pay for their wish list. Now you know why inflation is called the “silent tax.”
Inflation is the top concern for most economists and market watchers because if it gets out of control, the Fed will need to cool off the economy and end the economic growth cycle that we have enjoyed for a while now. The last time the Fed stepped in to end an inflationary cycle was in the early 1980s when they ran interest rates well up into double digits, causing a sharp economic recession.
Right now, the government and the Fed have said the current rise in inflation is temporary and not a long-term problem. In fairness to the Fed, they have pulled us out of several economic crises using tactics I could not foresee, so they are smart people. However, they also have a history of being late in taking action, and if they are late in fighting inflation, it will become much harder to contain.
Recently the Fed has been actively pushing for higher inflation. They say an overheated economy is needed to create enough jobs, which seems a bit odd with job openings outnumbering job seekers in many areas. The bond markets have reacted negatively with the iShares Core U.S. Aggregate Bond ETF (AGG)down 1.96% since the beginning of the year as of this writing on June 17th, and that is with dividends reinvested. Without the Fed buying $120 billion of bonds each month to prop up that market, interest rates would be rising steeply, and interest rates affect your life a lot more than the price of any stock.
So what is happening? And what can we do to protect your savings from the risk of high inflation?
Recently, Luke Gromen of the Forest for the Trees suggested that the U.S. Government’s plan to make the $28 trillion federal debt more manageable is to inflate it away. No surprise there, as politicians, when faced with tough choices such as raising taxes or spending less to pay off debt, will always choose the least painful option for themselves, which is inflation.
Gromen suggested that 20% inflation for five years would wipe out almost 60% of the burden of carrying our federal debt, bringing it down to a level that we can manage.
Who loses in that kind of inflation? Anyone holding U.S. dollar–denominated assets (bonds, C.D.s, mortgages, annuities and cash, and those on fixed incomes), that’s who. Your dollars will buy only about 40 cents worth of groceries after that kind of inflationary surge.
But the Fed (our national bank) has been buying U.S. debt hand over fist and is by far the largest holder of dollar–denominated debt (Source: https://fred.stlouisfed.org/series/TREAST). So the Fed’s assets will get cut in value, too. But do they really care? I don’t think so, because it is all funny money, anyway. Some analysts are calling this type of scenario “the Great Reset” in asset prices.
The Fed seems to be telegraphing its intentions so that investors and the institutional bondholders most investors use (mutual funds, pension funds, etc.) have an easy out, selling bonds to the Fed, and giving them time to react if they believe that inflation is in our future. Bond funds with policies to stay fully invested in government or corporate bonds may be particularly vulnerable as they can’t adapt to this risk.
History shows us that inflation takes off quickly once it develops some momentum, so Gromen’s idea, although cynical, may have merit.
To protect your savings from the threat of inflation, at Shadowridge, we have been underweighting dollar-denominated bonds and adding hard assets to our portfolios as they tend to do better during inflationary times. Certain types of stocks tend to do better, or worse, during inflation, so inflation is now part of our investment algorithms.
Please call the office if you would like to discuss the details of these portfolio shifts. And if you have a friend who expresses concern about inflation, please forward this newsletter along to them. That would be one of the nicest things you could do for them – and for us.
June 2021 Market Commentary
(By Ryan Redfern, Shadowridge Asset Management, LLC)
Similar to earlier months this year, in June, the S&P5001 had peaked mid-month and then had a quick sell-off. Unlike other months, however, this month has largely bounced back and is as of this writing only slightly positive on the month. As of our last writing, we observed several factors that were turning positive. Well, that seems to be overshadowed by the Federal Reserve’s comments that came out on June 16th which incidentally coincided with the market’s mid-month peak.
The Federal Reserve’s commentary was only slightly more aggressive (often referred to as “Hawkish”) than it had been previously. Nothing said changed anything in the near term. So, the market’s fear didn’t seem justified. At least not at the time. Only time will tell if this leads to bigger issues or not.
As of Thursday night, our Shadowridge Dashboard is showing Positive to Negative sectors as 5 to 6 which is fairly neutral and weakening. While many sectors are struggling, the NASDAQ, which had been lagging behind all year, has re-emerged as the one strong place in the market.
We’re still looking at the Shiller PE ratio (see last month’s chart) and wondering how much longer the market can stay positive. Based on this data, we’re now seeing several projections for the S&P500 index to be flat to slightly negative over the next decade. That doesn’t mean the S&P500 will plod along flat for 10 years; rather, it is likely to be highly volatile with large swings that will ultimately cancel each other out. This would be much like we saw in the market from 2000 to 2010, also referred to as “the lost decade.”
This month’s chart is an interesting ratio between the S&P 500 and the 30 Year Treasury. If the Black line is rising over the Red line, then the S&P500 index is stronger than bonds (generally positive for the market). And if the Black line is falling below the Red line, then Bonds are stronger and the Stock Index is showing weakness (generally negative for the market). Now, to be fair, the Treasury Bond market was overly weak during February and March, which skews the data more up-ward in that time than it would normally be.
Bonds –continue to improve, but the Aggregate Bond Index is still negative on the year. The Aggregate Bond Index AGG is now at -1.86%. High Yield bonds remain strong, being up around 2.37% so far in 2021 (FastTrack Data). It hasn’t been a good year for investors who have a lot of exposure to the Bond Indexes.
Don’t forget to catch our monthly webinar version of this newsletter, where I dive deeper into what I mention in the newsletter commentary. For me, nothing tells the story as much as visuals, so that is how I prefer to dig into what we’re doing with investment decisions. After me, Phil and Laura will be presenting financial planning topics to help you with life’s financial challenges and opportunities. We hope you can join us – Wednesday, July 7th at noon Central time.
You can sign up for the webinar here. We look forward to seeing you there!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.
3 Things to Consider When Shopping for a Home
(By Laura Redfern, CFP®, Shadowridge Asset Management, LLC)
Ah, summertime, and the height of home buying season! Add to that a red-hot real estate market right now, and you’ve got a lot of people with home-buying on their minds. But in addition to the excitement, there can be a massive amount of overwhelm. And no wonder! There are so many things to consider… and if you are under the pressure of attempting to sell your current home at the same time, it can feel like everything is happening at once. This can be a formula for regretful decision-making. What to do? How about a checklist to the rescue!
Having a guide or checklist can help you keep things in perspective. Not only is a document helpful and practical, it can also be grounding and calming when working through a potentially stressful transition time. Home shopping with a partner or family? Having priorities defined and clearly stated can help everyone feel involved and heard. This allows you to work together effectively, even while differences of opinion may exist.
Here are 3 important considerations when shopping for a new home.
- Take some time before you go shopping to name the most important characteristics of a new home. What are the must-haves? If that’s overwhelming, perhaps consider: what features are not important to you at all? This still will help you to focus. If you are working with a partner or multiple family members, include a spot on the list for each person. Think about your daily routines. How do you want to feel when you wake up in your new home? When you come home at the end of the day? Who will visit you in your new home and how do you want that to feel? Brainstorm in any way that’s helpful to you, then use the checklist to organize your thoughts.
- Location, location, location. In addition to the home itself, what is important about the area? How close do you want to be to your neighbors? Who will maintain the property? Think long-term, as well immediate use. Will you need to be close to an airport, schools, hospitals? Will there be special needs to consider at some point?
- If you are considering a move to a different state or part of the country, take time to research the fiscal conditions of the state and cities on your list. You may also want to search for information about health and safety scores for your new area. If a real estate professional is helping you, they may be able to supply this information. Otherwise, internet searches can help.
- Financial realities. What’s the average price of a home in your desired area with your desired features? Realistically, how much money can you spend on your new home purchase? And don’t stop at purchase price. It’s worth the time to collect financial information for each property you are considering. Some of the information is public record (i.e., taxes and utility bills); some comes from the current homeowner; and some comes from your thinking about how you would live in and use the home. Do the research not only on purchase price, closing costs, mortgage, and insurance, but also on ongoing expenses like taxes, utility bills, and maintenance. (There’s a spot on the checklist to help organize this information.) If renovations or updates are in the picture, be sure to include those costs, as well.
Finally… Home buying can be stressful and tiring, so take breaks when you can. Even short breaks can help you to stay rested and refresh your mindset. Recognize that priorities may change as you move through your search for the right home. That’s OK. Life changes when you change where you live, so give yourself and others room to change and shift, as well. Your most important asset in this process may be a flexible attitude. Taking a well-timed deep breath can go a long way to reduce the stress and bring back the excitement. Happy shopping!
SDW Home Buying Checklist (Download)
Insights from the Bottom of the Grand Canyon
(By Phil Lebkuecher, Shadowridge Asset Management, LLC)
Last week, my family and I spent 7 days rafting through the Grand Canyon. Alice and I had rafted “the upper half” from Lee’s Ferry to Phantom Ranch, hiking out the Bright Angel Trail, in 1995. That trip had a deep impact on me. I was a 31-year-old newlywed in 1995. I still can’t believe how quickly 25 years has gone by since my last river trip.
During our adventure without internet, phone, or nonstop news cycles, it was a wonderful reminder that the world keeps going even when you can’t update on the “vital” news every 30 seconds. The canyon, river, geology, wildlife and sheer, immense beauty of it all constantly reminded me of just how brief our time really is.
I wanted to share some thoughts I collected from conversations with family and friends during the trip. I hope you take that “bucket list trip” wherever that maybe in the world. It’s wonderful for the heart, the mind and the soul.
- If you want to significantly increase your chances of achieving financial security, you might consider these three habits: save some of your earnings, keep track of what you spend, and be very cautious when borrowing money.
- You are responsible for you.
- The most expensive fragrance most people will ever experience is the “new car smell”
- Boats, RVs, ATVs, jet skis, and motorcycles come with that same fragrance.
- If your parents taught you how to constructively manage your finances, thank them. If someone else taught you how to a manage your finances, thank them.
- Ask questions of others as well as yourself. Find the answer that works best for you. Then the really hard part is applying that knowledge into daily life.
- There is no perfection, just practice.
- Wealth, like a reputation, can be amassed over decades and lost in about 5 minutes.
- Every family is dysfunctional, no exceptions. They are still your family.
- Good friends keep you grounded and make life fun.
- There is a rock formation at the bottom of the Grand Canyon called schist that is 2,500,000,000 years old. It’s a reminder that our time on Earth is not a long one. So, make the most of our brief time in this wonderful place!
Hope you are having a fun, safe summer!
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Shadowridge Asset Management, LLC, adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Shadowridge Asset Management, LLC, a Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
Copyright (C) 2021 William T. Hepburn. All rights reserved.
