April 1, 2021
What’s Up with Inflation?
Rising interest rates have put inflation back in the news, with the Federal Reserve and Treasury department saying “Don’t worry. This inflation is only temporary.” That may be possible, but betting on it could be hazardous to your financial health.
Inflation can ruin the value of anything denominated in dollars such as bonds, annuities and CDs and savings accounts. Things not denominated in dollars, such as shares of stock, barrels of oil, or acres of land tend to do better during inflation than investments denominated in dollars. Considering that interest rates set in the bond markets affect your life so much, rising inflation is a big deal.
The most common rationale for inflation is the government printing money, causing the price of goods to go up. A rising supply of money chasing a limited supply of goods would certainly cause prices to get bid up.
But over the past few decades, prices haven’t risen all that much. Some prices have, but many prices have come down, too. Look how cheap TVs have gotten. Autos have not gone up much lately, either.
“Between 2000 and 2021, cars experienced an average inflation rate of 0.21% per year. In other words, cars costing $15,000 in the year 2000 would cost $15,677.60 in 2021 for an equivalent purchase. Compared to the overall inflation rate of 2.02% during this same period, inflation for cars was lower. (Source: https://www.in2013dollars.com/New-cars/price-inflation)
But the government has been printing money (or creating it electronically, anyway) like crazy since 2000 and we haven’t seen much inflation. Why is that?
Because increasing efficiency in the economy offset all the money being printed. Efficiency in manufacturing ensured that we had an increasing supply of goods on which the increasing supply of money could be spent so there was no bidding for scarce goods. The Internet has dramatically reduced costs for us all as middle men are cut out of the supply chain.
What is different now than in the past several decades is the inefficiencies in our economy as the effects of the Covid shutdowns are felt.
Every grocery store has to have more workers to make sure you wear a mask upon entering, to keep things sanitized and online orders bagged and carried out to the curb. Who do you think pays for the extra help to make all these new functions happen? You do, as the price of groceries has to go up to pay for it.
Restaurants and shops are still operating at reduced capacity, meaning the overhead costs must be carried by fewer patrons, increasing the cost of goods or services.
I went to a Spring Training game last week and noticed that although the seating was limited to 20% of capacity, someone had to zip tie up the unused seats, there were still the same number of gates to be attended, same number of groundkeepers and the same amount of toilets to be cleaned and concourses to be swept and cleaned, all paid for with only 1/5th the revenue they are used to. Twenty years ago, I paid $10 for Spring Training tickets. This year $41. That is a lot of price increase, even spread over 20 years.
Our last big round of inflation was in the 1970s and early 1980s. Some would tell you that government deficits during the Vietnam War were the cause. I think there was a bigger cause than that.
During the 1960s and 1970s, large numbers of baby boomers and women were entering the workforce for the first time. All these new workers needed to be trained and equipped, costing big money. And for a while, new workers are not as efficient as more experienced workers, meaning prices have to rise until new workers are as efficient as the others.
We see this same inefficiency theme again causing inflation as businesses absorb the extra costs of coping with Covid restrictions and pass them along to you.
Hopefully this inefficiency will wane when Covid restrictions are no longer necessary and this is the reason the government is telling us to not worry about rising inflation. Anyone who remembers the inflation of the 1970s and how it devastated the accounts of savers sure hopes they are right.
Shadowridge is Coming to Town
Hmm. I think there is a song title in that headline.
The Shadowridge team of Ryan Redfern, Chief Investment Officer, Laura Redfern, CFP® and Phil Lebkuecher, BFA they will be in Prescott the last week of April to meet with clients. If you are a client (or would like to become one) and haven’t yet met these folks, please give us a call at 928-778-4000 to schedule your meeting or account review.
March 2021 Market Commentary
(By Ryan Redfern, Shadowridge Asset Management, LLC)
I’m noticing a pattern in the market this year that has been challenging. The first half of the month has been generally positive, and then toward the end of the month, the market proceeds to sell-off. This is how January, February, and March have played out, and it’s made it somewhat difficult to latch on to any persistent, directional trends.
But, as we have seen before, there can be extended periods of “meh” in the market. Often traders get lulled to sleep by the slow movement, then bam! A new trend can appear when you least expect it. And sometimes, much of the entire year’s gains can be made in these short periods of time.
So, for now, we wait.
Our Mid-Term Cycle indicator has been negative this week and steadily worsening. So far, the market hasn’t sold off as much as the gauge suggests. However, it might still be too early. When we designed it, the goal was to spot markets with a high probability of a quick sell-off. The idea was to be more safe than sorry. But when it gives a negative signal, we never really know if it’s going to be -5%, -10%, or -30%+ (like it was in March 2020).
In addition, on Thursday morning, our Long-Term Cycle indicator went negative but rebounded by the end of the day. Had that stayed negative (when both the Long-Term and Mid-Term agree), then we believe it is time to batten down the hatches and brace for a bigger storm. For the moment, that storm has passed, but we’re not in the clear yet.
All that being said, other data also suggests the end of March could be difficult for the markets. But that same data also indicates that the market could calm down and resume its upward movement into April and May. Beyond that, things could get interesting and volatile going into the fall season this year. But for now, that is a long way off.
This month’s chart illustrates how 2021 has gone so far. The blue line shows where the S&P 500 index closed at the end of 2020. Since then, we’ve had moves up that seem to fall back to the blue line. Right now, with our Mid-Term Cycle indicator showing a negative reading, it looks possible that the index could go back down to the blue line once again before resuming a move higher – even if it only lasts for a few hours.
Bonds – the bond markets are having a tough time this year. As interest rates rise, the price of bonds falls. The Aggregate Bond Index AGG is down -3.14% Year-to-Date. High Yield remains the bright spot, and is right at break-even for the year so far (FastTrack Data). Since we shortened the duration of our bond holdings last month, we’ve experienced less of the hit the bond market has taken.
Cycles remain short and opportunities to be in the market are still limited. But we’re optimistic that it could change once we get further into the spring season. Inflation remains an issue – so much so that during our monthly webinar (coming up on Friday, April 9th), Will Hepburn is going to go into more detail about Inflation… what it has done historically, and what we can do about it. We hope to see 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.
Helping the Next Generation
3 Things You Can Do as a Responsible and Loving Adult
(By Laura Redfern, CFP®, Shadowridge Asset Management, LLC)
Many parents ask me about what they can do to help their children achieve financial independence. They may have different ideas in mind: a college fund? A financial gift at some important milestone? A car, perhaps? All do-able, and all possible. But I have also observed that sometimes the answer to this question is less complicated than you might think.
Whether you have children or grandchildren, nieces or nephews, or friends’ children to think about and to love, there are a few helpful things that you can do as an adult to help the next generation. The good news is, they don’t necessarily require a lot of money. They simply require focus and commitment.
- Model good “financial hygiene.” Anyone who has spent some time with kiddos knows that they can be uncanny mimics. (This is true even as we get older and it becomes less obvious than them repeating our sentences.) Humans are built to learn in this way, and financial behavior is no different. Kids will pick up on what you do just as much (or more than) what you say. This doesn’t mean you have to be perfect! Rather, it is an excellent opportunity to think about financial habits you may have developed and whether they still serve you. What message might you be sending as you spend, save, and talk about money? If you’re not sure, ask the kids! They just might tell you. And that brings us to the next point…
- Remove the taboo by talking about money. To be a bit crude, I’m surprised by how many parents will talk to kids about poop, but not about debt! In many households, money seems to be a taboo topic. If nothing else, bringing the topic out in the open and exploring it together could be one of the best things you can do. It makes it less scary and foreign for everyone and starts to build a healthy lifelong relationship with money. I’m not saying that making money a natural part of the conversation is easy in our society, but it is absolutely possible and unbelievably helpful. So… how?
- For young children, you might use identifying games and comparisons. For example, I can remember learning things like how many coins it takes to make a dollar, how many dollars it takes to buy a toy, etc.
- For older children, you might help them set goals for saving for a purchase they really want (my brother’s favorite was video games back in the day – this was a great motivator for him!).
- For young adults, consider sharing what you know about setting a budget and paying bills. Even if you consider it “basic,” that is probably what they need to know! I still remember how important and adult I felt when my parents took me to the local bank to open up an account. I remember learning what a check was and how money went in and out of the account. It sounds simple but it was a big deal in my young adult life. If you’re not comfortable teaching this, ask a banker or trusted financial advisor, but don’t let the conversation go unspoken.
- Consider learning together. This really helps remove the taboo and opens the door for fun, yet safe, exploration. Learning together can happen in short bursts or longer study. A short burst example is: you could have a conversation about what a savings account is, then go online together and “shop” for the best interest rates. Or you could look up a financial term and then try to explain it to each other (the best way to learn is to teach, they say!). Next, you could find a financial book and read it together, like a book club. Some authors even have specific questions and/or activities. For more in-depth exploration with young adults, consider taking a finance course together – there are many choices online or through a local community college. Some banks and credit unions also offer complimentary webinars on specific topics. Pick a topic you’d like to learn more about. You may be surprised by how much you both get out of it!
And finally, consider that sometimes, “experience is the best teacher.” This may be the hardest thing any adult goes through (whether they are “your” kids or not). We don’t want to let our next generation fall, of course, but bruises can be powerful teachers. So just keep that in mind. In the end, you can’t do it for them. But you can help to shine a light on the possibilities that await.
The Good & Not So Good of Low Interest Rates
(By Phil Lebkuecher, Shadowridge Asset Management, LLC)
We are in a period of the lowest interest rates ever. If you are borrowing money, these are some of the best of times. We have never been able to borrow money for homes, businesses, cars, etc. as low as we have been able to this past year. As a result, individuals and businesses are borrowing at the highest levels ever seen.
According to a recent article in MarketWatch, US corporate debt was a record $10.5 trillion as of August 31, 2020. That is a drop in the bucket compared to the federal government with over $28 trillion of outstanding debt. Low rates have allowed businesses to develop, expand and hire. They have also substantially reduced the amount of interest that the federal government must pay to sustain the national debt.
Conversely, fixed-income investments have never paid less to investors who have bought bonds, certificates of deposit or fixed annuities. This has the potential to force retirees and other risk-averse investors to buy investments that provide a higher return but with higher volatility.
But what does all this mean to you and me? Low interest rates reduce our interest expense when compared with higher rates. While all-time low rates occurred last year, the current mortgage rates for home buyers are still close to historic lows. With rates so low, it becomes worth discussing the benefits and risks of paying additional principal to a mortgage for an earlier payoff as well as paying less interest. Or you might consider the possible tax advantages of mortgage interest as well as long-term inflation. It might be better for growth-oriented investors to make the minimum loan payment and put any extra towards investments that have the potential to achieve a higher rate of return.
For people that are closer to retirement, own a home and still have a mortgage on the property, refinancing at a low rate for a longer-term can reduce the monthly cost of housing. This can free up monthly cash flow for other necessities.
While low rates make buying things more attractive to all of us, it is still something to avoid or at least limit. Here’s why: a buyer might get a 0% interest rate on a new vehicle, but that car will probably lose 10% to 20% of its value as soon as the new owner drives away from the dealership. Come to think of it, that new car smell is probably far more expensive than Chanel or other perfume on the market!
The risk of any borrowing is that you must make timely payments in full. Lenders don’t care if you change jobs, have health care expenses or lost big at the horse track. (Please watch the movie “The Big Short” for an educational and entertaining look at the mortgage crises of 2008.)
Today’s low rates are indeed an opportunity, but borrowing money can be also risky. I hope this article has given you financial insights to help you become a more knowledgeable borrower. Please let me know if you have any questions.
As Ryan mentioned in his Market Update for this newsletter, we are in a waiting mode, waiting for the stock markets to tell us what they are going to do. For the past 45 days, the S&P 500 has chopped sideways but made little progress. The tech heavy Nasdaq Index has chopped, but lower rather than sideways.
There was a shock to the financial system last week as a hedge fund was forced to liquidate as they could not meet margin calls at their bank. In one day, $20 billion of stocks and ETFs were dumped on the markets, causing huge losses for holders of those stocks. Commentators dismiss this as a one-off problem, but it feels eerily like 2007 and 2008 when a few of these one-off issues in the mortgage markets kept cropping up until we had a run on the market.
As a result of all this uncertainty, the Future Technologies strategy that I manage for Shadowridge is 100% in cash at the moment. And Ryan Redfern, Chief Investment Officer’s growth strategies are lightly invested being mostly in cash, money market and Treasury Bond funds.
Flexible Income accounts are fully invested in a mix of corporate bonds, high-dividend Real Estate Investment Trusts and specialized lenders called Business Development Company which also pay nice dividends.
And that is how we are staying in sync with this market.
“Mental Floss” Humor
Protecting Your Privacy
I found this article by Kim Komando to be a real eye opener, both in terms of how much Google knows about you, but that we all have control over it, too!
* 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.