economy, interest rates, retirement, risk management

2021 Inflation and Parallels to the Seventies

My most vivid memory of the Seventies is sitting in the car with my siblings and parents in a mall parking lot the week before Christmas and my mother crying because they couldn’t afford presents and had to file bankruptcy. For a 12 year old it made the challenges of real life… real.

The seventies were a traumatic time for many Americans… the end of the Vietnam war, the political chaos of Watergate and Nixon, the oil embargo, gas rationing throughout the decade, the suffocation of unions, the loss of jobs and industries as Japan and South Korea became exporters. Economic instability was an ever-present cloud.

Moving in waves through the decade, the economy suffered from bouts of inflation and deflation. It made policy decision-making challenging at best… boost the economy to keep it from slowing down, or is the economy running too hot?

When you drill down one sees many similarities between conditions that led to the “stagflation of the 1970s” and the situation we find ourselves in post COVID.

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Climate change, economy, environment, retirement, risk management

Global future growth… and Climate Change

A recent Bloomberg article titled “The Global Growth Hotspots of the Future Are Here” discussed an HSBC report which advises that investors need to focus on the growth of cities in the Emerging Markets. (1)

“While wealthier countries are more urbanized today, the proportion of urban to rural dwellers in emerging markets is expected to climb to 63 percent in 2050 from 50 percent now, according to the study, which draws on research by McKinsey and the United Nations.

Developing nations’ emissions are rising fast and the report predicted that their share of cumulative emissions would reach 51 percent by 2020. (2)

By 2050 some 5 billion people – more than half the world’s population – will live in emerging market cities, and account for more than half of global gross domestic product growth.

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Climate change, economy, entrepreneurship, environment, ESG, life insurance, new economy, protection, retirement, risk management, Socially Responsible Investing, SRI

Embracing the Future: An Interview with Charlotte Markward

I met Charlotte and her Husband Randy years ago at a Green Drinks in Philadelphia. It was before the days of Tesla, widespread solar power and organic food sections at the grocery store. People got together to share a beer and dream about a future that would be more sustainable. Things have changed a great deal in the past few years.

Charlotte is a graphic designer based in Philadelphia. She has agreed to share some of her experiences and insights so that we all might have an easier path to financial security.

Charlotte has been interested in supporting socially responsible investing for many years. I asked her what it means to her. Charlotte said, “For one thing it’s smart. We have a finite amount of resources and we are running out of them. To continue doing things in the old ways is to set yourself up for failure. Green investment is where the growth will be.”

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economy, income, interest rates, retirement, risk management

“Rising Prices in the Economy”: Inflation Post COVID

In September 2020 Jay Powell announced that the Federal Reserve would adjust how it reacts to inflation, one of its chief mandates, and allow inflation to run hotter for longer. The expectation is that it will be several years before the Fed raises interest rates. Traditionally, elevated rates of inflation indicate the economy is operating at full capacity and may be in danger overheating. Following the COVID recession of 2020 the Fed is trying to create a positive environment for the recovery.

In the Spring of 2021 signs of inflation are abundant. Since the fall of 2020 commodity prices had risen dramatically. Lumber prices had soared as supply constraints limited what was available, especially as housing prices went up and building accelerated. Copper surged to new record highs. Wheat, corn and other food commodities went up as the economy reopened and supply couldn’t keep up with demand.

Among tech businesses a shortage of computer chips affected the building of everything from cars to exercise equipment. “Just in time” supply chains showed increasing strain.

To top things off, a gasoline pipeline was held hostage by a ransomware attack in early May 2021. The result was gasoline shortages and higher prices throughout the east coast US.

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economy, interest rates, retirement, risk management

The Impact of Financial Euphoria

On a recent rereading of John Kenneth Galbraith’s “A Short History of Financial Euphoria”, he outlines common characteristics from past financial bubbles including the Tulip mania of 1637, the South Seas bubble of 1720, the various booms and busts of 19th century America, the market crash of 1929, and the October 1987 market crash. While the financial instruments vary, the behavior of investors has many elements in common. Bubbles in financial markets have several characteristics in common.

One of the elements Galbraith cites in the financial bubbles he analyzes is the introduction of new financial instruments. Such new instruments offer the “investment opportunity rich in imagined prospects…” (p51) Added to these new instruments is the element of leverage. Leverage allows investors to capture more profit than is normally possible. However, leverage also introduces fragility into the financial system when the value of investments start to fall and leverage needs to be unwound. The unwinding of leverage leads to additional sales and additional losses. The collapse of bubbles has an “inevitable and depressive aftereffect.” (p67) Such a depressive aftereffect is manifested in weakened consumer goods demand, shaken business confidence, a fall in business investment, and a rise in business failures. The bursting of bubbles has a “substantial and ultimately devastating economic effect.” (p89)

Another critical element in the development of bubbles is psychological. “Individuals were dangerously captured by belief in their own financial acumen and intelligence and conveyed this error to others.” (p51) In this aspect, bubbles not only develop from financial innovation but especially because of psychological behaviors and characteristics.

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economy, income, interest rates, retirement, risk management

“Data Dependent” Fed Changes Course and Markets React

In the Fall of 2018, equity markets sold off.

What was the cause?

Widespread view among economists was an expectation of slowing economic growth in 2019 and a Federal Reserve led by Chairman Jay Powell that was expected to continue to raise rates three more times in 2019.

As anxiety and stress built up in November and December, markets dropped. Between October 3 and October 29 the SP500 fell 9.7%. Between October 29 and December 7 the market bounced around rising 6.5% only to give it back and to fall .3%. However, in the weeks before Christmas, December 7 to December 24 the market fell another 10.7%. Showing the rapidness of the decline, on Christmas Eve the SP500 fell 2.6%.

On Bloomberg Surveillance on April 4th, Tom Keene asked Jim Paulson “Was December the mother of all cathartic events? It was so traumatic.” Jim Paulson responded, “I don’t ever remember a December like that ever in my entire career. It was original, and I think it shocked all of us, myself included that this happened in December… But it looks increasingly like the oddity, what was incorrect and inappropriate, was the December swoon… and we may be overdid the selling more than we should have.” (2)

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economy, entrepreneurship, income

In Memoriam, Alan Krueger and Raising the Minimum Wage

Anyone who knows me, knows I don’t easily shed tears. But I did on Monday March 18th, 2019. For over an hour I wept.

On this day it was announced that Alan Krueger, beloved Princeton economist, had passed away over the weekend. (1)

Michael Mckee of Bloomberg said “He was one of the nicest people in economics, always willing to sit down and explain concepts to you, to talk with you, it’s a real shock…” Peter Coy continued, “If he were just a nice guy it would be one thing, but he was also a deep scholar…” McKee explained, “There are a lot of economists doing important work, but Krueger really had an enormous impact on public policy outcomes.” All concurred, “It’s a tragedy.” (3)

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economy, interest rates, retirement, risk management

Market Risks and the Wall of Worry

For years, one of the biggest issues facing the economy has been excessive debt and leverage. Yet even with these problems, prior to COVID-19 it was commonplace to see headlines in the financial media that read…

“Current Bull Market Continues To Climb A ‘Wall of Worry’” (1)

The “wall of worry” is one of the phrases frequently used to illustrate the resistance or fear of investors to invest in a stock market that had earlier gone down.  Since the Great Recession of 2008 and the financial crisis many investors have worried about the possibility of another financial crisis.

In a 2018 conversation with clients I was asked about a recent stock market pull back and if a problem in the market… could cause another financial crisis. This was an issue that was on many people’s minds these days.

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economy, income, interest rates, retirement, risk management

Are Bond Yields Moving Higher?

On October 3rd, 2018 the 10-year yield moved dramatically higher increasing 3.3% in a single day. Pundits have listed many reasons for rates and bond yields to move higher… a strengthening economy, decreasing unemployment, rising oil prices signaling inflation, a Federal Reserve committed to further rate increases into 2019. (3)

These pressures had been building for some time and signaled a good economic environment.

However, there are a few factors that some view as critically important moving forward in deciding how much bond yields could move up as well as how quickly.

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economy, retirement, risk management

Tariffs, Trade Wars, and Risk

“All things being equal, trade is a good thing, although it can also eliminate certain jobs and hurt some firms or workers. On balance, though, trade creates jobs and boosts the overall welfare of a country… Trade can be an engine of increased production, economic growth, development, and poverty reduction.” (1)

–Richard Haas

In 2018 I had several clients ask about what impact the proposed trade tariffs might have on their retirement plans.

On June 19th, 2018 the S&P 500 sank the most in three weeks with industrial companies getting hit hardest after President Donald Trump threatened tariffs on another $200 billion of Chinese goods, and the Asian nation pledged retaliation. (2)

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