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Three-Legged Stools

Whether it’s a beachfront condo in Florida, time spent playfully spoiling the grandkids, or hours carefully tending an award-winning garden, everyone has their own vision of retirement. If you’re like me then you never plan on retiring but at least want to build a large enough retirement nest egg to make that choice. As a personal finance professor, I encourage my students to start saving for retirement immediately after landing their first job. I can’t say that every young student follows this advice. According to the Federal Reserve, only 49.6% of people under age 35 have any retirement savings account with an average account balance of $18,880. By age 65-74, 51% of Americans have a retirement savings account with an average account balance of $115,000. I imagine most Americans who retire at age 65+ likely couldn’t retire for long with only $115,000. That size of a retirement fund certainly wouldn’t buy you an oceanfront property in Florida and those grandkids may have to make do with rice and beans at grandma’s and grandpa’s inland Florida shack.

Retirement planning is often referred to as a three-legged stool with the legs referring to 1) social security, 2) pension plans, and 3) personal retirement savings accounts commonly known as 401(k)s or IRA(s). Ideally, each leg is sturdy and collectively can support you comfortably throughout retirement. However, if one peg comes up a bit short, you may find yourself taking a tumble off of your retirement stool. Unfortunately, a quick fix like putting a piece of paper under the inadequate leg like you would in a restaurant likely won’t be an easy option when stabilizing your retirement savings.

Personal Retirement Plans

Defined Contribution plans such as 401(k)s, IRAs, 403(b)s, and employee stock ownership plans (ESOPs) have become increasingly common as companies move away from offering defined benefit plans, such as pensions, under which the company bears all the investment risk. Defined contribution plans shift the investment risk to the individual by offering the individual control over the selection of their investment allocation. Giving individual plan participants control over investment decisions could be to the detriment or benefit of the person depending on the performance of their investment choices. According to the U.S. Census Bureau, 401(k)s, 403(b)s, 503(b)s, and Thrift Savings plans are among the most common retirement account types. Unsurprisingly, these accounts have higher participation among employers who must make regulatorily defined contributions to these plans. Roughly 92% of employers offer 401(k)s through which the companies make defined contributions to the accounts of employees. On average, of those companies with 401(k) plans, individuals contribute 7.4% of their annual salary to their 401(k) account while employers contribute 4.5% of employee salaries.

The Census Bureau table above presents ownership rates by type of retirement account.  These ownership trends are not consistent across age, gender, or race. The Baby Boomer generation shows the highest level of participation, with 58% owning at least one type of retirement account. Ownership rates progressively decline in the younger generation, with the lowest participation seen in Generation Z, which is understandable since many in this group may still be in high school, college, or early in their careers.

One concern highlighted by this census data is the significant inequality in participation rates among races. White Americans have the highest participation levels, while individuals identifying as Asian, Black, or Hispanic lag behind. This discrepancy stems from systemic issues in the United States, as these minority groups have historically had lower access to higher education, which can lead to jobs with better retirement programs and greater financial literacy.

Not only are participation levels divergent across age and race for retirement planning but the type of investment mix within existing accounts is also worth considering. Investment allocation differs based on individual goals, risk profiles, and knowledge of financial markets. While overall financial literacy levels have grown significantly with the rise of the internet, access to information, and professionals advocating in the space, the financial literacy leg of the retirement stool varies across populations, especially in the minority groups mentioned above.

Nowadays many people hit the easy button for selecting their retirement investment allocations. No, I am not talking about the big red button at Staples, but I am referring to target date funds.  These are the “set it and forget it” asset allocation options for retirement savings. Fidelity reported that 94.3% of its plan participants default to target date funds (date of planned retirement). Target date funds can be a great option for those who do not want to manage their accounts actively, but it comes at a cost. Target-date funds require frequent adjustments to the investment mix for risk allocation as the fund approaches the specified retirement date. This active management may result in higher fees compared to self-managed index funds. According to Vanguard, the average yearly return for retirement accounts is 4.9%, which may not be sufficient for most individuals as inflation continues to erode returns.


Defined benefit plans, better known as pensions, have declined in popularity as companies look to shift investment risk onto their employees. Only 15% of the U.S. workforce have access to a pension whereas in the 1960s around half of all private sector workers were covered by a defined benefit plan. Various factors have contributed to this shift, but one of the main reasons is that people are living longer due to better access to nutrition, healthcare, and overall healthier lifestyles. Longer lifespans mean a longer investment horizon and the need to pay retirement income for 25 to 30 years instead of 15 to 20 years which may have been the pension assumption in the 1960’s. This increased capital commitment led employers to phase out pensions and introduce defined contribution options to their employees. The creation of the 401(k) plan by the U.S. Congress in 1978 as part of the Revenue Act facilitated this transition.

While pensions are increasingly rare in the private sector, people working in government, military, infrastructure, public schools, public safety, and unions are still largely covered by pensions. The often dangerous and more strenuous nature of work in these positions and often lower pay make pensions a powerful selling point for some employees. Pension commitments are one of the largest outstanding long-term obligations for many states alongside retiree health care benefits and outstanding municipal debt. Unfortunately, many states face large unfunded obligations with a total of $1.25 trillion of outstanding unfunded pension obligations among all states as of 2019. The Pew Charitable Trusts report that this debt is equal to 6.8% of all the states’ income and that percentage has been on the rise since before the Great Recession.

Many states deferred their pension contributions during the Great Recession, and the gap in unfunded pension obligations grew further. Some states have felt the burn more than others with New Jersey’s unfunded pension liability accounting for 20% of their total state revenues. The state of Illinois follows closely behind with its unfunded pension liability amounting to 19.4% of state revenue. Illinois in particular is known to have a relatively young retirement age with 63% of workers retiring before age 60. The average pension for a person in Illinois retiring before age 60 with at least 30 years of service is $63,424. This information suggests Illinois’ pensions may be unsustainable unless there are policy changes to alter retirement ages.

Social Security

It is impossible to talk about retirement without opening the door to a discussion about Social Security. Currently, 70 million Americans are receiving Social Security benefits which provides retirement benefits to Americans who have paid into the system during their working years. For every dollar that an individual contributes to Social Security, 85 cents goes toward the Social Security Trust Fund, while the remaining 15 cents is used to assist people with disabilities. For 4 in every 10 retirees, social security provided at least 50% of their total retirement income suggesting that for many retirees social security is crucial to ensuring a secure retirement.

The funds collected from the current year’s FICA (Federal Insurance Contribution Act) taxes are used to pay out benefits in the current year. In theory, the system seems sound but recent reports from the Social Security Administration suggest that the Social Security will run out of money to pay full benefits by 2035. Unless congressional action is taken, the Social Security fund will only be able to pay out 83% of retirees’ full benefits. According to the Social Security Administration, it has been 11 years since Social Security collected enough FICA taxes to meet its current year’s obligations and SSA has been steadily eating away at cumulative surplus FICA contributions. To cover the shortfall, the Administration has issued Trust Fund bonds totaling $24 billion.

The reason behind the funding gap is similar to why many companies are phasing out defined benefit plans. People are living longer, which means benefits must be paid out for more years than actuarially assumed, and there aren’t as many people paying into Social Security relative to the number of Social Security recipients as before. Until 2020, the Baby Boomer generation was the largest. As this generation began to retire, there weren’t enough workers to fill their positions as Social Security contributors, leading to a decline in Social Security reserves. Fortunately, subsequent generations, particularly Millennials and Gen Z, have started to enter the workforce, which will help alleviate the funding burden. However, many people are calling for policy reform to either raise the FICA tax level or lower the benefits paid out. It is unlikely that Social Security will go bankrupt, as it is a key issue for policymakers’ constituents.

Another concern surrounding Social Security is the long-term decline in U.S. birth rates since 2008. This decline isn’t just a worry for Social Security but also for the economy, as our supply chain, workforce, and infrastructure rely on a sufficient population size to fill roles. While artificial intelligence may offer some relief, it’s unlikely that the U.S. government will start requiring AI to pay income taxes, including Social Security.

The Wobbly Three-Legged Stool

Based on the current inflationary environment and improving lifespans, it is likely that the three-legged retirement stool may become a bit uneven and require some long-range planning. As private sector pensions continue to disappear and the structural integrity of social security becomes increasingly untenable, individuals must become more self-reliant by balancing the personal savings part of the stool. Thankfully, financial literacy programs abound and sophisticated financial advisors can employ innovative technology and a broad, diversified investment opportunity to reinforce the personal savings leg of your retirement stool. Servant Financial is dedicated to understanding your retirement goals and building a purpose-built retirement savings plan for your golden years. Optimally, you will find yourself sitting at ease throughout retirement resting on the personal savings leg entirely while the other two legs serve as a footstool for your beach flip-flops or as seats for your grandkids.

Mind the Gap In U.S. Infrastructure Investment

In its 2021 report card “Failure to Act: Economic Impacts of Status Quo Investment Across Infrastructure Systems”, the American Society of Civil Engineers (ASCE) gave the United State’s infrastructure a “C-,” up from a “D+” in 2017—the highest grade in twenty years. Still, ASCE estimated an “infrastructure investment gap” of nearly $2.6 trillion this decade that, if unaddressed, could cost the United States $10 trillion in lost gross domestic product (GDP), 3 million jobs, and $2.3 trillion in exports by 2039.

The chart below summarizes ASCE estimated spending gaps to be mindful of in the 2021 infrastructure report card:

By far the largest spending gap in nominal dollars at $1.2 trillion is in surface transportation which includes highways (ASCE – D grade), bridges (ASCE – C grade), and other transit systems (ASCE – D- grade).   These vulnerabilities in U.S. infrastructure were punctuated recently by the mishap at the port of Baltimore.

Baltimore Bridge Collapse

While the nursery rhyme whimsically suggests that the London Bridge may be crafted of silver and gold, recent events have starkly toppled this notion. On March 26th, 2024, tragedy struck as a cargo ship departing from the Port of Baltimore en route to Sri Lanka experienced engine failure. This untimely malfunction while the ship was leaving the port led to a collision with the Francis Key Scott Bridge, one of America’s busiest roadway bridges. Prompt action by transportation authorities upon receipt of the ship’s “mayday” call enabled them to halt traffic just in time, yet the collapse claimed the lives of six construction workers performing repair and maintenance work on the bridge. The news of this disaster shocked the nation, sparking concerns about potential disruptions to U.S. supply chains and highlighting ASCE’s earlier warnings about underinvestment in the country’s strategic infrastructure. Cleanup of the bridge wreckage is ongoing with the U.S. Army Corps of Engineers anticipating the port’s reopening by the end of May.

The Port of Baltimore ranks as the 15th largest container port in the United States with its major exports including automobiles, coal, natural gas, and agricultural equipment. India is the largest trading partner with the Port of Baltimore with coal being the primary product being exported to India. Even though the port is expected to re-open by the end of May, the bridge collapse has caused an estimated $28 billion worth of goods to be diverted to other ports leading to additional transportation and fuel costs and delays for suppliers. However, analysts do not expect there to be a considerable impact on consumer prices globally. Locally, the bridge collapse has negatively impacted 15,300 port jobs and is estimated to have cost the State of Mayland $28 million in potential lost tax revenue.

Analysis of U.S. Infrastructure

The Baltimore Bridge collapse is unlikely to have a meaningful impact on global markets, however, this incident warrants more diligent oversight of the U.S. Port system given its importance to U.S. international export markets. The U.S. exports 2.3 billion tons of freight from its seaports annually and currently has 208 commercial ports across America’s coastlines. The largest U.S. port is located in Houston, Texas with more than 265 million tons of freight flowing from the port annually. U.S. ports handle 43% of all U.S. international exports totaling almost $2.3 trillion worth of goods making them crucial to the U.S. Economy. Keeping these ports running smoothly is crucial to the United States’ $27.4 trillion economy as highlighted by the 2021 ASCE infrastructure report.

Experts suggest that the independent ASCE report contributed in part to the bi-partisan infrastructure bill passed in March of 2022 called the Infrastructure Investment and Jobs Act (“Infrastructure Act”).  The Infrastructure Act provides $550 billion from 2022 to 2026 to improve roads, bridges, mass transportation systems, and water infrastructure. The main goal of the legislation was to improve supply chain resiliency through improved security, inventory management, and emergency stockpiles after the disruptions that occurred during the COVID-19 pandemic.

Gaps for Investment

The 2021 ASCE report card and recent events make it clear that one of America’s investment priorities should be its strategic transportation, telecommunication, and energy infrastructure. During the spring and summer seasons, it is nearly impossible to travel on of the 164,000 miles of the United States interstate highway system and not encounter road construction or bridge repairs. From an investing perspective, investing in local and national infrastructure, whether it’s transportation, telecommunications, energy, medical, or water management systems, has never been more critical. According to Marsh McLennan, infrastructure emerged as an investment class in the mid-1990s as the .com revolution revealed opportunities in the telecommunications and internet industries. Currently, $100 billion of capital is raised annually for infrastructure expenditures through a variety of investment vehicles, with the most common being private equity and real estate funds. More recently, other forms of tax-advantaged opportunities for infrastructure investing have emerged. Under the 2017 Tax Cuts and Jobs Act, the federal government introduced the opportunity zone program.   Opportunity Zones (OZs) are economically distressed communities, designated by the IRS, in which investments in real assets and infrastructure, with requisite improvements thereto, may be eligible for tax-exempt appreciation and other tax benefits. Opportunity zone investments support local economies by building workforce housing, medical or industrial facilities, or renewable energy, data, telecommunication, or agricultural infrastructure. If you are interested in learning more about farmland OZ infrastructure investment in rural America, we encourage you to visit the website for Promised Land Opportunity Zone Fund.

Artificial Intelligence Infrastructure

One of the more topical areas within infrastructure investing these days is in the semiconductor space to meet the growing demand for microchips used in artificial intelligence (AI). AI has been around for several years but recent deployments and advancements of Chat GPT and other AI software are poised to potentially revolutionize the way many businesses are run. The United States has traditionally been dependent on China for microchips and the supply chain backlogs from the COVID-19 pandemic highlighted the risk of continued dependence on Chinese production for this crucial integrated operating component in everything from cars to agricultural equipment. As a result, the White House recently announced a $5 billion investment through the CHIPS and Science Act which will be used for research and development in the semiconductor industry. The goal is to boost domestic chip manufacturing while bolstering a qualified workforce to ensure strategic production capacity remains in the U.S.

The other consideration with artificial intelligence is the immense amount of electrical power necessary to fuel the massive AI computational capacity of the future. As our country works to create a more carbon-neutral society, AI companies are publicly promoting and sponsoring investments in nuclear power as a reliable, renewable baseload power source. Alex De Vries from the Vrije Universiteit Amsterdam School of Business and Economics researched the necessary electric power for the expected AI infrastructure buildout and estimatedthat a 50% increase in the amount of electricity would be required to power the growing demand for AI-driven data collection and analysis.  Alex’s analysis bodes well for all renewable and traditional sources of electrical generation generally.   Further, many experts believe AI-driven demand for electricity may result in a nuclear power renaissance.

Servant Financial expanded its allocation to real assets and infrastructure by adding the Sprott Uranium Miners ETF (Ticker: URNM) and Recurrent MLP & Infrastructure Class I mutual fund (RMLPX) to client portfolios in mid-February.  Each fund received an initial position size ranging from 0.7% to 1.7% depending on investor risk profiles.   URNM invests in uranium mines and the infrastructure necessary to procure and process uranium. The ETF invests in 20-40 globally diversified stocks with its top holdings consisting of Cameco which is a Uranium producer located in Saskatoon, Canada. URNM’s total return year-to-date through April 26, 2024, was 5.7%.

RMLPX invests in energy infrastructure master limited partnerships (MLPs) and C‐corporations, which primarily hold midstream pipeline assets. RMLPX’s total return year-to-date through April 26, 2024, was 17.0% and its current yield is 5.7%.  Servant Financial will continue to closely monitor URNM’s and RMPLX’s performance along with its other real asset allocation as the economy moves through a transitionary period that has the potential to reignite inflation.  The nascent nuclear renaissance to support the artificial intelligence capacity buildout will also be a keen area of interest.

The recent Baltimore Bridge collapse serves as a blunt reminder of the vulnerabilities within our transportation networks and the potential ripple effects on domestic supply chains. As we continue to assess its aftermath, it is clear from the ASCE 2021 report card that investments in infrastructure are not just prudent but imperative for sustaining economic growth and prosperity for communities nationwide. Fortunately, investment opportunities abound, spanning from traditional sectors like transportation and energy to emerging fields such as data centers and artificial intelligence infrastructure. Whether it’s investing in local roads and bridges or speeding along the information superhighway of the future with artificial intelligence, infrastructure investing is poised to remain a cornerstone in investment portfolios for years to come.

While bridges aren’t made of silver and gold, silver and gold are common materials used in computer chip design, including artificial intelligence chips. Gold is often used for its excellent conductivity and resistance to corrosion, while silver is valued for its high thermal and electrical conductivity. Both metals play crucial roles in ensuring the efficiency and reliability of computer chips used in AI applications.  By minding the gap in U.S. infrastructure investment, your investment portfolios may shine brighter.

IPOs Ready for Liftoff

Risk markets have been generally buoyant since the Federal Reserve paused its interest rate hiking cycle in 2023 and with the Fed continuing to signal a “pivot” to lower interest rates later this year.  Year-to-date through March 15, 2024, bitcoin is leading risk assets with a total return of 38.7%, followed by midstream energy at 11.4%, and the S&P 500 at 7.6%.

Optimism is rising that the U.S. initial public offering (IPO) market is “ready for liftoff” after a couple of years of significant declines in volumes and valuations.  According to Ernst & Young, there were 128 U.S. initial public offerings in 2023, with a listing value of $22.6 billion.  2023 was a nice uptick compared to 2022, yet well below the capital raised in the 2019 to 2021 period.

Ernst & Young experts believe the 2024 IPO market could return to historically “normal” levels.  Favorable indicators for their optimism are the significant backlog of IPO hopefuls and more favorable market conditions characterized by rising valuations, moderating volatility and inflationary pressures, and expectations of Federal Reserve interest rate cuts in the not-too-distant future.

The 11 spot bitcoin ETFs approved by the Securities and Exchange Commission (SEC) on January 11th were the first new securities offerings off the 2024 IPO launch pad.  And what an amazing blastoff it has been.  Bitcoin held by these vehicles has grown some 226k to 836k bitcoin in the two months since launch.  The total assets in the 11 spot Bitcoin ETFs have crossed above $60 billion, over $3 billion higher than the assets under management (AUM) in the largest Gold ETF (GLD) with $56.9 billion. Bitcoin is sometimes referred to as digital gold.

Further as the chart depicts below, BlackRock iShares Bitcoin Trust (IBIT) AUM at $25.3 billion and Fidelity’s Bitcoin Fund (FBTC) garnering $9.7 billion have been the fastest growing entrants in the bitcoin fund space.  The spot bitcoin ETF’s IPOs have been more widely successful than even the most optimistic expectations by garnering AUM expected over a full year in just two months.  Consider this, IBIT and FBTC rank 3rd and 4th in year-to-date inflows among all ETFs, standing tall on the podium against some of the biggest, more established ETFs in the world.



In the 2024 IPO staging area is Reddit (RDDT), set to go public on March 21st.  RDDT and is one of the most highly anticipated IPOs of 2024. The social media company is seeking a $6.5 billion valuation and is aiming to raise up to $748 million through the sale of 22 million shares at an expected price of $32.50 per share.  Reuters commented on St. Patrick’s Day that Reddit’s IPO is currently between four and five times oversubscribed.

Reddit has been around since 2005 and is best known for hosting text-based discussions with expert influencers gaining popularity for their opinions and answers to audience questions. The Reddit business model is based on ad sales, as well as sponsored posts and promoted content, and premium features through subscriptions.  The Reddit platform hosts vast discussion forums called “subreddits,” focused on topics ranging from technology, music, food, etc.  Users are called “Redditors.” In fact, it is expected that approximately 1.8 million shares of newly issued stock in the IPO will be allocated for purchase to Redditors.

More recently Reddit has entered into licensing agreements with various Artificial Intelligence (AI) software providers to further monetize its proprietary content and data.  AI companies use databases, like Reddit’s, to train their models.  In its IPO registration statement with the SEC, Reddit disclosed, “In January 2024, we entered into certain data licensing arrangements with an aggregate contract value of $203.0 million and terms ranging from two to three years. We expect a minimum of $66.4 million of revenue to be recognized during the year ending December 31, 2024, and the remaining thereafter.”  The licensees were not disclosed, but there is broad speculation that one or both of Google and OpenAI could be customers.

According to Axios, Reddit received a letter of inquiry on Thursday, March 14th, from the Federal Trade Commission (FTC).  Reddit said publicly that the FTC is “conducting a non-public inquiry focused on our sale, licensing, or sharing of user-generated content with third parties to train AI models.”  Of note, Reddit is not the only company receiving these so-called “hold letters,” according to a former FTC official who spoke with Axios.

We’re looking forward to seeing how the Reddit IPO launch performs later this week.  This could ignite the IPO market for 2024.

Ready for blastoff is Starlink, a subsidiary of Space X, Elon Musk’s sponsored aerospace company. Starlink provides satellite-based internet service around the globe. Space X uses spaceships with rocket grade kerosene and liquid oxygen in its recoverable and reusable Merlin engine system to place Starlink satellites into orbit.  The scale of Starlink’s satellite system is absolutely out of this world!  On March 15, 2024, Space X announced that it placed its 6,000th Starlink satellite into Earth orbit.  In addition, Starlink has “bravely gone where no internet service has gone before.”  Last year, Starlink introduced its broadband internet service to two of the most remote areas of the globe – Pitcairn Island and Easter Island – both thousands of miles from the nearest continent.

AG Dillon & Co managing director Aaron Dillon estimated Starlink’s possible valuation at $1.6 trillion based on the following key metrics:

  • Starlink has satellite internet monopoly,
  • 6 billion people (33% of global population) have no access to internet,
  • Starlink charges a monthly subscription fee of $50 to $110 per month,
  • And with an assumed 10% Starlink capture rate of internet-less humans, or 260 million subscribers, at $50/month is $156b in annual recurring revenue,
  • Aaron uses an aggressive 10x revenue multiple to derive his $1.6 trillion valuation.

With the Reddit IPO in the staging area, Elon could be possibly waiting in the wings to see how this IPO performs before proceeding with Starlink.  There is little dispute about Starlink’s success in launching satellites, nor Elon’s success in launching IPOs. Talk about a match made in heaven.

So long as markets remain receptive to risk-taking, we believe it’s not a question of if, but when the Starlink IPO will come to market in 2024.  In that light, we’re preparing for an Apollo 11-type countdown:

“Twenty seconds and counting. T minus 15 seconds, guidance is internal. Twelve, 11, 10, 9, ignition sequence starts… 8, 7, 6, 5, 4… 3… 2… 1, zero, all engine running… LIFT-OFF! We have a lift-off, 32 minutes past the hour. Lift-off on Apollo 11.”





Leaping Out of Credit Card Debt

Every four years, Americans are given the rare gift of time. February 29th only appears on the calendars every 1,460 days marking the well-known holiday of Leap Day. This extra day brings about traditions across the world such as women proposing to men and is commonly called “Bachelor’s Day” or “Ladies Privilege.” In other countries, Leap Year is known as an unlucky year for agriculture and particularly sheep. There is an old rhyme that says, “Leap Year was never a good sheep year.”  So don’t be a sheep this Leap Year, do your own thinking, particularly on important matters.

What does Leap Year mean for Americans? For credit card holders, it means an additional day to tackle the mounting $1.129 trillion debt Americans currently owe. Americans now have more credit card debt than ever before, and the COVID-19 pandemic only accelerated its “leap” higher. Credit card holders with unpaid balances hold an average of $6,864 with the highest average debt levels being owed by East Coast residents. The debt balances on these credit cards aren’t getting cheaper to carry either given rising interest rates. The average Annual Percentage Rate (APR) on credit cards is 21.47% making it even more difficult for consumers who have found themselves in the debt hole to “leap” their way out of it.

Source: Lending Tree


How did the average Americans find themselves in this dilemma? Higher prices at the gas pump and grocery store together with the increasing costs of housing have significantly contributed to the current crisis. Borrowers between the ages of 30 to 39 are particularly feeling the pain of rising interest rates as this age bracket often is also dealing with student loan debt repayments. Even though the U.S. economy continues its expansion, debtholders may be reaching a breaking point and be forced to scale back consumption.  Consumer expenditures represent approximately 70% of U.S. economic activity. The post-pandemic inflation levels were believed to be largely attributable to temporary supply chain shocks that would resolve themselves over time and prompted a slow response by the Federal Reserve. Credit card holders felt acute pain when a tardy Federal Reserve instituted an aggressive rate-hiking campaign to tame inflation. Some claim that debtholders are at fault for overspending and while that may be true, they are just taking a profligate spending lesson out of the Federal Government’s budget playbook. The current National Debt is hovering around $34 Trillion which comes out to an average of $102,279 per each American. Interestingly enough, the slope of the National Debt graph shows a very similar shape to the above graph featuring individuals’ credit card debt.

Source: U.S. Department of the Treasury


Even though credit card debt levels continue to rise, delinquency rates remain relatively low with only 3.1% of Americans with a balance that is more than 30 days delinquent. What do high debt levels and low delinquency levels mean? Huge profits for credit card companies. Currently, there are four major credit card networks in the United States: Visa, Mastercard, American Express, and Discover. Visa, Mastercard, and American Express have experienced rising earnings over the past several years as people swipe cards quicker and pay later. Not only are these companies leaping into financial success from higher individual card debt but also higher transaction fees. In 2022, credit card companies charged consumers an all-time high in interest and transaction fees of $130 billion.

These oligopolies are only projected to get stronger and more concentrated as Capital One announced this month their plans to buy Discover Financial Services for a whopping $35 billion.  Discover shareholders would receive 1.0192 Capital One shares for each Discover share under the terms of the proposed deal.  Capital One desires Discovers’ independent card network to go with its Capital One Visa operating on the shared Visa credit card network.  As more consumers swipe plastic cards rather than pay with cash, financial services are taking notice of the “leap” in prospects for the credit card sector. Some worry the rising credit card debt is signaling a weakening economy, JPMorgan CFO, Jeremy Barnum, reported during their earnings call that consumers are adjusting to the end of government stimulus checks and government-mandated pause on student loan repayments. Other bank executives point to a strong labor market signaling that consumers can afford the high credit card balances.

Servant Client Portfolio Positioning

Here is our Leap Year summary of Servant client portfolio composition compared to traditional benchmarks.  A traditional 60/40 portfolio would hold 60% equities and 40% fixed-income securities and cash for a client with moderate risk tolerance.

1. Underweight equities

2. Overweight non-U.S. equities vs. U.S. equities

3. Overweight precious metals, gold miners, and digital assets/bitcoin

4. Underweight fixed income duration

U.S. equity valuations are near extremes.  For example, Hussman Fund’s February 26, 2024 newsletter “Speculative Euphoria and the Fear of Missing Out” states that “the valuation measure we find best-correlated with 10-12 year S&P 500 returns in market cycles across history is the ratio of nonfinancial capitalization to corporate gross value-added, including estimated foreign revenues (MarketCap/GVA).  Presently, this measure is higher than at any point before June 2021, with the exception of three weeks surrounding the 1929 peak.”

Likewise, market breadth is very, very narrow with the performance of the so-called “Magnificent 7” (U.S. tech behemoths Apple (AAPL), Amazon (AMZN), Alphabet (GGOGL), Facebook/Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA)) diverging with NVDA soaring and TSLA tanking.

In our opinion, the aggregate stock market is priced for perfection and assumes inflation will sheepishly return to Fed’s targeted rate of 2% and a soft economic landing where a broad recession is avoided.  We see the potential for volatility in future economic data.  If such volatility were to occur, it could quickly “leap” into the stock market  For example, market projections for core PCE (Personal Consumption Expenditures), the Federal Reserve’s preferred inflation measure, remain closer to 4% than the Fed’s targeted 2%.  Further, recent economic data (employment and layoff announcements and retail sales) are consistent with a slowing economy.

We think the recent move in Bitcoin may be an economic tell.  Bitcoin has leaped from below $52k at the beginning of this week to breach $61k on the day of this writing on February 28th.  You may recall that Servant Financial initiated small allocations to client portfolios in 2020 of generally 1% to 2% based on the deep research that we conducted which showed that adding a small bitcoin allocation would historically benefit globally diversified portfolios by lowering risk while providing the potential for higher returns.  Market history has been rhyming lately.

John Heneghan recently received his Certificate in Blockchain and Digital Assets –  Financial Advisor Track from the Digital Assets Council of Financial Professionals so Servant Financial is prepared to serve your financial planning and investment needs regarding digital assets and bitcoin.

For more bitcoin-curious readers, we have been beta-testing a couple of more concentrated and volatile portfolios on the bitcoin, anti-fiat themes.  The first portfolio is focused on active best ideas in both the real asset and bitcoin/digital asset space.  This portfolio holds about 15 positions and has almost a 3-year track record.  The second and newer portfolio (10-month history) is much more speculative and holds only 6 positions – Fidelity Bitcoin Trust ETF (FBTC) and five other bitcoin-related businesses.  Please reach out if you are interested in learning more.

Leap Day is known to be a lucky day – good luck for some and bad luck for others. As Ray Charles sang, “If it wasn’t for bad luck, I wouldn’t have not luck at all.” One thing is sure, consumers cannot rely solely on good luck to leap them out of their debt holes because bad economic luck may be lurking around the corner. If you have found yourself struggling with high levels of credit card debt, we encourage you to check out the National Foundation for Credit Counseling for strategies and tips for your unique situation. Leap Day should not be just another date on the calendar; instead, view it as an opportunity to leap closer to financial freedom from credit card debt.




Bitcoin ETFs Clear SEC Hurdle: What it Means for Your Investment Portfolio

On Your Marks, Set

In our January 11, 2024, special report, we conveyed that the Securities and Exchange Commission (SEC) approved 11 spot bitcoin exchange-traded funds (ETFs).  This landmark decision lowered the barricades for institutionalized capital flows into Bitcoin.  The SEC approvals come after a lengthy legal battle by several industry leaders, such as Coinbase and Grayscale, against the SEC that had lasted for more than a decade since Tyler and Cameron Winklevoss first proposed a spot bitcoin ETF in 2013.

Bitcoin was the top-performing asset class in 2023 and gained 155% for the year according to CNBC.  Bitcoin ETFs clearing the SEC approval hurdle in early January created an exciting track event.  After the SEC fired the starter gun, it was off to the races for the investment athletes to gather the most bitcoin ETF assets under management (AUM).  The track stars included large Clydesdale-like contestants, like AUM-behemoths Fidelity Investments and BlackRock, as well as newer, challenger managers, like ARK 21Shares led by Cathie Woods of ARK Invest, a leading investor in disruptive technologies, and Bitwise, the largest crypto index fund manager in America.

Below is a table of the eleven approved bitcoin ETFs with symbols and reported fund management fees with teaser fee waivers and post-fee waivers in parenthesis:

Please note that as depicted above Grayscale Bitcoin Trust (GBTC) with almost $25 billion in bitcoin holdings was converted from a trust to an ETF (GBTC.P) on January 11 after the SEC approved U.S.-listed bitcoin ETFs. GBTC had been trying to convert to an ETF since 2016 and ultimately had to litigate with the SEC to obtain a court decision affirming that the SEC’s disapproval of Grayscale’s previous bitcoin ETF filings were “arbitrary and capricious.”  While regulatory approval was litigated, GBTC traded at a discount to its underlying bitcoin holdings that reached as wide as 50% in December 2022, following the collapse of crypto exchange FTX.  GBTC was the investment vehicle used by Servant to provide client portfolios with small, yet meaningful exposure to bitcoin (generally purchased at discounts to net asset value or NAV).  Allocations ranged between 0.5% to 2.0% of portfolio value, depending on investor risk tolerance.

First 10 Days of Trading

As depicted in the next table below, there have been net inflows of $745 million to all eleven bitcoin ETFs in the 10 trading days through January 25, 2024, with $4.8 billion flowing out of GBTC and $5.5 billion flowing into the other 10 bitcoin ETF (excluding GBTC).  The two hulking runners have gotten off to an early lead in asset gathering with BlackRock iShares Bitcoin Trust raising $2.1 billion and Fidelity’s Bitcoin Fund garnering $1.8 billion.  Ark21 and Bitwise were tied for the bronze medal in this race at $550 million in cash inflows.

Data courtesy of James Seyffart

You may be asking yourself “Why the net outflows from GBTC?”  Well, there are two principal reasons that I believe represent episodic selling.  We remain bullish on bitcoin for the long-term as we discuss further below.  First, GBTC was an asset held by FTX.  The liquidator of this bankrupt entity patiently awaited GBTC conversion to an ETF when the discount to NAV would be its narrowest to begin selling its GBTC interests.  There are reports that FTX’s liquidator has sold as much as $1 billion of GBTC in the past 10 days.

Secondly, many GBTC investors may have been selling GBTC in these 10 days and purchasing another ETF with a substantially lower management fee.  Although GBTC lowered its fee by 0.5% from 2.0% to 1.5% with its conversion to an ETF, its fees remain substantially higher than the other 10 ETFs.  Fees for the other 10 ETFs range from 0.2% to 0.9% (without fee waivers), leading investors to switch to more investor-friendly racers.

Despite the 10 other ETFs being large purchasers of bitcoin, this GBTC selling pressure as well as FTX liquidators potentially hedging price risk on its holdings in bitcoin futures markets put downward pressure on the trading price of bitcoin.  It is rumored that FTX’s liquidation of GBTC may now be complete.  Meanwhile, other investors’ rotation out of GBTC to other bitcoin ETFs with lower fees may also be slowing, possibly resulting in more favorable supply-demand characteristics.  For example, on January 26th, GBTC aggregate outflows slowed to their lowest since conversion at $255 million, down from an average daily outflow of roughly $500 million. Some believe the news of GBTC’s slowing outflows propelled Bitcoin’s 4.7% appreciation on January 26, 2024.

Bitcoin Supply-Demand Outlook

We remain bullish on Bitcoin in the near and longer term.  First, the next bitcoin halving will occur when the number of bitcoin blocks reaches 840,000 which is expected sometime in April 2024. The reward per block will decrease from 6.25 bitcoin to 3.125 bitcoin at that time. This halving of the block reward (proof of work, newly mined bitcoin) occurs roughly every four years.  This next halving will be the fourth.  The average daily block reward will be cut in half from 900 bitcoin per day to 450 bitcoin per day or an annual supply cut from 328,500 bitcoin to 164,500 bitcoin.  This compares to average net bitcoin purchases by the ETFs of roughly 1,200 Bitcoin per day or 438,000 Bitcoin per annum. After the next halving, demand is estimated to exceed supply by 2.7 times.

In addition to blockchain rewards for mining Bitcoin, miners/nodes on the blockchain network also earn transaction fees.  As block rewards decrease, there is an expectation that transaction fees will increase.  The Bitcoin blockchain is not designed to work on a FIFO (“first in, first out”) basis but rather an HFFO (“Highest fee, first out”) basis. In other words, market participants can pay for more timely transaction processing.  The chart below from ChartsBTC graphically summarizes these foregoing concepts.

Secondly, most of the ETF buying to date has come from self-managed retail and institutional investor accounts.  Fidelity, BlackRock, ARK21, and Bitwise haven’t yet had time to marshal their resources and call on their relationship networks of registered investment advisors, family offices, endowments, pensions, corporate treasury departments, and sovereign wealth funds. I spoke with our Fidelity custodial representatives last Friday and they indicated that Fidelity had just gotten started on internally educating their salesforce and distribution teams.

ETF Bitcoin Rotation in Client Portfolios

Servant Financial intends to rotate client allocations out of GBTC and into Fidelity Bitcoin Trust (FBTC) over the next few weeks.  Liquidity is critical in this volatile asset class, so the choice came down to Fidelity and BlackRock.  Fidelity is by far the more seasoned Bitcoin pacer.  Further, Fidelity has the distinction of being the only ETF sponsor able to custody the bitcoin themselves.  On the other hand, BlackRock is a late starter to this Bitcoin track and field event.

Fidelity Investments began researching bitcoin and blockchain technology in 2014, resulting in the creation of a dedicated business for this innovative asset class, called Fidelity Digital Assets.  Bitcoin and digital assets are an important part of Fidelity’s business strategy consistent with their stated belief that further digitization of investments will alter the future of capital markets, digital payments, and value storage.

Fidelity has been running this Bitcoin endurance race for nine long years already.  Fidelity has witnessed firsthand Bitcoin’s transition from a niche technology to the threshold of becoming a mainstream asset.  We expect that Fidelity will continue to build products that support the rapidly evolving digital asset ecosystem, enable broader adoption, and educate investment advisors and investors on this emerging asset class.  Below is Fidelity’s Bitcoin and digital asset timeline.

It’s a Marathon, Not a Sprint

I’d like to think Satoshi Nakamoto was into long-distance running much like Fidelity Investments. His vision for a trustless form of electronic cash articulated in his white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” certainly had a long-term focus as it stretched out the network incentive architecture beyond 2048.  Satoshi’s strategic vision was to build the most secure and efficient network of computing power the world has ever known.   Such a network would make the double-spending problem (fraudulent Bitcoin creation) prohibitively more expensive with each successive halving.  Miners/nodes are incentivized through block rewards and transaction fees to participate in the Bitcoin blockchain network (compensation for mining/computational work).  The economic desire for bitcoin miners to operate profitably, the step down of the block reward every four years/halving, and the inherent transition to transaction fee-based compensation to network participants (reflective of the market value of the network/transaction service) creates a virtuous cycle of increased security, efficiency, and value of the bitcoin blockchain network over time.

Nirvana for bitcoin miners is frictionless mining or near zero cost of mining.  This can be achieved by continuously driving up the efficiency of the computing power (Moore’s law) and driving down the cost of energy by utilizing zero cost/stranded energy sources (methane typically flamed in oil and gas production, excess renewable energy (wind, solar, hydro, geothermal) not always needed by the electricity grid and biomass).  The value of this distributed Bitcoin network can generally be thought of under two methods a) cost method – the cost to build and maintain the security and integrity of the network and b) fair value method – the aggregate net present value of the cash flow of miners/nodes for transaction and blockchain network services.

Since bitcoin represents an implicit ownership claim on this distributed blockchain network, we expect to HODL (hold on for dear life) to client bitcoin ETF allocations, content in Satoshi’s intelligent design of a distributed blockchain ledger.  It’s a bit of a Promised Land of computing with perfect knowledge and consensus in the truth, everlasting rest and peace with security from attack, distributed and independent yet in communion and interconnected with neighboring nodes, and contentment and joy from separation from the corruption of fiat money.



The Next Big Thing

As humans, we are constantly looking towards “the next big thing.” Children look forward to Christmas Day when they find presents under the tree. College students look forward to the end of the semester and being one step closer to closing the door on homework and exams. Adults constantly think about the next big life event such as buying homes, marriage, starting a family, retirement, or just trying to make it to the weekend after a long workweek. The human nature of “the next big thing” has created the yearly phenomenon of the New Year’s resolution.

Have you ever wondered where this tradition started? Why did we become so caught up with big or important goals or accomplishments of “next year I am finally going to get in shape” or “this is the year will be the year I finally start my own business”? The tradition is said to have begun 4,000 years ago with the ancient Babylonians. People would hold massive celebrations to honor the new year which began in March when crops were planted, and new life would begin to grow. Oftentimes this would be the time that the Babylonians would crown a new king which is an interesting analogy as we head into election year 2024 in the United States. Likewise, Ancient Romans believed in a similar practice and that their god Janus (how January got its name) would look backward to the previous year and make predictions about “big things” in the coming year.

Thousands of years later, we follow a similar practice of looking at our biggest accomplishments of the past year and setting new bigger, or higher goals for the coming year. In last month’s article, we evaluated the ups and downs of the U.S. economy by addressing interest rates, recession concerns, consumer spending, geopolitical issues, and bitcoin adoption among others. Looking at 2024, we see some New Year’s resolutions on the brink for the U.S. but not your typical “I want to lose 10 pounds” or “I want to finally get out of debt,” even though the U.S. government should definitely work on that second one. We expect some New Year’s resolutions within the U.S. regarding economic stability during election year madness and the public likely has some resolutions about the growing credit card burden in light of rising inflation and interest rates post-COVID-19 pandemic. We also expect a few big companies to have an IPO on their New Year resolution list and investors will be keeping a watchful high to see if they can hit these goals.

We Need to Keep the Economy Calm During the Election Year Madness

High on the New Year’s wish list for 2024 for many in the United States is to maintain a relatively stable economy during what is sure to be a volatile election year with more ballot histrionics and chicanery. Regardless of political beliefs, it is easy to see that polarization between political parties is paramount, which may only breed volatility in the economy and financial markets. People typically keep a watchful eye on the factors driving the economy during elections as sometimes changes in power or just the thought of a change in power can create uncertainty or confidence that shifts the trajectory of the economy one way other the other.

U.S. Bank recently published an analysis examining how elections have historically affected the U.S. stock market. Their analysis showed that while election years can bring added volatility to the market, there was no evidence suggesting a meaningful long-term impact on the market. U.S. Bank showed in the figure below how political party control has historically impacted the value of the S&P500 specifically during the first 3 months following an election.

However, individual sectors can swing more widely than overall markets depending on the key campaign issues during an election year such as energy, infrastructure, defense, health care, and trade or tax policy. Key issues going into the 2024 race are likely to be inflation, climate change, foreign policy, student loan forgiveness, and reproductive rights. U.S. Bank also concluded that the individual drivers such as economic growth, interest rates, and inflation are still the most critical factors for investors to consider. Each political candidate is likely considering these market-moving factors as they position their “big things” for their 2024 election runs.

This Year I Want to Get Out of Credit Card Debt

Those plastic shiny cards in Americans’ pockets may be seeing a little less action in the coming year. Credit card debt levels reached an all-time high of over $1 trillion in 2023 as consumers resort to spending on credit to maintain their standard of living in the face of the rising costs of almost everything. Interestingly, Statista reported in a recent survey that people’s #1 priority going into 2024 was saving more which means swiping less. The average unpaid debt among consumers is around $7,000 and the double-digit interest rate accruals on those debt levels do not bode well for consumer saving or spending.

Source: Statista

While the Federal Reserve is celebrating inflation heading towards its 2% target, some people forget that the inflation number is a year-over-year metric. This fact means while year-over-year inflation numbers have come down, they are being compared to high single-digit inflation numbers from the previous year. Let’s look at the specific costs of a few items. A loaf of bread in March 2020 just before the pandemic began was around $1.37 and a gallon of milk was $3.25 according to the U.S. Bureau of Labor Statistics. Currently, the price of bread is $2.00 per loaf and the price of a gallon of milk is $4.00 meaning there have been “big time” increases of  46% and 23%, respectively, in the price of these staples in just 3 years. On the other hand, the median household income in the United States has only grown around 9% since 2020 suggesting that wage increases have not kept up with consumer price inflation. That’s a “big deal” and this mounting credit card debt and higher interest rates will make it very difficult for most consumers to dig out the debt hole that has been created. Applying the first “big rule” of getting out of the hole is to stop digging, many consumers will cut up their credit cards and pursue more frugal lifestyles.

This is the Year We Go Public

In 2023, there were the fewest number of IPOs in recent history with only 153 companies going public compared to 181 in 2022 and 1,035 in 2021. Some of the biggest IPOs for 2023 were AI chipmaker Arm Holdings PLC [NASDAQ: ARM], which IPO’d on September 14 at a $54.5 billion valuation. The next biggest was Kenvue [NYSE: KVUE], Johnson & Johnson’s spinoff of its consumer healthcare division (Band-Aid, Tylenol, etc.) which IPO’d on May 4, at a valuation of $41 billion. In third place was the popular shoe brand, Birkenstock [NYSE: BIRK], IPO’d on October 11, at a valuation of $7.5 billion.

Looking ahead, 2024 is shaping up to be a “big year” for the IPO market.  Topping the list of “next big thing” is Stripe, an Irish e-commerce company valued at $50 billion as the most valuable privately held “technology” concern in the world. Batting second is AI company, Databricks, planning to go public with at a $43 billion valuation. Next in line is the popular social media service, Reddit, planning to go public with at a $15 billion monetization of its more than 50 million daily users.

Buzz due to a recent report from Bloomberg has also ensued around a possible public offering for Elon Musk’s Starlink which provides satellite internet to users around the world. The service has brought high-speed internet to people in even the most remote areas of the country to connect electronically with the rest of the world. Musk released a statement in November saying that Starlink had achieved break-even cash flow but denied reports that the company would be spun out separately from Space X and go public in 2024. Space X, including the Starlink satellite business, is truly the “next big thing.”  Space X’s 2023 market share of global satellite launches is estimated at 80% and it has an estimated valuation of $150 billion. While Musk seems to have already “hit the moon” with SpaceX, some are wondering what he will do next and if a Starlink IPO will be the next chain in his legacy.

Bitcoin Spot ETF Approval

Speaking of “big launches”, Reuters reported that up to seven applicants for a spot Bitcoin exchange-traded fund (ETF) only have a few days to finalize their filings to meet a looming deadline set by the United States Securities and Exchange Commission (SEC).  The SEC has set a deadline for spot Bitcoin ETF applicants to file final S-1 amendments by Dec. 29, 2023. The SEC reportedly told applicants in meetings that it will only approve “cash only” redemptions of ETF shares and will disallow in-kind redemption of ETF shares.  Further, the SEC also reportedly wants Bitcoin ETF filers to name the authorized participants (AP) in their filings.  APs are effectively market makers and risk takers in the creation and redemption of ETF shares.  APs acquire the underlying bitcoin that backs the ETF shares created and, likewise, sell the underlying bitcoin for ETF share redemptions. Any issuer that doesn’t meet the Dec. 29 deadline will not be part of a first wave of potential spot Bitcoin ETF approvals in early January.

The SEC approval of one or more bitcoin spot ETFs is expected to markedly increase institutional and retail investor demand for bitcoin as well as accelerate the bitcoin adoption curve. Bitcoin experts predict this will result in much higher prices for Bitcoin over time.

Bitcoin is currently trading at $42k and has been by far the leading asset class for 2023 with a 154% year-to-date return.

Our New Year’s Resolution

As we sing Auld Lang Syne into the New Year, we at Servant Financial remain committed to maintaining broadly diversified global investment portfolios tailored for each client’s risk tolerance and station in life. Further, we will make it our New Year’s Resolution to stay on top of the “next big thing” that could either adversely or positively impact the achievement of your long-term investment goals and objectives.  That “big thing” could be inflation or deflationary concerns that suggest positioning towards greater real asset exposures or lightening up. Alternatively, it could be sensible, yet unconventional portfolio allocations to more volatile asset classes, like bitcoin and gold miners, as anti-fragility plays on the bankrupt fiat money system. Hopefully, the end of 2023 will bring you great joy and satisfaction in some of your biggest life accomplishments for the year and the turn of the year brings you thoughts of resolutions that have you aiming higher or asking yourself what’s “ the next big thing” in your life.  May prosperity, good health, and well-being be your constant companion in the New Year.