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Category: Insight

Fed Sends Mixed Messages

Written by John Heneghan

On September 18th, the Federal Reserve cut interest rates by 50 basis points, marking the beginning of a new rate-cutting cycle. Historically, such a large initial rate cut has typically been reserved for times of economic crisis. Updated economic projections provided by the Fed, referred to as the “dot plots”, indicate that the Fed now anticipates a higher ending 2024 unemployment rate (4.4% vs. 4.1%), higher GDP growth (2.0% vs. 1.4%), lower inflation as measured by the Personal Consumption Expenditure (PCE) index (2.3% vs. 2.4%), and a reduced 2024 year-end Federal Funds rate (4.4% vs. 4.6%) compared to its December 2023 forecasts. These updated forecasts hardly suggest any economic downturn or crisis is around the corner. Both the bond market and the Fed expect an additional 50 basis points in cuts by year-end, implying a 25 basis-point reduction at each of the two remaining Federal Open Market Committee (FOMC) meetings this year.

The Fed’s 50 basis-point cut lacks clear justification based on currently available economic data. Core and headline inflation continue to exceed the Fed’s 2% target, and base effects and housing dynamics suggest that core inflation could remain sticky. Further, on September 26th, the U.S. Bureau of Economic Analysis reported that U.S. GDP grew at an annual rate of 3.0% for the second quarter of 2024. This final 2Q24 GDP figure was revised upward from the initial estimates and reflects healthy economic growth, driven by strong consumer spending, an upturn in private inventory investment, and business investments. Additionally, financial conditions are at their lowest since May 2022, and jobless claims continue to fall. Initial jobless claims in the U.S. fell to 218,000 for the week ended September 21, lower than analyst estimates of 223,000 to 225,000. The latest jobless claims represent a four-month low, indicating a stronger labor market than some analysts and perhaps the Fed anticipated. In addition, the latest Bank of America Fund Manager Survey shows that over 50% of respondents do not foresee a U.S. recession within the next 18 months, i.e.. the consensus expectation remains for a soft landing.

The Fed’s decision to cut interest rates by 50 basis points last week has sent mixed messages to the markets.  The ensemble of market reactions suggests the Fed has ignited risk-on behavior.:

  1. Stock Market: Initially, there was a muted or even negative reaction in the stock market. This might seem counterintuitive because rate cuts are typically viewed as positive for stocks due to lower borrowing costs which can stimulate growth. However, the immediate dip could be attributed to investor concerns that the larger-than-expected cut might indicate the Fed’s worries about underlying economic weaknesses, particularly concerning the labor market. However, following the initial confusion, there has been a meaningfully positive reaction with stocks rallying sharply as market consensus moves toward the assessment that the Fed does not have any inside information on data portending broad economic weakness.
  2. Bond Market: The bond market showed a significant and immediate reaction with the 10-year Treasury yield spiking to 3.78% on September 26th from 3.64% the day before the Fed’s rate cut. The bond market seems to be repricing for higher expected inflation and/or stronger economic growth in the longer term post the Fed’s cut.
  3. Gold: Gold spiked to an all-time high on September 26th by topping $2,700 per ounce for the first time in history. This signals both the possibility of a Fed dovish policy mistake and safe haven buying in response to the escalation of the wars in Ukraine and the Middle East.
  4. Bitcoin: Likewise, bitcoin, or digital gold, has popped above $65,000 and is up almost 4% on the 26th.  For market technicians, the $65,000 price per bitcoin represents a key technical level with many analysts suggesting that a breakthrough of this level may signal the beginning of another epic run. Today’s price appreciation may signal the start of a run to Bitcoin’s all-time high, previously set in November 2021 at approximately $69,000.  Pop zing!
  5. Energy Markets:
    1. Oil: Oil prices have shown limited volatility as of late. Brent crude has been range-bound around $75 per barrel. There’s some underlying sentiment of a bear market in oil, with some hopes pinned on-demand increases or external stimuli like actions from China to boost prices.  Escalation of the Middle East war between Israel and Iran’s Hezbollah proxy in Lebanon could drive increased risk premiums into oil prices.
    2. Natural Gas: Natural gas experienced a significant jump, with futures up over 8% recently, possibly due to the aforementioned geopolitical tensions in the Middle East or expectations of increased demand from electricity producers looking for energy resources to satisfy the growing demand for Artificial Intelligence computing capacity.
    3. Uranium: Uranium has seen quite dramatic swings in prices in 2024.  The spot price of uranium has decreased by (11.6%) since the beginning of 2024, reaching around $80 per pound as of late September, after hitting a 16-year high earlier in the year due to increased demand and tight supply.   Despite this year-to-date decrease, uranium has been the best-performing energy commodity year-over-year, despite its decline from a peak of $106 in February 2024.  The supply-demand imbalances in uranium are long-term in nature as it takes around a decade to bring new supply online.  As we’ve outlined previously, there is strong interest in uranium due to its role in nuclear power production, especially with global pushes towards decarbonization and the “greening” of nuclear energy. Uranium prices and Sprott Uranium Miners ETF (URNM) have been raging as of late. URNM is up about 13% since the last FOMC meeting.

X Grok AI rendering of Three Mile Island nuclear plant

 

Last week, BlackRock, Global Infrastructure Partners, Microsoft, and MGX announced an AI partnership that could invest up to $100 billion in U.S. energy infrastructure and data centers. Additionally, Constellation Energy signed its largest-ever power purchase agreement with Microsoft, adding 835 megawatts of carbon-free, nuclear energy to the grid. Microsoft’s long-term offtake commitment catalyzed the restart of the decommissioned Three Mile Island nuclear plant in Pennsylvania, with key permits still required.  The deal is projected to contribute $16 billion to Pennsylvania’s GDP and generate over $3 billion in taxes.

Prince fans will remember an analogous Fed policy instance that occurred in 1999.  At the December 21, 1999, FOMC meeting, the Fed kept interest rates unchanged, citing uncertainties around the century date change across the nation’s information processing systems. Nearly a year later, in January 2001, the Fed began cutting rates, starting with a 50 basis-point reduction due to weakening production, declining consumer confidence, tightening financial conditions, and high energy prices.   At that time, jobless claims and headline inflation were higher than today.  Core inflation and manufacturing activity were lower. The price-to-earnings (P/E) ratio of the S&P 500 was 30.1x, compared to 27.5x today. However, the technology sector’s price-to-sales ratio is currently over 30% higher than it was during the peak of the 2000 Tech Bubble.  The top 10 companies in the S&P 500 now make up 34% of this large-cap index, compared to 25% at the height of the Tech Bubble.

Servant Financial’s market commentary and portfolio recommendations for this 1999-like party atmosphere are as follows.  S&P 500 valuations appear rich using metrics like the Shiller P/E ratio.  Further, yield-to-earnings comparison (the inverse of the P/E ratio versus bond yields) suggests U.S. stocks are less attractively priced relative to bonds than at any time since the 1990s and are reminiscent of conditions before the dot-com bubble. For now, looser financial conditions introduced by the Fed (characterized by lower interest rates, higher liquidity, and easier credit) may end up keeping the ‘party’ going for some time, but no one knows for sure. We will continue to keep a watchful eye on the adults (10-year Treasury yield and gold) and the underage, yet savvy teenager (bitcoin) for messages and clues that things are getting out of hand and it’s time to leave the party. We’ll also keep an eye on inflation rates, shifts in Fed policy guidance, or significant geopolitical events that could also serve as catalysts for a change in market dynamics.

In light of these economic uncertainties, we believe it’s prudent for investors to continue to maintain globally diversified portfolios. Globally diversified portfolios are comprised of traditional investments in stocks and bonds but importantly also include diversifying assets like gold, silver, shares in gold miners, bitcoin, and real assets such as uranium and farmland. These assets offer a hedge against inflation, and currency fluctuations, and provide portfolio stability during periods of market volatility.

 

 

Little Ditty About Gold

Written by John Heneghan

In the investment world, it is often said, “It is better to fail conventionally than to succeed unconventionally.” Investors’ attitudes have been shaped over the last four decades to believe that the best portfolio strategy is to simply invest in a traditional benchmark 60/40 stock-bond portfolio.  The Wall Street mantra to buy “stocks for the long run,” balanced with an allocation to government and corporate bonds for their stability and safety of income reigns in investment advisory circles.  As we noted in last October’s “Got Gold?”, modern investment portfolios have generally been constructed with gold absent from the asset allocation, despite gold’s long history of portfolio diversification benefits and as a hedge against inflation and geopolitical risks. For example, around 71% of U.S. advisors have less than 1% exposure to gold.  And only 2% of U.S. advisors had between 5% and 10% of gold exposure in portfolios, with none having an exposure exceeding 10%, according to Bank of America Global Research.

Luminary investor Peter Lynch, portfolio manager of the highly successful Fidelity Magellan Fund and writer of “One Up On Wall Street: How To Use What You Already Know To Make Money In The Market” takes a decidedly balanced approach to investing.  He often condensed his commonsense approach to “Never invest in anything you can’t illustrate with a crayon.”  He further advised that if you cannot summarize your investment thesis in a concise two-minute elevator speech (or convey your thesis through a short song or ditty), then you should simply move on.

Crayon Illustration

Our fanciful, fictional “crayon illustration” this month begins by time traveling back to the 1980s to a tune about “Two American kids growin’ up in the heartland.”  A rural upbringing with its Tastee-Freez pop culture instilled in our young lovers a great appreciation for scarce assets like gold, farmland, and true love.  In fact, the singer-songwriter in our tale was a co-founder of the Farm Aid concert fundraiser in Champaign, Illinois in 1985 along with Willie Nelson.  Of course, we’re talking about John Cougar Mellencamp and his little ditty about Jack and Diane.  Let’s imagine that our young Jack and Diane developed an unconventional investment plan back in 1982 after their “little ditty” got some AM/FM radio airtime.

These “two American kids growing up the heartland” just “doin’ the best they can” did some napkin illustrations while eating their $1.50 chili dogs.  Today, a gourmet chili dog costs $5.19 at Portillo’s, or 3.5 times the price of a chili dog in 1982.  Jack and Diane took a portion of the royalties from their certified gold single (1 million in unit sales) and decided to invest it in a scarce asset with stable, enduring value across time and cultures.

“Jackie sits back, collects his thoughts for the moment.  Scratches his head and does his best {Peter Lynch}.    “Well then, there Diane, we oughta {just buy some gold.} “Diane says, Baby, you ain’t missin’ a thing.”

Jack has been thinking about his awesome good fortune of a number one single and so they buy a single gold bar at the average price of gold in 1982 of $447 an ounce for a total investment of $179,000.  Our hopelessly romantic young lovers bury that gold bar behind their favorite “shady tree” on the generational family farm for safekeeping.

Today, that gold bar birthed from true love and a solid gold single about rural life in America is now worth a cool One Million Dollars! Gold’s spot price just surpassed $2,500 per troy ounce on August 16th, an all-time high. With gold bars typically weighing in at about 400 ounces, that makes Jack and Diane’s gold bar worth around $1 million, or 5.6 times its cost.

Source: Trading Economics

Got Gold Reflections

In our October 2023 gold report, we cited commentary from former Credit Suisse economist Zoltan Pozsar that appears to be quite prescient with the benefit of 10 months of hindsight:

Commenting further on the commodities allocation Pozsar echoed the words of Ray Dalio on “gold, inflation and growth”:

“Within that commodities basket, I think gold is going to have a very special meaning, simply because gold is coming back on the margin as a reserve asset and as a settlement medium for interstate capital flows. I think cash and commodities is a very good mix. I think you can also put, very prominently, some commodity-based equities into that portfolio and also some defensive stocks. Both of these will be value stocks, which are going to benefit from this environment. This is because growth stocks have owned the last decade and value stocks are going to own this decade. I think that’s a pretty healthy mix, but I would be very careful about broad equity exposure, and I would be very careful of growth stocks.”

Year-to-date through the week ended August 16th, gold has indeed been shining with total returns of 19.4%, leading all major asset classes except Bitcoin. It’s been a safe haven’s dream, outperforming many traditional stock indices.  VanEck Gold Miners ETF (GDX) and iShares Silver Trust (SLV) have also been showing some luster while playing some catch-up to gold over recent years with total returns of 27.7% and 23.8%, respectively, over the same period.

Bitcoin (digital gold) continues to be this decade’s top hit with total returns of 40.7% year-to-date. If gold is the old reliable of the 1980s, Bitcoin’s been the wild, unpredictable teenager of this era.

The midstream energy asset class nosed out U.S. large caps (S&P 500) with a total return of 17.6% compared to 17.5% for the S&P 500 over this period.  The Magnificent Seven technology stocks, particularly Nvidia, have been responsible for a substantial majority of the S&P 500 year-to-date gains, with Nvidia alone skyrocketing by 162.2%.

With the Federal Reserve expected to embark on a rate-cutting cycle at its next meeting in September, ongoing wars in Ukraine and the Middle East, and Presidential candidates floating inflationary policy trial balloons like price controls (“inflation’s absolute best friend for life”), hiking and lowering of corporate income tax rates, tariffs on imports, taxing of unrealized capital gains, forgiveness of student loan debt, and free healthcare for all, Pozsar’s statement on inflation from that Got Gold? The article is also looking like a 24-karat prediction:

“Two percent inflation and going back to the old world, I don’t think it stands a snowball’s chance in hell. Low inflation is over and we’re not going back.”

Forward Positioning

With continued U.S. dollar purchasing power erosion due to inflation, gold continues to serve as a store of value, outperforming bonds over the past five decades as illustrated by our protagonists Jack and Diane. Gold has returned 7.9% annualized over the past 50 years, outperforming U.S. intermediate-term bond returns of 7.0%.  Gold has also been one of the top-performing assets since the peak of the Tech Bubble in March 2000 with an annualized return of 9.2%, outperforming U.S. large-cap stocks’ total return of 7.8%.

Exhibiting low correlations with major asset classes and a positive correlation with inflation, gold can serve as a strategic portfolio diversifier. Demand from U.S. investors is starting to increase, while strong demand from central banks and geopolitical and financial risks have helped drive gold to all-time highs in 2024. While there are risks, current fiscal policies, geopolitical tensions, central bank dynamics, and expected easing in monetary policy could bode well for gold returns in the coming years.

Potential risks to gold include higher real interest rates and the emergence of Bitcoin as a potential mainstream alternative. Since 2016, Bitcoin has outperformed gold, although gold has outperformed very recently.  The growing interest in Bitcoin among investors, particularly younger generations, may be cannibalizing gold demand. Servant Financial advocates a blended approach that includes physical gold, Bitcoin/digital assets, and gold miners as we seek to hedge portfolios for the inevitable erosion of purchasing power resulting from inflationary monetary policy.

Record gold prices and signs of cost stabilization have led to notable margin improvements for gold miners. Gold miner production has reaccelerated, with large miners seeing improvements in cash flow as capex has leveled out since the start of the year. Stock performance of the miners has also been improving, with gold stocks outperforming U.S. large-cap stocks in 2024. Given record gold prices, we see the potential for further production improvements at attractive margins. Servant Financial plans to maintain existing client portfolio exposures to gold miners but intends to trim positions if the current balanced sentiment on gold miners moves toward excessive bullishness.

Let’s close this golden ditty about Jack and Diane with a karaoke sing-along, “Oh, let it rock, let it roll.  Hold some gold to save your souls. Holding on to sixteen as long as you can. Changes come around real soon, make us women and men.”

Inflation Conundrum: How to Protect Your Portfolio

Written by John Heneghan

Stock Market and Inflation Trends

Stock indexes have continued their bull run in July ahead of the much-anticipated June Consumer Price Index (CPI) report. On July 10th, the S&P 500 and the Nasdaq Composite both closed at record highs, marking their seventh consecutive session of gains in July. The Dow Jones Industrial Average ended just shy of its own record close. Through July 10th, the S&P 500 was up 3% for the month, while the tech-heavy Nasdaq surged 4.9%, and the Dow added 1.4%

The continuation of risk-on attitudes were encouraged by Fed Chairman Powell’s July 9th comments in Congressional testimony before the Senate Banking Committee.  Powell expressed caution about cutting interest rates, stating that the data does not yet support full confidence in the inflation path needed for a rate cut. He emphasized the need for more positive economic indicators to boost his confidence on the future path of inflation. Powell also warned that maintaining high interest rates for too long could negatively impact economic growth.  On the other hand, he commented that prematurely easing monetary policy or easing too much could harm the Fed’s progress in taming inflation.

The Federal Reserve remains focused on achieving its 2% inflation target and is closely monitoring labor market conditions, which have shown recent signs of cooling but remain relatively robust.  If you recall, May CPI came in much cooler than expected, which went a long way in restoring Wall Street’s faith that expected Federal Reserve rate cuts would happen in 2024.

The June Consumer Price Index (CPI) was reported on the morning of July 11th, and it did not disappoint. CPI for all items decreased by (0.1%) in June 2024, which was below expectations of a 0.1% increase. This is the first negative month-over-month inflation print since May 2020. Year-over-year headline inflation for June of 3.0% now sits at a 12-month low.  Core CPI, which removes more volatile energy and food prices, increased 3.3% from a year ago.

In response to the June CPI print, bond traders have increased the odds of a Fed rate cut by September 2024 to 83% from 67% odds before the deflationary June CPI inflation print.  Exactly one year ago, the Fed stopped raising interest rates.  Despite market and Fed expectations for at least one interest rate cut this year, U.S. inflation remains 100 basis points above the Fed’s 2% inflation mandate.

The next inflation update is the June PCE Prices Index on July 26, which is Fed’s favored inflation indicator. Additionally, there are two more CPI prints and one more PCE Price read due out before the Fed’s next meeting in September.

Bull vs. Bear

Bullish and bearish investors immediately began battling it out after the June CPI print as to whether inflation has been tamed by the Federal Reserve or not.  Mastering of inflation is generally considered bullish for both bond and stock markets.  Alternatively, the starting of a Fed easing cycle without putting a lid on inflation is considered bearish to both markets.  The worst-case economic scenario is stagflation where we experience slowing economic growth, but inflationary pressures remain.

Risk capital began making its bets on July 11th right away as capital made meaningful rotations by asset classes, equity market capitalization and sector, and geography.

Here is a heat map for the trading day for popular, domestic Exchange Traded Funds (ETFs):

Bond ETFs (AGG, +0.5%, LQD +0.5%, JNK +0.4%) as expected all responded positively to the deflationary CPI print. While the top-performing major equity benchmark was interest rate-sensitive small caps (IWM, +3.7%) on the day. Capital-hungry small caps have substantially lagged the S&P 500 (SPY, -0.9%) on a year-to-date basis by over 10%.    The technology-heavy NASDAQ (QQQ, -2.2%) was the worst performer on the day along with the S&P 500 Technology sector (XLK, -2.5%) as investors booked profits and/or took some chips off the Magnificent 7 table.  Interest rate-sensitive sectors within the S&P 500 had meaningful bounces with Real Estate (XLRE, +2.7%) and Utilities (XLU, +1.8%) the top performers.

It’s also worth noting that traditional inflation hedges like precious and industrial metals also did well with gold (GLD, +1.7%) and S&P Materials sector (XLB, +1.4%).  The U.S. Dollar Index (DX-Y.NYB, -0.6%) traded lower against a basket of the other global fiat currencies.   Fidelity Wise Origin Bitcoin Fund (FBTC, +0.1%) was flat, but China (FXI, 2.2%) was the top-performing international market on the day as the dollar weakness acts as a for sale sign on Chinese goods on international markets.

Relative to the S&P 500 decline on the day, noteworthy contributors to Servant Financial client models were Farmland Partners (FPI, +3.2%), gold miners (GDX, +2.8%), Sprott Physical Gold and Silver Trust (CEF, +2.0%), silver (SLV, 1.9%), high quality value-oriented large caps (DSTL +1.6%, BRK.B +1.2%, MOAT +1.1%) and uranium (URNM, 1.3%).

Protecting Your Portfolio

Inflation has remained stubbornly above 3% and well above the Federal Reserve’s official 2% policy target for more than three years.  Over this period, the traditional 60%/40% (equities/fixed income) portfolio has struggled and may no longer be an appropriate default investment approach going forward.

The risks of continued persistent inflation above the Fed’s target inflation of 2% are considerable.  The Federal Reserve is expected to begin an easing cycle at a time when the fiscal situation remains nothing short of precarious.  As witnessed in the recent Presidential debate and in the discourse that followed, there is a complete lack of fiscal restraint being expressed by political leaders on either side of the aisle.  The Congressional Budget Office recently estimated that the fiscal budget deficit was estimated at $1.9 trillion, or 7% of U.S. GDP, for the year ended June 30, 2024.  The last time the deficit was this high as a percentage of GDP was during World War II.

Just to cite one conundrum reflecting Washington’s inability to responsibly govern, the Federation for American Immigration Reform testified before the House Budget Committee that American taxpayers pay $151 billion annually due to illegal immigration.   The CBO estimated 2024 deficit of $1.9 trillion apparently does not fully account for the cost of illegal immigration at the state and local level or include discretionary costs and long-term entitlement costs associated with illegal immigration.

The prospects for a traditional 60/40 portfolio in a future resplendent with high and sustained inflation are worrying, particularly if inflation is like that experienced in the 1970s and early ‘80s stagflationary period. Servant Financial believes broadly diversified portfolios require a healthy allocation to inflation-protected assets like gold and precious metals, bitcoin (“digital gold”), real estate, high-quality large-cap equities, energy, and raw materials to weather any potential economic disturbances ahead.  Specifically, Servant Core portfolio allocations to Real Assets, Infrastructure (energy), and Digital Assets range from approximately 9% for the most conservative client risk profiles to 25% for the most aggressive risk profiles. We also run a bespoke “best ideas” portfolio that has substantially all its assets invested in Real Assets, Infrastructure, and Digital Assets.

We close this article with a wise quote from another period of war, irresponsible governance, and economic injustice for the working class and poor in our nation.

“In this unfolding conundrum of life and history, there is such a thing as being too late. Procrastination is still the thief of time. Life often leaves us standing bare, naked, and dejected with a lost opportunity.  The tide in the affairs of men does not remain at flood — it ebbs. We may cry out desperately for time to pause in her passage, but time is adamant to every plea and rushes on. Over the bleached bones and jumbled residues of numerous civilizations are written the pathetic words, “Too late.””

~ Martin Luther King, Jr., Beyond Vietnam — A Time to Break Silence

Delivered 4 April 1967, Riverside Church, New York City

Unplugged: Elon’s Untold Story

Written by John Heneghan

By John S. Heneghan and Grok

 

In the grand tapestry of human history, few figures have woven a hero’s journey as electrifying as Elon Reeve Musk. Born on June 28, 1971, in Pretoria, South Africa, Musk’s life has been a relentless pursuit of the extraordinary, a cosmic dance between ambition and innovation that has reshaped several industries and redefined the limits of human potential.

I’m listening to Walter Isaacson’s authorized biography, “Elon Musk.”  The book is a fascinating tour de force.  Musk’s life story through 2005 in the book has noticeable similarities with the “Pinky and The Brain” cartoon and the book “The Hitchhiker’s Guide to the Galaxy.” Elon has been applying the Brain’s mission to “take over the world” in each cartoon episode on an industry-by-industry basis. Unlike the Brain, Elon has successfully executed his business strategies to dominate one innovation-starved industry after another.  After world domination, Elon’s galactic aspirations may end up being his final chapter as he dreams of humanity’s future inhabitation of Mars.

Elon’s accomplishments in his first 53 years are a testament to the power of human ingenuity and the limitless potential of the human spirit. Here are five electrifying facts about Elon Musk (through 2005 in the book) that might just make you see him in a whole new light.

1. Musk the Gamer: Elon was a tech whiz from the get-go. At the tender age of 12, he developed a video game called “Blastar.” Blastar was a simple space shooter game reminiscent of classics like “Space Invaders” and “Asteroids.” The game’s objective is to pilot a spaceship and destroy alien freighters carrying deadly hydrogen bombs and “status beam machines.” Elon sold Blastar to a computer magazine for a whopping $500 but talk about an entrepreneur starting at a young age!

2. Musk the Survivor: During his childhood in South Africa, Elon had a very tough time. He was socially awkward and was often bullied and beaten up as a smaller child in his youth. Elon’s father Errol sent him and his brother Kimbal to a wilderness survival camp known as a “veldskool” when Elon was 12. In the camp, the children were given small portions of food and water and were encouraged by camp counselors to fight over their meager provisions. The bigger and older kids took advantage of the Musks. Elon was once thrown down a flight of stairs by a gang of classmates and kicked into a bloody mess.  Elon proceeded to train in judo, karate, taekwondo, and Brazilian jiu-jitsu, briefly, to be able to better protect himself and Kimbal.  The bullying stopped at around age 15.

3. Musk the Space Enthusiast; SpaceX: “Launching rockets and dreams, one Falcon at a time.”: Elon’s fascination with space isn’t just a recent thing as you might have discerned from his development of Blastar. Musk’s love for science fiction as a teenager extended beyond “The Hitchhiker’s Guide to the Galaxy.” He read the Foundation Series by Isaac Asimov. This series explores the fall and rise of a galactic empire, showcasing the cyclical nature of civilizations.  Dune by Frank Herbert, the epic tale of political intrigue, religion, and ecology on a desert planet, is also a favorite of Musk’s. The novel’s themes of human survival and adaptation resonate with Musk’s business ventures.  The Lord of the Rings by J.R.R. Tolkien is another Elon favorite. Although not strictly science fiction, the themes of heroism, friendship, and the struggle against overwhelming odds resonate with the challenges he’s faced “taking over the world.”

In his early days, Elon was so obsessed with space exploration that he even tried to buy a rocket from Russian sources before founding Space X. In fact, Elon and his team traveled to Russia to purchase and repurpose ICBMs. As Musk tells the story, the Russians agreed to sell him two missiles for $16 million.  After Elon agreed to the Russian’s terms, they quickly upped their asking price to $21 million for each rocket.  This lesson left a mark as Elon vowed to make his own rockets with Space X and would further pursue a vertical integration strategy for Space X and other subsequent ventures.

4. Tesla “Where the S, 3, X, and Y come together to electrify the world”:

In 2008, Tesla was on the brink of bankruptcy. Elon stepped in and invested $40 million of his own money to save the company. He then took over as CEO and turned Tesla into the electric car giant it is today. Elon Musk’s business strategy at Tesla is a fascinating mix of innovation, risk-taking, and maniacal focus on products.

They’ve spent very little money on advertising at Tesla. Instead, they focus on making the best possible products. Tesla has vertically integrated virtually all aspects of its business, including battery production, software development, and even the construction and development of its own charging network and Artificial Intelligence supercomputer, called DOJO, for autonomous driving. Vertical integration allows Tesla to control the entire customer experience and maintain its high level of quality. Musk also has a clear vision for the future of Tesla and the role it will play in the global transition to sustainable energy sources.

Elon is not content with simply making electric cars; he wants to create a sustainable energy future for the world through renewable energy applications.  Tesla’s growing energy generation and storage segment represents 10% of total revenues and is the company’s highest-margin business. In fact, Elon wrote a paper in college about the importance of the world embracing solar energy. The paper discussed the idea of using solar-powered satellites to capture solar rays and convert the energy into microwaves to beam to Earth as an energy source.

5. Musk the Rebel: Elon’s relationship with his father, Errol Musk, was far from rosy. In reality, it was downright offensive. According to Walter Isaacson’s biography, Errol was verbally abusive and often told Elon he was “dumb” and “would never amount to anything.” Can you ever imagine telling your son or daughter that, let alone the boy who would become the richest man on the planet?

As we close this hero’s rousing tale, we are reminded that the future belongs to those who dare to dream, to those who are unafraid to challenge the status quo, and to those who never stop reaching for the stars.  You can continue to follow future attempts by Elon to “take over the world” on X/Twitter.

“One small step for man, one giant leap for Elon’s ego.”

Three-Legged Stools

Written by Ailie Carlene Elmore

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.

Pensions

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

Written by Ailie Carlene Elmore , John Heneghan

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.

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