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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.

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

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.

Source: https://heyapollo.com/bitcoin-etf

 

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.”

 

 

 

 

Speeding Towards the E.R. – Economic Recession

Somebody Call 911, the U.S. Economy is Sick.

Ambulance sirens blare, doctors prepare, and the patient is on their way to the E.R. with little time to spare. The patient is the U.S. economy which is on its way into the E.R. – Economic Recession that is! Anxiously waiting for the wellness diagnosis are U.S. consumers, Wall Street investors, and analysts around the globe. A recession is defined as a “significant, extensive, and lingering period of economic downturn.” Some may argue that since COVID-19 we have been experiencing these symptoms as inflation persists and equity markets tumble. But who diagnoses a recession or determines economic well-being? The r-word has been tossed around over the past few years by Wall Street experts, media pundits, and struggling consumers but the entity that gets the final say is the National Bureau for Economic Research (NBER). Unlike the relatively timely results from your personal physician, NBER’s diagnosis can be painstakingly slow. It took 366 days for NBER to announce its recession conclusion after the 2008 financial crisis. That’s like sitting in your doctor’s office knowing you are seriously ill with common flu symptoms, yet the doctor will not accept the obvious diagnosis and prescribe anything until they rule out every other ailment first.

So, what’s the hold-up? Why does it take so long for NBER to call a recession? Much like doctors, several tests and conclusions must be drawn by NBER before a formal recession decision is made. NBER states “It waits until sufficient data are available to avoid the need for major revisions to the business cycle chronology.” Their goal is to not sound an alarm that could cause consumers and investors to make premature decisions before all the data is analyzed. In other words, NBER does not want to be the proximate cause of a recession.  The effects of a recession diagnosis can radiate through the economy and impact government policy decisions.   Accordingly, NBER takes its time to confirm a recession has occurred well after that conclusion has been universally accepted. Not only do they take their time calling a recession, but they also wait to confirm the economy has healed and an economic recovery has taken hold. It can also take more than a year for NBER to make the call of a recovery. See below.

Source: Newsweek

The symptoms of a recession can vary and are unique in each case. Many define a recession as two consecutive quarters of falling real Gross Domestic Product (“GDP”); however, NBER evaluates a variety of metrics before making the call. NBER analyzes data about labor markets, consumer spending, business spending, industrial production, and overall income. They take a more holistic approach to analyzing the economic situation rather than using a practical rule of thumb or threshold to trigger a recession diagnosis. So, let us look at the current vital signs of the U.S. economy.

Vital Sign #1: Gross Domestic Product

The U.S. economy’s GDP is a key benchmark of economic performance. GDP measures the value of the final goods and services produced in the U.S.  As an economic vital sign, typically a recession diagnosis is given when the economy’s GDP experiences two consecutive quarters of negative GDP growth. The economy experienced this already during the first half of 2022.  There was considerable debate in many circles about a recessionary call at that time given the one-time distortive impacts of COVID-19 preventive measures.  Consensus GDP projections for 2023  were for growth of around 2.5% in the first quarter. The Commerce Department announced on April 27th that GDP growth slowed to a 1.1% annual rate as consumers retrenched due to high inflation and rising interest rates.  Reported first quarter 2023 GDP marked a slowdown from inflation- and seasonally adjusted 2.6% growth in the fourth quarter of 2022 and 2.2% average annual growth in the 10 years before the pandemic. This rapid slowing in the U.S. economic pulse sets the stage for a potential recession in the second half of 2023 if this vital sign continues to deteriorate.

Vital Signs #2, #3, and #4: Inflation, Federal Reserve’s Monetary Policy, and Bank Instability

While persistent inflation is not necessarily a sign of recession it can be the first domino to fall in a series of economic drivers. Inflation has been causing the United States economic discomfort for the past year and its peak of over 9% was like a sharp pain in the gut of the U.S. economy. Chronic inflation caused the surgeons at the Federal Reserve and U.S Treasury to grab their scalpel and open up the patient to take a closer look. In last month’s article entitled Jeromeggedon and Calamity Janet, we highlighted the banking and economic trauma caused by the sheer force of the Fed’s aggressive rate hiking campaign and the potential damage to the banking system, a lifeblood to the U.S. economy. This aggressive monetary policy has caused the yield curve to invert which is a telltale sign that the patient isn’t well, and it is a reliable signal of an oncoming recession. Typically, banks profit on the spread between longer-term assets and the interest paid on short-term liabilities such as bank deposits.  However, if the yield curve is inverted, bank profitability is problematic. As a result, banks may have to lessen their lending activities which can reduce economic growth. Moreover, today banks can deposit their excess reserves at the Federal Reserve and safely earn 5% on the Federal Funds Rate. This further depresses bank lending.

The inverted yield has already caused a few banks to collapse that anticipated inflation to be “transitory” after comments made by Fed Chairman, Jerome Powell in 2021. However, inflation persisted causing the Federal Reserve to aggressively hike interest rates.   This caused long-duration securities to fall in value, taking Silicon Valley Bank down with it. Concerns surrounding bank stability have arisen and depositors have already started to reduce their bank deposits below the FDIC’s $250,000 insurance limit. The fallout from the banking crisis has economists and the Federal Reserve cautioning that a recession is probable later this year. Not everyone agrees about the potential unhealthy condition of the banking system as the Vice Chair for Supervision, Michael Barr, said the banking sector “is sound and resilient.” While there are multiple opinions about the diagnosis and prognosis of the US economy, the banking sector should at least be considered an acute care patient and continue to be closely monitored.

Vital Signs #5 and #6: Consumer Spending and Unemployment Levels

“It’s a recession when your neighbor loses his job; it’s a depression when you lose your own.” – Harry Truman. But what would President Truman have to say about an economy that is experiencing some of the lowest unemployment levels ever, but the central bank is signaling a recession beginning later this year? Consumer spending has not appeared to be slowing much even as recession fears among economists persist. Retail spending jumped 3% from December 2022 to January 2023.  Yet the consumer appears to be leveraging future income to meet consumption as consumer debt levels have reached historic peaks.  And while its growth has tapered a bit in recent months, household debt is projected to reach the highest value in history with the personal savings rate also declining after hitting its pandemic high at almost 35%. Credit card debt is at an all-time high with U.S. household credit card debt reaching $986 billion in 2022, a 15% increase from 2021. While some see this metric as a strength of consumer sentiment, others believe that Americans are having to put more and more on credit cards to keep up with rising prices and wages that have stagnated.

 

Source: SP Global

Some people may look at consumer spending and wonder when consumers will start to crumble and begin reducing their consumption and spending. However, the continued strong economic outlook for the job market has some wondering if a change in consumer behavior will even happen. Historically, recessions are characterized by weak job markets and subsequently reduced consumer spending. However, this is not the type of labor environment we are experiencing right now. With an unemployment level hovering just above 3% and consumer sentiment scores still strong, American workers remain confident in their job security and ability to maintain income and spending levels. Consumers who are confident about their job prospects and income level will likely continue to spend and finance purchases on credit cards.

The strong job market has been an important vital sign for consumers however it has been to the detriment of many employers. “Help Wanted” signs continue to be posted in a variety of businesses from retail to finance and technology. Companies are having a hard time filling open positions and coupled with continued supply chain lags, their production has slowed. This fact has many economists intently focused on government and private market reporting on employment statistics, watching closely for early symptoms of illness in the job market.

The Prognosis and Prescription

So, what’s the overall prognosis for the U.S. economy? Will the old adage “an apple a day keeps the recession away” hold true in the upcoming year? Both the Federal Reserve and economists have signaled the economy is likely to enter a recession within the next 12 months.  Many economists, like physicians often do, put a little sugarcoating on their messaging using terms like “mild” or “treatable”  The most up-to-date leading economic indicators from The Conference Board point to a 99% likelihood of a recession over the next year with the root causes stemming from the Federal Reserve’s interest rate hikes and tightening of financial conditions within the banking sector. The Federal Reserve has predicted a mild recession to begin later this year with a recovery happening over the next two years.

Investors have been watching recession vitals closely and some argue that recessionary fears are already priced into the market. We believe this market is at historically high relative valuation levels and is priced for an economic soft-landing or shallow recession rather than the median historical recession.  The S&P 500 for example has continued an upward trend since January even as recessionary fears grew.  This U.S. large cap valuation index has moved higher mostly on the back of a handful of large technology names.  Further, while earnings expectations for 2023 have come in, they are only showing a mild earning contraction over 2022 which would be a highly favorable outcome for the typical recessionary period.

Given this prognosis, we lowered risk elements across Servant client portfolios by lightening up allocations to a) equities and b) inflation hedges earlier in April.  Proceeds were deployed into short-term treasuries and high-quality corporate bonds.  Note we were conservatively positioned across investor risk profiles prior to these tactical moves.  These trades further increased our equity underweight.

We trimmed allocations to Distillate U.S. Fundamental Stability & Value ETF (DSTL) by a third and deployed proceeds into iShares iBonds December 2024 Term Treasury ETF (IBTE).  We also swapped allocations to iShares 0-5 Year TIPS Bond ETF (STIP) for Invesco BulletShares 2026 Corporate Bond ETF (BSCQ).  The STIP inflation hedge has played its important portfolio buffering role well as inflation moved from “transitory” to “chronic” in Dr. Powell’s medical charts.

The motivation for the equity trimming is purely a function of stock market valuations rising into a deteriorating economic backdrop, creating an even more unfavorable risk/return set up.   We continue to believe that crucial pillars to the economy and markets are trending in the wrong direction and opportunities for a smooth transition out of elevated inflation are running out of time. Issues in the banking system may also cause further economic disruptions at the same time the elongated negative real wage growth cycle for consumers will ultimately force real spending to slow.

In short, the stock market is priced for mild or “transitory” case of economic recession in line with Fed speak while we are discounting the downside case that the economy is speeding towards the E.R. with potentially more acute or “chronic” conditions.

Where Have All the Good Workers Gone?

Reminiscent of the 1984 Bonnie Tyler hit from Footloose, many US employers are crooning for working class heroes. “I need a worker, I’m holding out for a worker ‘til the end of 2023.” The U.S. labor force has been dwindling from food and beverage service to financial analysts since the COVID-19 pandemic began. While some have been quick to blame the shortage on several rounds of government relief money that idled some workers, a combination of factors is influencing this labor change. Millions of people were suddenly unemployed at the start of the pandemic and many industries assumed these people would return to work when normalcy resumed. However, almost 3 years after the start of the pandemic, these “missing” workers may never return to the labor force. This labor shortage could cause a secular shift in American businesses and labor markets.

COVID-19

Government and businesses’ responses to COVID-19 brought about a 50-year high in unemployment, peaking at 14.7% in April 2020. Service workers and business professionals found themselves suddenly without work and wages. The U.S. government came to the rescue, handing out $5 trillion in pandemic stimulus money with a large portion devoted directly to individuals in the form of stimulus checks and extended unemployment benefits. When evidence of a growing labor shortage emerged, many people pointed fingers at the U.S. government for providing so much monetary support and disincentivizing workers to return to the job market. However, the story isn’t that simple. Fears of contracting and spreading COVID and the existential risk of mortality created a widespread shift in lifestyle priorities and an increased desire for a better work-life balance. The result of these factors has been the rise of remote labor and gig workforces. A study done by the U.S. Chamber of Commerce found 91% of survey participants hoped they could continue to work remotely at least part of the time. Businesses have generally adapted to this desire and been accommodative.  However, remote labor isn’t really a possibility for customer-facing service roles or manufacturing jobs for which labor activities are concentrated in a single location.

The U.S. Labor Department reported 10.5 million job openings in November 2022 with the labor participation rate at 62.3%, down from 63.3% in February 2020. Not only do service industries have their “Help Wanted” signs out but so do financial services and professional and business services. While workers are demanding more remote work, these professional industries are demanding people come back to work in their office buildings to collaborate with their colleagues. Workers have been less receptive to this return to the office mandate causing worker turnover rates to reach 57.3% in 2021, up from 45% just two years earlier. Businesses that have been able to accommodate their workforce’s desires for at least partial remote work are generally experiencing lower turnover and avoiding severe labor shortages.

No More Baby Boomers

Economists argue that this labor shortage was always on the demographic table. The labor participation rate has been on a downward trend since 2000 and some argue it is as simple as the laws of supply and demand. One of the largest generations in U.S. history, the Baby Boomer generation, is clocking out with no plans to punch back in. The median age of the Baby Boomer generation (born 1946-1964) turned 66 last year meaning many boomers are taking a refrain from Johnny Paycheck’s 1977 hit song, “Take This Job and Shove It” and checking into retirement. The next generation behind the boomers, Generation X, is about 5 million people short to fill the employment hole the boomers are leaving. The next generation able to take the Boomer’s place is the Millennials; however, it is still going to be several years before they enter the labor force. COVID-19 only intensified Boomers leaving the workforce as older generations were more susceptible to adverse outcomes from the virus. Boomers were also less likely to adapt to changes toward more remote work.  This trend may have something to do with the adage of old dogs and new tricks.

Source: Statista

These trends in labor demographics are not likely to be resolved any time soon as the World Bank projects the number of people between the working ages of 15 and 65 is set to decline by 3% over the next decade. “Without sustained immigration or a focus on attracting workers on the sidelines of the labor force, these countries simply won’t have enough workers to fill long-term demand for years to come,” said the chief economist at Indeed. Historically, immigration and globalization have helped bridge the labor gap; however, during the pandemic we saw a reversal of both trends. Policy reform towards immigration will need to happen if the U.S. wants a sufficiently dynamic labor force in the years to come.

Is the End in Sight?

The question begs, how long will this domestic labor shortage last? While a body of evidence suggests this is a systematic change, other economists argue a potential shift into a recession could help lower demand for labor and bring the labor situation towards equilibrium. The shifting landscape of the U.S. economy toward a recession would likely reduce hiring levels as companies are forced to cut back on growth plans. While we may see an uptick in unemployment levels, it is doubtful it will reach the near 10% unemployment levels the Great Recession of 2008 brought. The looming recession and persistent inflation point to a normalization of the labor market in 2023; however, some companies are still going to need to make adjustments to their business models to compensate for the loss in workers.

Companies are beginning to readjust their hiring strategies and their job expectations to accommodate the current labor market conditions. Inflation has made it difficult for companies to keep pay scales in line with the cost-of-living increases. It is going to be increasingly important for companies to be proactive with their employment strategies and stay ahead of the trends in worker lifestyle demands if they want to retain good talent. Companies such as IBM (Ticker: IBM) predicted this shortage long ago and began outsourcing their talent to countries with growing populations such as India. They have been able to capitalize on lower market-based wages in these developing countries and cheaper input supplies.

Meanwhile, the technology sector is busily working on solutions to these labor shortages, like artificial intelligence and machine learning.  The most recent market hero in this space is ChatGPT from the venture firm OpenAI.  ChatGPT optimizes language models for dialogue. The ChatGPT model has been trained to interact with users in a conversational way. This format makes it possible for ChatGPT to answer follow-up questions, admit its mistakes, challenge incorrect premises, and reject inappropriate requests. Several in the Twittersphere claim that ChatGPT has passed portions of the Bar Exam, medical license exam, and MBA operations exam. Further, experts interviewed by UK’s Daily Mail believe ‘AI will take 20% of all jobs within five YEARS’ and explain how bots like ChatGPT will dominate the labor market. According to the article, Microsoft invested $10 billion in ChatGPT and said that the technology will change how people interact with computers.

From our standpoint, the best way for investors to express a purposeful view on the future emergence of artificial intelligence and machine learning is through the leading technology heros, like Microsoft and Apple, who have massive distribution capabilities through their existing software and hardware product suites and business relationships across sectors. We like iShares U.S. Technology ETF (IYW).  This ETF provides exposure to the leading U.S. electronics, computer software and hardware, and IT companies.  IYW’s boasts assets under management totalling $7.8 billion and a reasonable expense ratio of 0.39%.    IYW has traded down 35% in 2022 and trades at an estimated 2023 price to earnings ratio of 23 times.  The following summarizes IYW’s top holdings:

We recommend buying IYW on future weakness and sitting on the sidelines holding out for a hero ‘til the morning light. In other words, wait until the next recession and buy these tech heroes who are strong, fast, and fresh from the fight.

Twelve Themes of Christmas

Contributions made by: John Heneghan & Michael Zhao

 

‘Twas the week before Christmas, when all through the financial house, not an investor was resting, not even a DC louse. 2022 brought investors increased market volatility and a wide array of risks and uncertainties remain, yet some opportunities may lie hidden under the Christmas tree. From inflation worries to geopolitical risks, we have been on a wild sleigh ride this past year. But whether you landed on the naughty or nice list this year depended on your ability to navigate the economic whiteouts caused by the likes of the Federal Reserve, Vladimir Putin, and Sam Bankman-Fried.

 

Tis’ the Season for Interest Rate Hikes

On the first day of Christmas, Federal Reserve Chairman stuffed my stocking with 7 rapid interest rate hikes. The Fed has been hiking the benchmark Federal Funds Rate at an unprecedented pace to combat high inflation which is causing concern among investors and consumers alike. As the cost of borrowing increases, whether it’s for a mortgage, car loan, or credit card, it impacts the affordability of goods and services for many households.  People tend to hunker down on spending and are less likely to take on new debt, which impacts aggregate consumer spending and business investment. Recently, the Federal Reserve raised its benchmark interest rate from 4.25% to 4.5% in its final policy meeting of the year. This marks the seventh consecutive increase in just nine months to the highest benchmark interest rate in 15 years.

The Federal Reserve has signaled its desire to keep interest rates higher through 2023 with the potential of rate easing, not until 2024. As a result of the Fed interest rate hikes, mortgage rates have reached 20-year highs, interest rates for home equity lines of credit are at 14-year highs, and car loan rates are at 11-year highs. Savers, on the other hand, are seeing the best bank deposit and bond yields since 2008. The 10-year U.S. Treasury yield hit a 12-year high in September at 3.93% causing foreign investment to flock to U.S. treasuries and spurring strength in the U.S. Dollar. After several years of low-yielding bond investments, investors are busily re-balancing their investment portfolios so they can much more safely jingle their way to their investment objectives.

Source: Statista

 

Dashing through Inflation

Santa’s pocketbook may be feeling a bit squeezed this gift-giving season as inflation continues to rage at the North Pole, particularly for the basic foodstuffs like milk and cookies. The Bureau of Labor Statistics reported earlier this month that the U.S. Consumer Price Index (CPI) saw a 7.1% increase year over year during the month of November, down from annual CPI of 7.7% in October and lower than the 7.3% increase forecast by economists. Importantly, the November monthly increase slowed to 0.1% and was driven into positive territory primarily by rising food (0.5%) and housing costs (0.6%). The PCE Prices Index due this Friday is the last consequential data release for the year. Other data this week mostly focuses on the housing market where home sales have slowed down, but actual prices continue to rise. Still rising housing costs are a problem for the Federal Reserve as “shelter” expenses account for the largest share of CPI. Housing cost increases have been slowing down and many economists believe gauges for both home prices and rents will start to show declines in the coming months.  The Fed’s owner’s equivalent rent measurement is a notorious lagging factor and when this statistic rolls over it may take a substantial bite out of headline inflation.  Supply chain backlogs, rising costs, government spending, labor shortages, and increasing demand have all played a part in elevating inflation to its current levels. As a result, these inflation trends have been the principal driver of the Federal Reserve’s aggressive hiking policy which has economists, investors, and consumers appropriately worried that a Fed-induced recessionary winter storm might be brewing as the Fed overshoots on the hawkish side.

 

Baby, it’s Looking like a Recession

Current economic pressure really can’t stay, baby, it’s looking like a recession. Recession fears are rising as investors lose confidence in U.S. economic performance in the face of an unprecedentedly rapid and yet unfinished Fed hiking cycle. Despite relatively strong economic growth in the third quarter of 2022 and a still low unemployment rate of 3.7%, the Federal Reserve has lowered its forecast for next year’s U.S. economic growth in light of its rate hikes and expects the unemployment rate to rise by the end of 2023 as well. Some believe that the current widespread concerns about a recession may help us avoid one, as caution leads to less risk-taking and borrowing, potentially cooling the economy enough to reduce inflation and the need for further interest rate hikes. Lagging inflation statistics remain elevated and central banks globally are continuing to raise interest rates to destroy demand and slow economic growth in the coming year. More real-time inflation measures, like the Cleveland Fed’s “Inflation Nowcasting” measure, show inflation moderating. Inflation Nowcasting’s fourth quarter run-rate CPI is at 3.5% and Core CPI (excluding food and energy) is at 4.7% suggesting the Fed is “fighting the last war” rather than anticipating what will happen next.

 

The U.S. Dollar All the Way

Santa’s reindeer are taking a new launch angle this year along with the U.S. dollar by soaring to new heights in 2022. The US Dollar Index, a measure of the dollar against a basket of other major global currencies, had been on the rise throughout 2022 but started to taper off in late November and December. Other central banks have joined the competitive rate-hiking game and compressed interest rate differentials. The strong dollar is beneficial for American consumers who purchase foreign goods, as it makes them cheaper in U.S. dollar terms. However, it can be an earnings headwind for American businesses that export goods or have multinational business operations such as McDonald’s and Apple. McDonald’s reported that its global revenue fell 3% this past summer due to the strong dollar as the rising costs of Big Macs have foreign consumers turning to other options. The strong dollar is also a reflection of the relative strength of the U.S. economy compared to other advanced economies, such as those in Europe (Euro) and Japan (Yen). Foreign investors flocking to higher and arguably lower-risk U.S. treasury yields only bolsters the dollar further.

U.S. Dollar Index; Source: Google Finance

Eat, Drink, & Spend like Consumers

U.S. consumers found themselves on the nice list in this year of profligate government spending. The US government gave consumers several nice stimulus checks due to the COVID-19 pandemic.  While some consumers used these relief funds to pay for day-to-day necessities, others have been able to enjoy new furniture, electronics, and vacations that have them saying “Mele Kalikimaka”.  Economists predict this holiday season may be the last fling of spending toward luxury brands and exotic travel. The current level of consumer spending is projected to dwindle towards the end of next year as recessionary fears manifest and unemployment levels grow as the Fed’s aggressive hiking policy takes hold.

 

It’s Beginning to Look a lot like a Labor Shortage

Santa may be having a bit of trouble finding enough elves to manufacture toys in his workshop this year. The COVID-19 pandemic brought about many changes to people’s lifestyles, and many re-evaluated their lifestyles as they were challenged with their mortality. Across the nation businesses in every sector are feeling the pressure to find enough skilled labor to meet the growing consumer demand for goods and services. In 2021, 47 million workers quit their jobs in what is referred to as the “Great Resignation.” The industries hurting the most are food services, manufacturing, & hospitality. Workers have signaled a desire for better company culture, work-life balance, and compensation. Some believe the labor shortage will work itself out if a recession were to occur.   However, others argue that this is just the beginning of secular labor shortages as declining birth rates in the U.S. and other developed nations have economists worried that we are not restocking the world’s workforce fast enough. Maybe Santa will be nice enough to supply us with some of his highly productive elves to bridge this gap until intelligent robotics develop further.

Source: US Chamber of Commerce

 

How Vladimir Putin Stole Ukraine

At the top of most of the world’s Christmas wish list is for the Russian-Ukrainian conflict to be resolved. Not only did the invasion of Ukraine in February bring about economic disruption but it has brought devastation to the Ukrainian and Russian people. It is estimated that close to 7,000 civilians in Ukraine have lost their lives in the conflict. The power-hungry, Russian Grinch Putin, is committed to overtaking Ukraine for strategic access to important trade routes and resources. Currently, Russia is occupying several major port areas along the Black Sea.  The Ukrainian defense has been putting up a strong fight with the help of $32 billion and growing of financial support from U.S. taxpayers.  Several trade restrictions and sanctions have been put into place to hurt Russia financially.  However, since Russia is the global largest energy supplier of natural gas and oil, these sanctions are only putting more extreme pressure on energy prices worldwide. Ukraine is also a large exporter of agricultural products, and the conflict has caused several production and logistics issues for Ukrainian farmers. Commodity prices have climbed as a result, particularly for wheat. While the conflict today looks unresolvable, maybe Grinch Putin’s heart will grow three sizes and he’ll decide to shower Who-ville with presents instead of artillery.  “Fahoo fores dahoo dores!”

Photo Source: Behance

Source: Wikipedia

 

Making Energy Bills Bright

As the war between Russia and Ukraine rages on, energy bills for people around the world continue to climb. Oil and natural gas prices have soared in 2022 with Europe being hit hardest by the jump given its deep dependence on Russian natural gas. In August, gas futures hit a record high of 350 euros creating immense pressure for European nations to set price limits on natural gas. Household electricity prices from natural gas-fired plants have increased in Europe by 67% in just one year, stopping some Europeans from lighting their Christmas trees this year. The European energy ministers imposed an electricity price cap this week to help lessen the burden on consumers. The United States has also felt the brunt of high energy prices as power prices rose almost 16%, the highest increase in 41 years. Consumers also felt the pressure at the gas pump as the average price of a gallon of gas rose to $4.96. Maybe in 2023, we can be like Santa and his reindeer-powered business model by running more of our economy on renewable energy.

 

Cryptocurrencies Roasting on an Open Fire

Cryptocurrencies roasting on an open fire, Sam Bankman-Fried nipping at your confidence. One of the largest cryptocurrency exchanges and hedge funds, FTX, filed for bankruptcy this November after information was released about its risky holdings and clandestine relationship with its affiliated hedge fund Alameda Research spooked many of its exchange customers. Several exchange customers sought to withdraw their crypto holdings from the FTX exchange, prompting the bankruptcy filing of the company.  It turns out FTX was another Ponzi scheme or con game with apparently none of FTX’s well-healed venture capital investors doing any due diligence or demanding a role in corporate governance. The price of Bitcoin has fallen 65% in the past year with investors losing confidence in an asset class imputatively regulated by the SEC and Commodities Futures Trading Commission (CFTC).  The CFTC has defined bitcoin as a commodity, but a turf war has continued with SEC creating regulatory uncertainty and ample opportunities for miscreants.  FTX was a Bermuda-based firm regulated by the Securities Commission of the Bahamas.  The SEC could have required crypto exchange registration and reporting and U.S. domestic incorporation.   Former FTX CEO, Sam Bankman-Fried, has agreed to extradition and will now be answering to the Justice Department and SEC for violations of wire fraud, money laundering, securities fraud, commodities fraud, and conspiracy to violate campaign finance laws. The once shiny wrapped package that was FTX Digital Markets now looks like a lump of coal.  Expect the naming rights for FTX Arena, home of the Miami Heat, to become available soon and most of FTX’s liberal political contributions to be returned to the bankruptcy court. Bernie Madoff will look like a petty thief compared to SBF.

 

Dreaming of Student Loan Forgiveness

About 43 million Americans received a nice Christmas present from President Biden this year, with forgiveness for part of their $1.6 trillion student loan debt. President Biden announced the plan earlier this year sparking both joy for recipients and scrutiny from every other U.S. citizen. The plan would eliminate $10,000 in federal loans for individual borrowers making less than $125,000 per year or couples earning less than $250,000 annually. Pell Grant recipients, which account for 60% of current student debt holders, could receive upwards of $20,000 in forgiveness. However, this largesse begs the question of where the money for this forgiveness will come from as the US government already is $31 trillion in debt.  Biden’s Executive Order faces many legal challenges in Congress and the Supreme Court to overcome and move this profligate effort forward.

 

All I Want for Christmas is Farmland

The bright star on top of the investment tree this year is an asset class that has been at the top of many institutional investors’ Christmas wish lists all year, U.S. farmland. Farmland hasn’t always been seen as an accessible investment option.  However, farmland funds such as Promised Land Opportunity Zone Fund and others have been formed to allow investors access to in this durable, inflation-beneficiary asset class. Iowa State University recently reported farmland values in Iowa were up 17% in 2022 which comes on top of a 29% increase in 2021. Similar stories have been reported throughout the Midwest as strong commodity prices fuel farm incomes and transacted land values. The COVID-19 pandemic had people re-evaluating what is important to our world with basic human needs, like food, at the top of the list. While consumer preferences and social trends may change, people will still need to eat, making farmland one of the most durable asset classes through time. This has many investors saying “All I Want for Christmas is Farmland.”

 

We Wish You a Diversified Portfolio

At Servant Financial, our goal is to help you navigate these turbulent times and help you make the best decisions for your investment portfolio. We understand increased market volatility may be causing investor unease, but it is times like these that the basic investment principle of portfolio diversification proves its mettle.  With inflation still a concern and US treasuries on the rise, we are paying close attention to iShares 0–5-year TIPS Bond ETF, STIP. With low management fees (.03%) and a 30-day SEC yield of 5.84%, its 2.5-year duration could be an ideal addition to a blended debt and equity portfolio.  The principal value of TIPS (upon which the stated interest is paid) is adjusted semiannually as inflation rises, as measured by CPI.  STIP holds a variety of U.S. treasuries with maturities of less than 5 years protecting you against rising interest rates and inflation.  STIP is a core holding of Servant’s risk-based client portfolios.

 

Happy Holiday’s from your friends at Servant Financial and we wish you a globally diversified portfolio.  

Instead of holiday cards or gifts, Servant Financial will be making an annual contribution on behalf of clients and friends to Mercy Home for Boys & Girls.

May this holiday season be a time of rich blessings for you and your family.

Source: Pinterest

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