Double Whammy

It's been a tough start to the year for investors as this month's chart from Sundial Capital Research makes clear. The overwhelming majority of investment wealth in the U.S. is tied to stocks and bonds, and both have been broadly hit. Neither asset class has provided ballast to the other.

It's extremely rare to see both stocks and bonds in a pullback at the same time, defined as a 5 percent decline from a 52-week high. Starting late last week, the total return in the S&P 500 and Bloomberg U.S. Aggregate Bond Index were both more than 5 percent off their highs.

That's why rising inflation is seen as such a problem. As the Fed raises rates to slow the economy and thwart price increases, bond prices fall. At the same time, corporations are getting their margins squeezed by the increasing cost of inputs and wages, as well as the new higher cost of capital, so their prices fall. Double whammy.

Notify Your Insurance Company

When you finance something that needs to be insured like a house, car, boat, RV, etc., the financing company is named on the policy. This makes sense because they are part owners of the property.

Once the loan has been paid off, you should notify your insurance company to remove them. This is important because if there is subsequently a claim filed, any check that is issued will be in the name of you and your lender. Your insurance company will then have to issue a stop-payment on that check and issue a new one, a process that could take another week or two.

I had this happen to a client recently. Save yourself a potential headache by keeping your policies up to date.

New Paradigm in 2022

In the December outlook of my newsletter (subscribe here), I noted a change in tone from the Federal Reserve in regards to their interest rate outlook. Specifically, I said that the statements they made about stopping their bond buying program by March, earlier than expected, could be a potential game changer.

They upped the ante in December by introducing the possibility of the Fed funds rate increasing “sooner or at a faster pace” than had been anticipated. Additionally, the minutes from their meeting also raise the possibility that the FOMC will allow the Fed’s balance sheet to begin unwinding “relatively soon” after they begin raising the funds rate. Obviously, there is no guarantee it definitely will translate into action, as the pandemic has made it clear how quickly things can change. That said, the change in the FOMC’s tone is quite noteworthy.

Clients and I have talked quite a bit about how crucial the Fed’s bond-buying program has been to the swift rise of stocks since the start of the pandemic. As a result, we're now at market valuations last seen in the tech bubble of the late nineties.

Market Cap to GDP is a long-term valuation indicator for stocks. It has become popular in recent years, largely thanks to the influence of Warren Buffett. Back in 2001 he remarked in a Fortune Magazine interview that "it is probably the best single measure of where valuations stand at any given moment."

Market Cap to GDP is commonly defined as a measure of the total value of all publicly-traded stocks in a country divided by that country’s Gross Domestic Product. The MC to GDP ratio is currently 50% higher than what we saw at the tail end of the tech boom.

Buy Now, Pay Later

You may have started to notice an option to pay for your purchase over a series of monthly installments, often "interest-free," on the checkout page of your favorite online store. It is not the retailer that is offering this option. It is a buy now, pay later (BNPL) app that is providing this service. Popular BNPL apps include Bill Me Later/PayPal Credit, Afterpay, Affirm, Klarna, and FuturePay.

These apps sometimes charge interest, much like a credit card, but they may offer "interest-free" periods. If you pay off your balance before the period ends, you can avoid paying interest altogether. The regular interest rates on BNPL are typically very high.

A typical BNPL interest-free offer might break a purchase into four equal installments, the first one paid at checkout and the other three paid every two weeks. You apply right at checkout so it takes no extra time to use it (if approved).

The trouble starts if you miss a payment or don't have sufficient funds in your linked account. You can be charged a late fee and possibly a returned payment fee. If you default on your payments, the full amount is charged to your debit card immediately and your account closed.

Unlike 0 percent intro APR credit cards, which waive interest for a certain period of time, most BNPL accounts often come with deferred interest. Deferred interest means that if you don't pay off your balance in full by the end of the six months, you'll be charged interest on the whole amount, dating back to the original purchase date -- even if you only have a few dollars left to repay. In contrast, with a 0 percent credit card, you'd only pay interest on the remaining balance.

Young people starting out hoping to build credit by making on-time payments are out of luck with BNPL apps. In most cases, payments aren't reported to the credit bureaus, so you won't be building a positive credit history. Be sure though that any late or missed payments will be reported.

BNPL's short repayment periods and interest-free offers can save you money on interest and help you avoid falling into debt. However, it's crucial to both your bank account and your credit score that you make sure you can afford the agreed-upon payment schedule. Merchants love them because they help boost sales, so they are going to become more prevalent.

IRMAA

One of the causes of the labor shortage is that many people near or at age 65 decided to take the retirement plunge. Qualifying for Medicare certainly helps with the transition, so take a look at the cheat sheet under our resource tab to help you make sense of the alphabet soup and all its parts.

Medicare is not free (the cost is deducted right from your Social Security payment in most cases), but what a lot of people don't realize is that the cost is not the same for everyone.

Medicare applies an income-related monthly adjustment amount, otherwise known as IRMAA, for enrollees with higher incomes.

IRMAA is an amount you may pay in addition to your standard Part B and Part D premiums, if your income is above a certain level. The Social Security Administration has a series of income brackets that determine what that amount is. Most people will pay just the standard premium amount. But if your modified adjusted gross income is above the specified threshold, you may owe IRMAA.

Because couples pay their own premiums separately, the surcharges apply to both and can add up quickly.

The premium surcharge is also based on your income from two years earlier, so 2021’s surcharges will be based on your 2019 modified adjusted gross income. This becomes important when making decisions such as when to take income, or when calculating Roth conversions.

Choosing an Executor

Being an executor is a huge responsibility, so be sure to choose someone who is up to the task. Here is a nice summary from Executor.org It is a great checklist to guide you through the selection process:

1. Do they have the time? Phone calls, trips to the county courthouse to record financial information, standing in line at the post office to mail registered letters -- these and countless other tedious duties await them. They'll need to have information from banks, mortgage servicers, investment firms, life insurance companies and other firms that had a role in the deceased person's holdings. Among the more grueling tasks, they will be called on to sort and value the contents of the person's home.

2. Do they have the skills? Being an executor requires a high degree of organization. "People who can't balance their own checkbook, who have financial difficulties of their own, who have no idea how to organize financial information, people who don't like detail -- those are not good candidates," says Sally Hurme, an elder care lawyer at AARP.

3. Do they have the temperament? As they sort through legal and financial matters, they'll confront a range of personalities, so it helps to be calm. Some lawyers say it's best to appoint one executor, but Anthony Enea, chair of the elder law section of the New York State Bar Association, advocates choosing at least two. "It creates a system of checks and balances," he says. "If you pick one child, it gives that person a lot of power and discretion. But it depends on the family dynamics. There's no set formula."

4. Do they know the rules? Each state has specific laws on executors' responsibilities, along with timetables for them to perform their duties. Paying the funeral expenses, publishing death notifications, and filing estate tax returns are a few examples of what might be required. Your state may have an online law library that details the rules and requirements. The American Bar Association website also offers guidance about settling an estate. Many executors find certain tasks so daunting that they consult lawyers for help. Others hire lawyers to manage the entire process, which is of course much more expensive.

Either way, they need to follow the law strictly -- an executor is personally liable for the proper administration of the estate. If they misrepresent the value of any assets, they could be held accountable by the IRS or by the beneficiaries. If they are found to have shortchanged the heirs, they could be required to reimburse them out of their own pocket or pay fines.

5. Can they afford to be an executor? If they live in another state, they may need to travel to the person's hometown, and if so, how often? Will the estate cover travel expenses? What about the value of their time? In most states, executors are entitled to take a percentage of the estate's value, even if a fee wasn't specified in a will. But with those legal guidelines, it's still common for executor fees to become a source of conflict with heirs. Some family members may view the money as their own or be unaware of the time that's been invested.

Beyond Stocks and Bonds

When we think and talk about investing, we tend to focus on stocks, bonds, and real estate. The ultra-wealthy talk about those as well, but they also include art, classic cars, yachts, jets, and Rolex watches in those discussions. Now, thanks to a Securities and Exchange Commission (SEC) rule change and the advent of fractional share ownership, seemingly everyone else can too.

Fractional ownership is simply a percentage ownership in an asset. Fractional ownership shares are sold to individual shareholders who share the benefits of the asset such as usage rights, income sharing, and more importantly for most investors, a chance to capture price appreciation.

In 2015, the SEC increased the amount that firms could raise in “mini” initial public offerings to $50 million. These are open to the public, not just “accredited” (high net worth) investors, granting all the opportunity to make seemingly anything investable.

If you've watched Jerry Seinfeld's Comedians in Cars Getting Coffee and thought it would be fun to own a classic car like one of the ones he drives, now you can. RallyRd created a trading platform that mimics the major stock market exchanges, like NASDAQ and the NYSE. It started with cars, but now offers all kinds of alternative assets, from an original Shakespeare text to a 1969 Apollo 11 crew-signed New York Times cover.

Each collectible purchased by Rally is placed in its own mini-company, which is split into equity shares. These shares are then made available for sale to investors. Rally investments are subject to Securities and Exchange Commission (SEC) regulations and are reviewed and vetted by a FINRA-registered broker-dealer to make transactions as transparent as possible.

Unfortunately, owners don't get to drive the cars or display the sports cards, but they can visit the showroom in NYC. And just in time for the Fourth, a current offering is an original copy of the Declaration of Independence at $25 share.

Masterworks has a similar model for art. Since its founding in 2017, Masterworks has bought more than $150 million in paintings by artists like Banksy, Kaws, and Basquiat. According to its website, blue-chip art has outperformed the S&P 500 by 180 percent from 2000–2018. Deloitte estimates the total value of art to be $1.7 trillion.

There are two ways an investor can profit on the platform once a share purchase is made. The first is to sell shares to another investor on an approved trading platform. The second is that an outside collector can make an offer to purchase a painting from investors, where they can vote on whether to sell.

If pop culture is more your style, look no further than Otis, which bills itself as the stock market of culture. The Air Jordan's Michael wore when he shattered a backboard on a dunk? Make a bid. A first issue X-Men comic book from 1963? It's here too.

Otis does all the work of maintaining, storing, sourcing, analyzing, and securitizing each investment in-house. All investments are stored in a museum quality storage facility at UOVO Fine Art in Orangeburg, NY, and insured by Aspen American Insurance Company.

Fractional ownership works well with real estate, where few have the large down payments available to access the real-estate investing game.

Most people think of timeshares as fractional ownership, but with a timeshare, you don't own the property, you just have use of it on a pre-determined schedule. With Roofstock One and Fundrise, you are an actual owner of the property garnering all the benefits (and potential pitfalls) of being a landlord.

Roofstock focuses on individual rental properties. For as little as $5,000, you can invest in residential rental real estate. Purchase shares in an individual rental home to collect rent without operating responsibilities. One of the best features of Roofstock One is the ability to diversify your rental house investments across multiple geographic areas with small initial investments. This concept is great because you gain access to a quality asset class without a significant financial commitment.

Fundraise focuses on commercial properties. Their website gives an excellent overview of different investor levels and plans. For $500, you can invest in the ‘Starter Portfolio’ and begin choosing your investments. They have three different plans, the Supplemental Income, Balanced Investing, and Log-Term Growth plan. These three plans are structured differently to offer varying degrees of dividends, appreciation, and total return.

The company has invested more than $2.5 billion in real estate around the country, from apartments to commercial property. It has returned anywhere from 8 to 12 percent annually going back to 2014. It would be almost impossible for a small investor to create this type of diversification on their own.

If owning a building seems like too much, Acretrader allows you to buy farmland. Investors purchase shares in the entity that owns a farm via the website. Each farm is divided into 1/10 of an acre. You can buy as many pieces of each farm as you like. Acretrader claims that alongside a rapidly growing global population and demand for food, farmland offers a truly diversified investment opportunity with attractive long-term returns.

Now some of you may want to invest in something and not have a partial ownership. StockX may be for you. It is an online marketplace and clothing reseller, primarily of sneakers, but they also have watches, electronics, and trading cards. Sellers send purchased items to StockX facilities for inspection and verification, then authenticated products are shipped to buyers. They feature a "stock market-like" variable pricing framework and discloses price histories for specific items.

I have my eye on the Nike x Drake Certified Lover Boy Hat.

Inflation in the Nation?

The inflation question is foremost in investors' minds. Everywhere you look, from the front page of the Wall Street Journal to CNBC, it has become the lead story. It's also come up quite a bit in conversations I've been having, and deservedly so. How it gets resolved will be a large driver of how the economy and markets perform going forward.

There is no question that inflation is running hot. The consumer price index is up 4.2 percent from a year ago; producer prices are up 6.2 percent. The Federal Reserve focuses on the inflation measure for personal consumption expenditures (PCE), which is up 3.4 percent.

The Fed has said it thinks the inflation surge, at least when looked at on a year-over-year basis, is overstated because it is built on comparisons to a period when prices were falling during the onset of the COVID-19 crisis. It also thinks any recent pressures are caused by supply-chain issues that should go away as the economy continues to recover. Due to the government's largess with PPP loans and extended unemployment benefits, the recession that we experienced last year is the only one in history where incomes actually rose. Those stimulus checks are being spent now, creating supply issues. The Fed's belief is that six months to a year from now, when things have normalized, we'll no longer be talking about inflation.

The other side of the argument is not so sanguine. There has been tremendous growth in the money supply since the pandemic. It's not just the Fed that has embarked on easy-money policies: Central banks around the world have introduced Quantitative Easing in the past decade and this liquidity is finding its way into commodity markets. However, commodity prices have historically been extremely volatile. Manufacturers often will not pass increased costs on to end users if they think the spikes are short-lived.

The cost of labor is different. Once increases are in place, it is harder to roll them back. There are 10 million fewer people employed now than before last March, despite the help-wanted signs posted everywhere. Talk to any business owner and hear the same thing. Higher wages will work to alleviate that problem, but that would mean we'd have to get used to paying higher prices.

Stable prices are one the the Fed's mandates. It believes that what we're seeing currently is transitory. Looking at the bond market, it appears the Fed is right for now. Yields moved higher in Q1 of this year, but have stopped rising since then. Bond investors don't like inflation for a couple reasons. First, if the inflation rate is higher than the coupon rate you're earning on the bond, then you lose money over time because your purchasing power goes down. The benchmark 10-year treasury currently yields 1.6 percent, and as noted above, inflation is close to twice that. That is not sustainable.

Secondly, we learned how to stop inflation back in the 70s: Raise rates to slow down the economy. Not a good thing for bonds or stocks if that turns out to be the case.

Got Wood?

If you're looking for signs of inflation you don't have to go any further than the lumber aisle at Home Depot.

Lumber futures have increased an astounding 375 percent between April 2020 and April 2021. That means investors have sunk almost four times as much money into the same amount of wood compared to a year ago, and the spike shows no signs of stopping. The increase has added $24,000 to the construction price of an average house.

There are a lot of reasons for the spike -- from harvesting restrictions in Canada to supply chain disruptions caused by the pandemic -- but we are seeing it across the whole commodity sector. The global economy went from a full stop a year ago to a reawakening at a much faster pace than many anticipated. Demand has simply overwhelmed supply.

This is what the Federal Reserve is looking at when they say they're comfortable keeping interest rates low. They believe that the current jump in inflation is transitory and that it will revert back to their targeted two percent range on its own as normalization continues. If it persists too long, it could force them to change their easy money policy. One of the stated mandates of the Fed is price stability.

An Investment in America

A nice infographic from the Washington Post that lays out the Biden Administration's "once-in-a-generation investment in America."

It is hailed as an infrastructure bill to rebuild our aging roads and bridges, but actually, only about 5 percent of the spending is earmarked for that. Nearly 20 percent of the bill goes toward expanding caregiving for the elderly and disabled by building more care centers and expanding access to home-based care, and another 13 percent goes toward boosting the U.S. manufacturing sector with large investments in semiconductors and green energy. Those investments aren’t typically seen as traditional infrastructure but align with the administration’s focus on caregiving and reviving U.S. manufacturing.

There is also a mismatch in how it is to be funded. The $2.3 trillion in spending would take place over the next eight years. It would take until 2036 — 15 years — for President Biden’s proposed corporate tax hikes to generate that much revenue. It's a stretch to think that future administrations would be incentivized to keep tax rates higher to pay for a program that happened on someone else's watch.

Republicans think it goes too far, and some Democrats are saying it doesn't go far enough. According to Bloomberg, the competing pressures mean Biden’s proposal likely will have to be broken up into two or even three pieces of legislation that may ultimately differ significantly from the administration’s plan. Some parts will need Republican support to make it through the Senate, while other provisions may be put into fast-track budget bills that need only Democratic votes to pass. Either way, don't expect anything to happen in the near term.