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The Inflation Mystery

The March blog post offered a scenic tour of GDP, and why it’s an important economic measure for investors. Let’s continue the economics theme with inflation, which also gives us a chance to look at a conundrum that has been around for several years.  Why does inflation remain so low when it should have started spiking a long time ago? Let’s start with some inflation basics, and then we can look at the dilemma.

What is Inflation?

In the 1930’s the US abandoned the gold standard, which gave the Federal Reserve or “The Fed” the ability to create and destroy money.  This gives the Fed the ability to stimulate a weak economy, or slow a rapidly overheating economy.  In fact, the Fed only has two jobs: manage unemployment and inflation.  One of the downsides to this approach is that we’ll always have some persistent level of inflation over the long term.

Just a quick side note: the US should never return to the gold standard, never fall for that thinking.

Inflation is basically a sustained rise in the price of goods.  For example: what you can buy for $1 today may cost you $1.03 next year as prices rise. The purchasing power of your dollar erodes.  This isn’t as bad as it sounds because many employers will adjust wages with inflation to retain and attract employees, Social Security is adjusted for inflation, and some pension plans may adjust as well.

The Inflation Dilemma

During the “Great Recession” the Federal Reserve helped the US economy recover by keeping the basic market interest rate, that it controls, at near zero for years.  They also purchased lots of bonds, and paid for those bonds with what were essentially newly created dollars.  This was like “printing” trillions of dollars under the assumption that the Fed would need to remove this cash to prevent runaway inflation.

As the economy recovered markets expected to see inflation rise.  It never happened.  It has been ten years, unemployment is historically low, the Fed raised interest rates as the economy heated up, yet inflation has remained stubbornly and unexpectedly low.  The vast majority of that newly created money remains in circulation.

The punchline: nobody really understands why inflation continues to run so low.  This has left a lot of smart people scratching their heads and wondering what happened to inflation.  Some like to blame the Fed, some like to blame globalization, some people blame it on issues with economic theory, and the list goes on.

So, What?

For the average person this is not necessarily bad news.  While some people have felt price increases on certain things, overall the cost of living hasn’t been rising uncontrollably.  Welcome news for families on tight budgets, and retirees who may be on fixed incomes.

This does become a potential issue in the event of an economic downturn.  We’re currently at the top of a long-term economic expansion, the next part of the cycle would be a recession.  While predicting a recession is tricky business, when the time comes, the Fed will be forced to cut rates, and possibly create more new dollars, doing whatever it can to stimulate an ailing economy.

If inflation were to become deflation the economy would be in real trouble, fortunately, this is something that hasn’t happened in the United States since the Great Depression.

While deflation is highly unlikely, the fact that all known causes of inflation have occurred, and we still haven’t seen it, has economists and market watchers wondering what changed, which is rare, and makes this interesting.

So as this question of inflation gets tossed around, know that for every theory you hear, there are at least two or three others that could also be convincing.  The mystery may not be solved anytime soon, but hopefully, at some point in the future, researchers will be able to tell us what happened and why.

If you would like to understand more about anything in this post, or how inflation at any level impacts your investments please do not hesitate to reach out!

 

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

 

 

 

 

 

 

 

 

GDP for the Cocktail Party

This blog may help you not avoid this topic if it comes up at a cocktail party, and you may become a little more comfortable with a concept typically wrapped in weird jargon.

People tend to throw around economic terms they may, or may not understand, especially in the business media. We’re approaching the end of a long-term business cycle, and in the coming months pundits and professionals will begin obsessing about GDP.

GDP is the value of everything produced in the United States in a year (other countries have GDPs too, but that’s a different cocktail party).  They really do mean everything, from haircuts to cars to buildings, but nothing imported since it’s not produced in the US.  This is a huge number, right now around $19,000,000,000,000 per year…that’s $19 trillion.  Just calculating it is a massive undertaking, and there are all sorts of PhD level statistics involved!

One of the reasons GDP gets more attention on the downhill side of the business cycle is because when the economy is booming everyone is looking at stock market gains.  As the economy begins to soften and the dreaded R word, recession, comes into play, all of a sudden GDP is relevant.  But, what is it and how does it relate to a recession?

Typically, what we obsess about is the change to GDP since that’s how fast the economy is growing or shrinking. There is some math done on this number to remove the effects of inflation for an apples to apples comparison. So, this change in GDP with inflation removed is called Real GDP.  For the last three months of 2018 this change was an annual rate of 2.6%.  Now, let’s look at how this meets with the infamous R word.

The most commonly accepted definition of a recession is when the Real GDP number is negative for two quarters, or six months, in a row.  A private, non-profit called the National Bureau of Economic Research makes the official call on dating a recession, and there are many other factors they look at, but if GDP is negative for two quarters, we’re probably in a recession.

The good news is that in many cases we can be headed out of recession by the time we even knew we were in one since GDP always looks backwards at what happened during the prior three months. The bad news: when we’re at this point nobody needs to look at GDP to know the economy is in rough shape because unemployment will be up, people will spend less, businesses will earn less, there will be defaults on loans…anyway, I’m sure you get the picture.

So where are we now?  Over long periods of time the economy moves in waves, and as you can imagine we’re at the peak of a long period of expansion that came following the last recession.  Like watching a wave in the ocean that seems to hang frozen in the air, it’s hard to tell when the wave will crest and tumble.  In economic terms this would be the trough, contraction, or recession.

All of this is why I like to watch the GDP.  There is a lot of information available on GDP; because, given it’s importance, there are a lot of people in the industry who get paid to forecast and predict changes over longer periods.  Much like TV weatherpersons, many of these forecasts end up being wrong, but looking at the overall trend can be helpful.

If I’ve really captured your attention, one of my favorite places to look is here.  This is the Atlanta Fed’s “GDPNOW” forecast, which is nice because they track the evolution of the estimates of the next quarter’s GDP number, and also provide a range of estimates from the financial industry.

I hope this blog helped you gain a better understanding of GDP and why people like me talk about it a lot, and if it comes up at a cocktail party please jump into that discussion!

As always, please reach out if you have questions about this, or any other aspect of your financial life!

 

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

 

 

 

 

Shop Like You’re Buying a House or Car!

When considering the big purchases in life, such as homes and cars, we typically spend time shopping, doing research, evaluating the pros and cons of different options, and carefully scrutinizing the costs of those options. Think about the last time you “locked in” a mortgage rate. You likely compared rates from various lenders, and got heartburn over the long-term financial impact of a fraction of a percentage point.

If you bought a car, you probably did some research and test drives, compared prices from different dealerships, and spent time haggling over a couple of hundred dollars.  You may have shopped for a car loan as well, focused on interest rates, and the payment.

When it comes to investment management, very few people take the same approach.  Let’s face it, when it comes to our portfolios we don’t see them as having the same comfort and beauty factors like we do with a car or home.

Obviously, I love investments and finance, or it wouldn’t be my chosen profession, but I’ve noticed many people would rather go to the dentist than really dig into their investments, even when they’re paying someone else to manage the portfolio.

If you step back, and look at the costs of investing over a lifetime, you’ll quickly see the amount at stake can be staggering.  Let’s look at a basic example:

If you’re paying an investment manager or broker 1% to manage a $300,000 retirement nest egg, over 25 years you might end up paying around $70,000 – $80,000 in fees.  Is this starting to look like a larger purchase than you might have assumed? And as we know, this is a low fee, sometimes fees can end up exceeding 2% with the client unaware of the actual “all in” costs. 

The next issue is quality of advice. Many firms typically charge as much as they can, and this is not to say that there aren’t excellent firms and professionals out there; however, many times what gets missed is how the slick sales process unfolds.

The dentist joke wasn’t all tongue in cheek.  When you walk into a big-name shop, you’re probably at a disadvantage.  They’re going to throw around concepts and terms you may not understand, while giving the appearance of being masterful at this stuff.  In reality, you may be dealing with someone of limited experience that just does sales, and the actual “product” is simply what the firm is trying to sell in bulk.

Somehow trust quickly develops because you just want to be done, and the idea of going through this with two or three firms seems impossibly tedious.  The process is also complicated because it often lacks transparency. While fees may be mentioned during the sales process, there is lots of fine print, and it’s set up so you don’t “feel” the fee. Rather than fees being clearly detailed like you might be familiar with in a mortgage or car loan statement, some fees are often buried, and the advisor may be hesitant to discuss what these fees add up to over time, even if you ask directly.

There are various types of search engines and websites that will make “recommendations,” but know that on the other side of those websites they’re selling leads to firms that pay subscription fees. These websites and services approach people like me constantly to sell you as a lead.  This can create an implied competence that’s simply not there, it’s in the fine print…

Managing investments is serious business, and the industry is full of firms that are just ok or worse.  People are often attracted to this profession because of the potential compensation.  You owe it to yourself to shop around, learn how these services are offered, and find someone that will take the best care of you possible.

The good part is that when you do find the right fit, you’ll probably be with that firm for a long time.  Nothing is set in stone, if you’re in a situation where you think you might be better served elsewhere, make the change!  Accounts are very easy to transfer, and firms are more than happy to make that happen.  This is all well worth the investment of your time.

If you have questions about this stuff please don’t hesitate to reach out.  I love to answer questions about the differences between brokerages, investment advisors, & insurance companies, how these firms charge you, and how to cut through the noise of the various types of credentials they often tout.

While I may or may not be the right professional for you, I’m happy to help you navigate these waters as an educated consumer, and we’ll keep it less painful than a root canal!

 

 

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

An “Interesting” Year

It’s Been an “Interesting” Year!

Coming into 2018 the stock market was still chugging along with the momentum of a steady bull market bolstered by corporate tax cuts; however, the bliss began to fade quickly as a series of challenges piled up.

The Setup

In 2018 we’ve been able to observe, in real time, why our high school economics text books taught us that trade wars are bad.  This self-inflicted wound was not helpful by any measure, but it’s also not the entire story.  As I mentioned in a March blog post we were beginning to see signs that inflation was gaining momentum, and the Federal Reserve began to do it’s job by broadcasting an intention to continue increasing rates in order to keep inflation under control, and keep the economy from overheating.

As this point stock prices were already high relative to corporate earnings.  Trade wars and increasing rates helped trigger the beginning of this choppiness that we hadn’t seen in several years.  Fortunately, first quarter corporate earnings came in strong; however, by summer, and as noted in my July blog post, the stock market had already lost all gains for the year.  By the third quarter we began to see reports from analysts that companies had reached “peak earnings.”

This was not surprising since GDP growth had peaked by midyear.  Assumptions for stock prices are largely based on the expected strength of the economy, and as growth began to slow, stock prices had nowhere to go but down, especially as bond yields increased, creating further headwinds.

The Challenges

Looking at GDP forecasts going into 2019, there is no expectation that we’ll see the kind of growth observed in the first part of 2018.   For most of 2018 the expectation was for the Fed to increase rates three times in 2019. The Fed has already started backing away from that notion in public statements, and naturally, the bond market has backed away from that expectation as well.

Over the summer we began to see the investment banks and economists play the age-old game of guessing when the next recession will begin, which is never good for digestive health.  Right now, the estimates vary from the end of 2019 to the beginning of 2021 with 2020 conspicuously in the crosshairs.  The “R” word is a loaded term, it’s important to keep in mind that recessions are measured with such a lag that the economy is usually out of the recession before the official stamp is given that one occurred.

In practice we’ll know what’s happening because we’ll feel it as unemployment creeps up, corporate revenues decrease, and the Fed cuts rates in an attempt to bolster the economy by reducing borrowing costs.

The Good News

Despite my caution as we look forward; currently, the economy is healthy and strong by most measures.  Statements you may see in the media to that effect are absolutely true.

The economy continues to grow, just at a slower clip.  Unemployment is so low it has many economists scratching their heads.  The stock market has returned to a more reasonable price level, and with rates increasing, savers, who were left out in the cold for a long time, are finally seeing some returns.

Where to Now?

If you’ve followed my blog posts you know a key mantra at Buoyant Financial focuses on asset allocation. This means choosing a mix of stocks and bonds that reflect where you are in life, and your tolerance for risk, or the ups and downs of the market.  This is not something that changes based on market conditions.

As the stock market seemed to go nowhere but up coming out of “the Great Recession”, many people began to hold more stocks in their portfolios either by allocating more to stocks, or choosing not to rebalance, which would have resulted in selling stocks to buy bonds along the way.

If you chose to take that approach it’s important to note, you left the world of disciplined asset allocation and began to “trade the market.”  Even if it didn’t feel like you were trading, you began to make decisions based on the market, and not your age and risk tolerance.

Now is a great time to get back to a more disciplined approach.  Despite the challenges we’re seeing, you’re still probably enjoying returns from many years of market growth. Rebalancing is one simple step you can take, and if needed, step back and look at your overall allocation based on where you are in life.  You should never lose sleep over the financial markets!

If you have any questions, please don’t hesitate to reach out.  Even if you’re not looking for a financial advisor, I’m always happy to answer questions, and provide perspective.

 

 

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

 

 

Why Are You Still Using Mutual Funds?

In thinking about this blog post I considered writing about “investment containers.”  People will often say “I have mutual funds”, “I have an IRA”, “I have a 401(k)”.  Which is like saying “I have a brown box with stocks and bonds in it”, “I have a yellow box with stocks and bonds in it”, or “I have a green box with stocks and bonds in it.”

These are all really containers for your investments, and each has different rules for how you put money in and take money out.  Let’s look at the famous mutual fund, and a great alternative.

Mutual Funds

Mutual funds, as we know them today, really began in the 1940’s.  For a long time if you wanted to diversify, the basic choices were: buy a mutual fund, or allow a broker to maintain a portfolio for you.  If your choices were to pool money with a large mutual fund run by the best and brightest in the industry, or allow the twenty something broker to make these decisions, the answer was pretty clear.

Over the decades mutual fund companies flourished and became massive, and most brokerages essentially became the sales arm of the fund companies.  While brokerages were still happy to trade stocks for you, they were just as happy to sell you mutual funds.  As you can imagine, a lot of people need to be paid for all of this.  The mutual fund company and it’s operations, the brokerage and it’s back office, etc…  And, the broker has to make what would have otherwise been earned trading stocks for you.

As a result, mutual funds can be a very expensive way to invest.  For example, most clients of a large broker or advisor may be placed into “loaded funds” with a variety of sales charges and ongoing annual fees.  For example, a 5% sales charge is not uncommon, which means it takes a 5% return just to get back to your initial investment.  Ongoing management fees can run between 0.5% and 2%, these last forever.  And then there is a thing called a 12b-1 fee (named after a rule) where the fund can charge you a separate fee to advertise itself, seriously.

Along the way, mutual funds realized they could sell “no-load” funds.  These have no sales charge, and generally cater to the “do it yourself” investor.  While the ongoing fees can still be high it was a big leap for people who didn’t need the “advice” of a broker.  Over the years firms like Vanguard have been able to make “no-load” funds quite inexpensive.

The Exchange Traded Fund

In the late 1990’s a new option began to appear.  The exchange traded fund is a portfolio of stocks that trades on the open market as a trust.  The trusts are created by issuers, and cover just about every asset class an individual investor would ever need.  The great thing about ETFs is that they can be very inexpensive.  The most popular ETF that owns the S&P 500 charges a mere 0.09%.  Why would you pay a 5% sales charge and ongoing annual fees pushing 1% to a mutual fund company when you can own the same exact stocks for 0.09%?

The Catch

If you’re thinking most brokerages are putting clients into mutual funds instead of ETFs because it makes them more money, you would be absolutely correct.  They will have a lot of answers as to why the mutual fund in better, and these can sound very convincing.

For example, a mutual fund can be “active,” which means trading a lot while trying to beat the market, or “passive,” which means they’re happy to take the long term returns of a stock index, like the S&P 500.  Your broker or advisor may highlight how a mutual fund “always beats the market.” Statistically, this can sometimes be true for one or two years, but it’s been proven that over the long run, they have a 50% chance, meaning they’ll do worse 50% of the time.

Most of the time these active managers “hug” the index, meaning they basically own the index, but make a few active choices to justify the fee and try to beat the index.  Often, you’re just paying a lot to basically own the index.

Another way around this is where a firm will bundle low cost ETFs into portfolios they sell as a “managed account”. They purchase a bunch of ETFs, and then slap their own management fee on top of the portfolio of ETFs. Seriously.

Avoiding the Fees

The ETFs are out there waiting for you with lots of choices: super conservative, super risky, very boring, highly exotic, and everywhere in between.  I look at them as tools in a tool box.  If you’re comfortable managing your own investments you might want to consider moving into ETFs if you haven’t already.

If you’re someone who likes to engage a professional to help manage your financial life, you can work with a truly independent investment advisor, like Buoyant Financial, where we build portfolios using ETFs to save our clients’ money, and because it’s the right thing to do.

 

 

Retirement: Hopes, Dreams & Fears

Retirement dreams, retirement planning, and retirement saving are all related, but this mental crossroads is challenging and often compartmentalized. You may love to dream about being retired, but the planning and saving parts cause anxiety. You may be highly focused on the saving and investing, but have no idea what you’ll do once retired, and the very idea of stopping seems stressful. Or like many, your head space may be somewhere in the middle.

Saving and investing cause a great deal of anxiety and stress for many, and it’s ironic, not the funny kind, that this sits next to your retirement dreams. You may dream of some big-ticket item, a boat, a second home, an RV, and that dream gets you out of bed and into work each day. Maybe experiences are your thing: travel, learning, or the arts. For some it may not be a dream at all, it may be working to fight fears, fears of not having enough, fears of “running out of money,” fears of aging. For many the reality lies somewhere in the middle of these spaces.

And we’re continually intersecting it with savings and investing. For some this is a continuous mental calculation that’s usually not rooted in fact. The stock market slumps, and there goes the trip to Tokyo. The stock market is screaming, and all of a sudden, we decide to pile on some new dreams wondering if investments will fall victim to a trade war, a real war, or a war with the spouse. We suddenly have to back off on the 401(k) to fund college, and with one simple change, all of the dreams are pulled into question by our crazy mental math, creating stress.

This is often our mental reality. It seems manic because it is. We carry almost all of the weight when it comes to creating our financial post-work life.

So, we probably need some help with this, and that help can come in a variety of forms. Let’s not stir up any additional anxiety about the types, structures, and packaging that financial advice can take. Let’s assume you go to a reputable investment advisor or planner. Someone who is good will be using sophisticated software that is very helpful, and very complex, bringing everything to the table.

Your advisor and the software will do what they are told (if you don’t feel that’s the case, run!). But now you have to begin quantifying all of these dreams, wants, and fears. You have to put numbers on the intangible. Some advisors use software that is goal based and others use software that is cash flow based. So, planning for the RV, or the trip, versus, just planning to replace a certain amount of your current income in retirement. This is not a software judgement, most of this software can do a little bit of both just fine.

You are part of the input for all of this, and so you answer the advisor’s questions, the advisor gives you the plan, and now all of that stuff seems more concrete. Now you worry about the plan and what’s in the plan, or did you leave something you might want out because the computer said you’ll run out of money? If it seems like we have come full circle it’s because we have.

The retirement picture is something that evolves over time. You can and should dream, and allow yourself to have options knowing that circumstances can change, and your wants and needs will change. Your retirement dreams at 35 are probably very different than your retirement dreams at 45 or 55. You will have spent decades working hard, and when you actually stop, you may find a different mindset yet again. After a year or so in retirement with some time to breath and reflect, you may have a new view about what you want and what’s important.

All of the basic habits of planning for a successful retirement are very similar, and your probably already doing those things. When we intersect dreams, and numbers, and investments it can bring up a lot of stress that we create in our mind. Cut yourself some slack, and be patient with yourself. It’s a long and changing game with very few things set in stone.

A good financial advisor will work with you to update and refresh your plan every year.

At Buoyant Financial we enjoy working with people and understand that these feelings can be complex, stressful, and changing. We have the fancy software, but we also have the mindfulness and patience to work with you as a human with hopes, dreams, and fears.

A Midsummer Glance at the Markets

We’re half way through 2018, which is a great time to take a look at where we are and where the rest of the year may take us. As you’ll see, between the noise of the “trade wars,” and where things stand with the broad markets, this really is an interesting point in the overall cycle.

Trade Wars

The “trade wars” caught everyone’s attention in May, and as noted in our related blog post, these are never a good thing. Many of us were hoping this was merely saber rattling, but the situation has escalated quickly with many of our key trading partners pulled into the fray along with the US economy. In a nutshell, trade wars are bad because they always have unintended consequences. It started with trying to make US steel and aluminum producers more competitive by making foreign imports more expensive. Now we’re seeing an impact on soy bean farmers, companies like Harley Davidson, and enough other examples that the impact is now being viewed in terms of how much it will impact the overall economic output of the country (think GDP).

Stock Market

The S&P 500 is close to where it was at the beginning of year. A key metric related to stock prices is the price-to-earnings ratio. This essentially tells you how much it costs to buy what a company earns. For large companies this number historically averages around 17, and right now that number is around 24. In order to return to a long-term average corporate earning need to go up, stock prices need to come down, or some combination of the two would need to occur.

Fortunately, corporate earnings have been strong, which has helped keep the market hovering where it has been all year, and this trend is expected to continue for the time being. However, there doesn’t appear to be much room for prices to move up given that these strong earnings simply have the market treading water. Many companies have been buying back their own shares, which has also helped support the market.

Bond Market

In the world of bonds, the Fed has been getting much of the attention. The Fed’s job is typically seen as trying to keep unemployment down while also keeping inflation under control. Unemployment is extraordinarily low right now, and inflation is finally increasing after years of sitting stubbornly low. The Fed’s natural response has been to increase interest rates to keep inflation in check, higher rates increase the cost of doing business acting like a brake on the economy.

In January the Fed was expected to increase interest rates three times in 2018, and now that expectation has moved to four increases. It’s important to note that the price of bonds drop as interest rates go up, which means bond portfolios could lose some value. While this is typically not as dramatic as the ups and downs of the stock market, it’s important to be aware of this relationship.

Yes, Things are Interesting Right Now

The stock market is expensive based on historical values, and moving sideways during a period of strong corporate earnings. The bond market is under the natural pressures created by increasing rates and inflation. And, we have the “trade wars” that don’t seem to be going away any time soon. At this point there seems to be some consensus among big banks and economists that the next recession will occur in 2020, but this is a moving target and estimates are likely to change.

Things are very interesting right now. We always feel that the best way to navigate any environment is through careful planning and allocating between stocks and bonds in a way that is appropriate for your age and risk tolerance.

Even if you’re not a client, we are happy to answer questions about the markets in general, or related to your personal financial situation. We love questions, never hesitate to reach out!

Banks Aren’t for Saving Money

When we talk about investments we usually focus on the stock or bond markets, and how things like our retirement accounts are doing. The money that often gets overlooked is the 6 – 12 months of easily accessible “emergency” savings we should all have. People often think this means the money should be in a bank account, not realizing they may steadily losing money in the long term with this approach.

Banks offer a lot of services that are critical to our financial life. They offer easy access to things like mortgages and car loans, and most of us would never want to return to life before bill pay. When it comes to protection it’s hard to beat FDIC insurance, guaranteed! But that protection comes at a steep price in the long term.

It’s All About Inflation

The idea of an emergency reserve is that we hope to never use it, which means most of it sits and sits and sits. Maybe we use a bit now and then to buy a new washer or repair the roof. Inflation is a constant drag on interest rates that you can’t see, but begin to feel over time as things become more expensive.

The Fed generally like to see this rate over 2%, which means just to break even over time on any investment you need to earn over 2%, and assuming you pay taxes, you’ll need a bit more.

Bank Rates

The nice thing about most bank accounts is they seem free. While there may be no up-front fees, real cost comes in the form of low rates on checking, savings, CDs, and FDIC insured IRAs. For example, today’s Wall Street Journal (5/9/18) quotes the annual yield for a five-year CD at 1.68%, and 0.45% for money markets for the banks they sample. Either way these will offer negative returns in the long run since both are lower than 2% and right now the most common measure of inflation is closer to 2.5%.

The punch line is that they are likely to always be less than inflation because of how these types of accounts are priced, they don’t “catch up.”

Risk is Relative

Beating inflation for long periods of time does require a bit more risk. The first place we look is US Treasury bonds and bills. US Treasury bonds are considered to have no risk of a principal loss because they are backed by the US government (just like your bank deposits). Prices do move on these, but if you hold one to maturity you will always receive 100% of your principal. Today the US 5 year note is yielding about 2.8%, good luck finding a five year CD at that rate. The best part, you can buy these inexpensively directly from the Treasury. They also offer inflation protected securities that will keep your principal amount current with inflation.

Is There an Easier Way?

Wouldn’t it be easier if we could just buy a portfolio of these bonds? Yes, and they are out there. There are exchange traded funds (ETFs) that hold portfolios of these bonds, and simply pay out the interest as dividends each month. As bonds mature they buy new ones. The risk here is that the prices do move with the bond market, but the investments themselves are simply US Treasury bonds.

For example, there is an ETF that holds US Treasury bonds that mature in 1 – 3 years currently yielding 2.38% at a very low fee. I assist many of my clients with managing their short term or emergency savings with this type of solution.

Conclusion

There are reasonable options that can help you overcome inflation, and still maintain an easily accessible emergency fund. Although we hope you don’t have emergencies and these funds can grow over time; in the event that you do, you’ll have funds available to cover your needs that have at least kept pace with inflation if not added to your bottom line.

At Buoyant we’re concerned about your entire financial picture, and helping you get the most you can out of your assets, even the mundane rainy-day fund.

If you have any questions about this or would like to learn more about short term savings option please shoot us a note or give us a call. We can point you in the right direction and may be able to offer some assistance with your entire financial picture.

Trade Wars? Give Trade Peace a Chance.

Last month the president announced tariffs on steel and aluminum, and this caught the markets by surprise (and it’s wasn’t the good kind of surprise). Let’s take a look at what’s going on, why trade wars are bad, why the markets reacted so negatively, and what may come.

What Happened

Tariffs, one of the weapons of a trade war, are a tax on imports. The idea is to support companies perceived as victims of global trade issues. Most economists view these as bad for free markets because they distort prices, artificially support some industries, and can have major unintended consequences.

The tariffs on steel and aluminum (and about 1,300 other products) were largely aimed at China, and China didn’t appreciate these tariffs at all. So as with any war, the country that was attacked responded in kind with a list of new tariffs. A big threat that got attention was soybeans. China consumes a lot of US soy beans (think tofu), so now US farming, which was minding it’s own business, is suddenly pulled into the fray. A recent NY Times article points out that the goal is probably an attempt to hit the administration in “red states.”

Without going into the weeds on economics we can quickly see how this begins to play out, including real impacts to average consumers who buy products, and business owners like farmers. As we’ve seen before the markets hate uncertainty, and this has created a lot of uncertainty.

The Markets Don’t Like This

The price of a stock represents it’s future value, always looking forward. The point where sellers are willing to sell and buyers are willing to buy is the stock price we see quoted. There are a lot of assumptions baked into these prices.

When the price of a basic item like steel comes into play, it’s very hard to predict how it will impact lots of companies. US companies that make raw steel may be OK, or even do quite well. US companies that buy steel in the global market to make things will feel pain, and consumers may end up paying more for finished products. When you spread that kind of thinking across all companies that just use steel it’s hard to justify the current stock price and hard to figure out what the new price should be.

This is what spooked the markets, and caused the animal instinct to sell, and push prices down until there is more information. This example was just steel, so the same thinking would apply to aluminum, soy beans, and every other item in play. So now we’re affecting the price of stocks, products, and things that impact the broader economy like disposable income, employment, etc.

This leaves us with much uncertainty and helps paint the picture of why trade wars are bad.

A Hope for Peace

While the steel and aluminum tariffs are already in place, the new lists remain only threats. There is an opportunity to negotiate and take a giant step back. A recent article in The Economist points out that the US stepped away from tariffs on European steel when a retaliation was threated on oranges, among other things.

What began as an attempt to help US steel, which was already in a long natural decline, is turning into a full-blown trade war that is already impacting stock prices and may ultimately impact ordinary citizens. The good news is that the threat to political careers may inspire some to get serious about negotiating us out of this mess.

The stock market is likely to remain sensitive to any and all news about this issue, which will only calm down when we know more about what will actually happen, and the uncertainly is removed.

If you have any questions about this blog post, investing, or your personal financial situation please feel free to reach out!

Well, That Escalated Quickly.

Over the course of a few short weeks the stock and bond markets went from a period of quiet, uninterrupted bliss to what now feels like complete chaos for investors. Many realized the day would come, and felt mentally prepared, until it really happened. Now it seems the harsh swings may be here to stay for a while, and some of these swings are normal and some are not so normal. Let’s take a look at what’s going on, what might come, and why some old adages are relevant.

What’s Going On?

It all began with a report on February 2nd showing that wages were increasing, which is good, and at a rate that was expected, no real surprise there; however, some read this as negative despite the expectations. Inflation typically causes the Fed to increase short term interest rates, but this was expected too, the Fed has been broadcasting this since last year. What changed?

Hedge funds trade funky things that track how much the market bounces around. They bet big there would be no volatility, and when it came, some think these trades led to even more selling. Now the market seems likely to react to anything. For example, when the new Fed chair, Jerome Powell, gave routine testimony reiterating that the Fed expected three rate hikes this year, the market dropped again. Either they didn’t get the message the first couple of times, or everyone is nervous and will use any excuse to sell. There is some drama here.

Essentially you have the president and congress attempting to crank up the economy at a time when the Fed is doing the opposite by trying to keep it from overheating since they think the economy is in fine shape. It will be interesting to see how that tug of war plays out. And as if that wasn’t enough, the president announces tariffs on steel and aluminum to everyone’s surprise. The market doesn’t like surprises, see above where things happening as expected was freaking people out. Why tariffs are bad is a blog post unto itself, but it’s not good news, and the markets indicated they were none too happy. So, the days of a gently increasing stock market seem behind us for now, and with rates increasing bond investors will feel some pain too.

What Now?

There is still a lot to play out this year, the markets will be looking closely at how much corporations make this year in order to justify stock prices, which are still historically high. You can guess by now what happens if those numbers aren’t perfect. Then we have the midterm elections this year, and the stock market usually doesn’t like Democrats running congress, so as the drama of primaries and polling plays out we can expect to see more ups and downs.

We have short memories, during the Great Recession (think 2008ish) we quickly became numb to these kinds of wild movements, and investors who stayed the course and didn’t panic survived and did quite well in the years that followed. There is power in the law of averages, and over the long term we see that markets generally return to historical averages. The market may have gotten ahead of itself as the economy grew, and now as interest rates return to long term averages, they cause a very natural drag on stocks.

Hold the Course

What do we do? We hold the course. A proper asset allocation will carry you through this. And if you have questions, concerns, are losing sleep, or feel like you’re getting mixed messages from those who manage investments for you, then you get help.

We’re here to help, and always happy to offer perspective. Please don’t hesitate to reach out.