When Too Many Dollars Doesn’t Make Cents

It feels good to wrap up a long holiday weekend as we honor those that lost their lives serving our country. We have been living in a period some refer to as the “Long Peace,” which began in 1945. Though wars have occurred during this time, they have been minor relative to some of the wars in our short history. Many site technology as the culprit, which has connected the world and allowed each country to trade goods and services. These economic linkages make it difficult for one country to start a war with another and not face severe economic backlash. Of course, none of this would be possible were it not for the heroes serving this great country. Out of respect, we should also honor those serving other countries. We are but one world, and I believe if we try to respect those in different countries, with unique cultures and beliefs, we can mitigate the risk of future wars and lives lost.

Globalization has been great for peace and efficiently using resources from an economic perspective. It may also be the reason developed countries have experienced prosperity while emerging, developing countries grow their middle class. Have you looked at the price of a television recently?! Global trade is the reason you can pick up a 65” Samsung TV for less than $600. But like many economic and political issues, it’s complicated and some negative externalities can be the result.

After several rounds of stimulus, American’s may be drowning in cash. Is there a point when too many dollars doesn’t make cents? Not if you look at the budget for 2022 that was submitted to Congress on Friday. Let’s look at some of the developments we are witnessing, the benefits of putting the economy on life support, and the potential consequences.

The Post-COVID Economy Is Reminiscent Of the Roaring 1920s

After unprecedented fiscal and monetary stimulus, we find ourselves in the midst of one of the hottest economies in decades, albeit uneven. People are vaxed, unmasked, and bringing their fervent demand for a return to normal. Spending at restaurants and fast food outlets in April were nearly 5% higher than before the pandemic on a seasonally adjusted basis. After the Spanish Flu of 1918 and the first world war, people were excited to get out and live life once again. The pent-up economic demand provided a catalyst to the growth responsible for the Roaring ’20s. This pandemic was not preceded by a war and the recovery may not be as buoyant as the ’20s, but that will not stop this recovery from being one of the strongest in our lifetimes.

Last week, the IHS Markit increased their forecast for second-quarter GDP growth to a yearly rate of 11.6%. If those forecasts are met, it would mark the highest growth since 1984. Demand for durable goods such as cars, appliances, furniture, and electronics is up almost 40% from pre-pandemic levels.

Looking for a Job?

Now is the time to do it. US job openings just hit a new record in March. Employers are struggling to find employees and are forced to provide higher wages and other perks to entice employees. Total worker pay is now more than 4% higher than before the pandemic, even with roughly 10 million still underemployed. Perhaps this environment will be the catalyst to reverse years of stagnant wages for blue-collar workers. Time will tell.

Euphoric Markets

Stimulus payments, boredom, social media sites, Robinhood, and blog posts continue to be a source of speculative behavior in the stock market. Novice investors watch as people just like them made millions on names they knew nothing about. Behavioral biases such as regret aversion, or FOMO (fear of missing out), cause them to react irrationally and buy the stock because the pain from not participating is too great for them to handle. Every bubble is created with this type of behavior and I feel sorry for those that will bear the brunt of this activity.

Bitcoin trading fits the definition of euphoric markets, but I admit there is credence behind the value proposition though crypto-enthusiasts often lack sound rationale for their investment decision. How can you explain putting almost all of their net worth in an asset that may not be here in ten years while being afraid of losing money in the stock market? Less than 1% of publicly traded companies go bankrupt. What are the chances Bitcoin becomes worthless? I think it is low, but I’m am confident it is greater than 1%.

Is the Dollar Losing Its Appeal?

Deteriorating Balance Sheet

As we engaged in superlative measures to save the economy, it looks like our balance sheet will need a ventilator. But can the US really spend too much money if it has a printing press? The answer is nuanced and will take decades to find out. In the short run, things will continue to hum along. In the long run, something has to give and we have to deal with the consequences, although probably not if you are an advocate of Modern Monetary Theory (MMT) - don’t stop spending and let’s keep this party going! Can you have your cake and eat it too? Any theory that allows this possibility will surely gain a following even though a closer look reveals how impossible it truly is - this includes Modern Monetary Theory. Despite the fact that comparing personal debt with government debt is an unfair comparison, it’s simply not possible to run massive deficits without some negative repercussions. I admit there is some credence to MMT, but its core premise relies on the dollar maintaining its reserve status. But is it possible to lose that status? Could the dollar get replaced by the Chinese Yuan, Euros, or even Bitcoin?

The Congressional Budget Office (CBO) paints a dire picture, estimating the interest payments on our debt will make up 27% of our budget, which will crowd out education, infrastructure, and many other forms of discretionary spending. Generational theft of this magnitude should be the premise for Mission Impossible 2040. In this movie, Tom Cruise at the age of almost 80 would drop down into the Treasury suspended on cables. In this covert operation, he would increase spending for entitlement programs (Social Security, Medicare, and Medicaid), lower taxes, and approve helicopter money for all. I may actually see a movie like this 🤔

But positive outcomes can occur if we grow our way (always the hope), or tax our way to a balanced budget. We can also kick the can down the road and avoid the immediate consequences of our actions if our actions are consistent with other governments around the world. Yes, we took on a lot of debt but so did everyone else.

What currency are you going to use if all governments have massive debt? Are foreign investors sending a message it will not be the dollar? For the first time in the past three decades, they are fleeing from US Treasuries and selling their dollar-denominated debt.

Are There Alternatives to the Dollar?

The European Union has its own problems and understimulating the economy may be the prime suspect for the lackluster recovery and the European Debt Crisis. Until Chinese officials stop manipulating the Yuan, it will be a while before they catch up to the dollar…or the Euro. The dollar still comprises the overwhelming majority of foreign exchange reserves but the Chinese renminbi (also known as the yuan) is gaining.

Ok Then, What About Cryptocurrencies?

I admit there is merit to the blockchain and crypto-assets. The concept of a decentralized currency is appealing to almost anyone. But that doesn’t mean it will work. The Bitcoin network itself is rather slow, handling just 14,000 transactions per hour, compared with 236 million for Visa’s network, according to BofA. First of all, for Bitcoin to work as a currency, it needs to stop appreciating. If this will not happen, it cannot be a currency. Think about it, would you ever agree to buy your home using a mortgage due in Bitcoin? No rational person would since there is a possibility they pay back 10x what they owed. For that reason, it cannot take the place of other currencies. Some third-world countries are accustomed to volatile currencies. The threat of capital controls limiting your ability to access your savings may be greater than the threat of Bitcoin plummeting. But governments may decide to ban transactions in cryptocurrencies. Turkey’s recent move to ban transactions in Bitcoin illustrates this threat. Chinese regulators are preventing miners (Bitcoin miners verify transactions by solving complex algorithms and are rewarded in Bitcoins for their work) from verifying transactions in Bitcoin. If you don’t think our government can shut down Bitcoin, you should prepare for a rude awakening if they seriously tried. Do those miners need power, a lot of power? Can the authorities shut down their access to the immense amount of power they use? Then, Bitcoin can be shut down.

The Globe Is Warming up to Bitcoin, Which In Turn Is Warming the Globe

It’s easy to see who is mining Bitcoins from the massive amount of power they are consuming. By Core Scientific estimates, it takes 100 MWh of electricity to mine just one Bitcoin. Roughly the same energy consumption as watching TV continuously for 98 years (using a 65” Samsung Q70T QLED 4D Smart TV 2020)! Did you know the global Bitcoin network now emits 60 million tons of carbon dioxide into the atmosphere annually, roughly equivalent to countries such as Greece (Bank of America). Bank of America estimates that every $1 billion of inflow into Bitcoin is like putting 1.2 million cars on the road (and not the Tesla kind). If the price were to reach $1 million, up from $58,000, Bitcoin would become the world’s fifth-largest carbon emitter, passing Japan. Bitcoin’s annualized energy consumption has surged to 135 terawatt-hours, doubling in the past year, according to the Cambridge Bitcoin Electricity Consumption Index. That is more electricity than countries such as Argentina, Sweden, and Ukraine consume in a year (University of Cambridge).

In addition to its shortcomings and environmental threats, Bitcoin also poses a risk to the dollar. I mentioned the key assumption for the Modern Monetary Theory is the reserve status of the dollar. If we lose this distinction, our debt will come due and the solution of printing our way out of this mess will no longer be a viable solution. Austerity anyone?

I have told clients, I am comfortable holding Bitcoin as a hedge against the possibility of the demise of fiat currency but this should not make up more than 5% of your investable assets. Remember, this is a hedge, so you will most likely lose money in this asset, but you are insuring your portfolio against this potential risk.

Do We Have to Worry About Inflation?

Or, is this another head fake in a secular trend of downward inflation that began in the 1980s? The commonly cited official inflation measures are the consumer price index (CPI) published by the Bureau of Labor Statistics, and the personal consumption expenditures deflator (PCE) from the Bureau of Economic Analysis. CPI is designed to track the out-of-pocket costs of living for the average American. PCE is supposed to track the prices of everything consumed by households, regardless of who pays the bill. The contrasting methodologies explain why CPI has been running almost 1% higher than PCE over the past year. Core measures of inflation strip out food and fuel to eliminate some of the noise from the inflation readings, and the Fed’s preferred inflation gauge is core PCE. The Fed’s preferred inflation gauge and their willingness to let inflation exceed their target of 2% could be the reason you are more nervous about inflation heating up than Jerome Powell.

In April, the monthly inflation rate without food and fuel rose at the fastest pace since the 1980s, and the year-over-year CPI reading was 4.2%. Prices of food, lumber, used cars, and homes are skyrocketing. We may finally be experiencing inflation after a confluence of factors provide the ideal backdrop for this to occur. Pair this with supply chain problems, tight labor, pent-up demand, and a Fed that is only becoming comfortable with talking about tightening policy - not actually tightening but just talking about it. What does that even mean? Is this the pre-meeting to prepare for the next meeting where they will discuss how they will handle the official meeting? It sounds like a brilliant plan, but they had to borrow it from Steve and Doug Butabi in the 1998 film, Night at the Roxbury.

Your budget may have changed from the pandemic and the official inflation indices may be weighted differently than the weights household expenditures. Is the CPI a fair measurement for you? If you want to find out the inflation rate you are experiencing in your budget, click here.

It looks like the punch is full and the party may continue over the next 12 months. Don’t be surprised to see some volatility this summer as the market digests excessive valuations and tries to look forward. A minor correction would be healthy for the stock market and may eliminate some of the zealous investment behavior we are seeing. That said, I would expect any drops to be relatively contained.

Noble Wealth Pro Tip of the Month

Focus On Your Goals

Investor biases can plague even the wisest of people. For example, Isaac Newton sold his 7,000 pounds' worth of South Sea Co. stock at a 100% profit. Declaring that he “can calculate the motions of the heavenly bodies, but not the madness of the people.” However, the excitement around England’s first great IPO proved too much even for him as he soon got back in. Newton ended up losing 20,000 pounds when the bubble burst, and from that moment on, he could “never bear to hear the South Sea referred to for the rest of his life.” Focus on your goals and don’t concern yourself with the attitudes of the crowd. Daniel Kahneman often demonstrates that human behavior is littered with noise and bias, which leads to suboptimal results. We witnessed this on March 31, 2020, when 66% of stock investors were “bearish” (American Association of Individual Investors). The 12 months that followed was the best performance for the S&P 500 in the past 30 years (BTN Research).

529 Plans - A Revocable, Irrevocable Gift for Estate Planning Purposes

529 plans may provide an estate planning loophole. Most tactics to reduce the size of your estate are irrevocable; once you’ve let go of the money, you can’t get it back. By contrast, you can change beneficiaries and even owners on 529 plans multiple times. Handled correctly, you can turn your 529 plan into a tax-free money pot that will fund the education of your children, their children, and maybe even generations beyond that.

Interesting Findings

The top 10% of US households (measured by net worth) own 70% of all assets nationwide and the bottom 50% only own 2% of all assets (Federal Reserve. 12/31/20).
82% of the US net job losses in 2020 were suffered by the bottom 25% of wage earners (Economic Policy Institute).
The 12-month period ending 3/31/21 was the best performance for the S&P 500 in the past 30 years (BTN Research).
According to a new study for the University of Oxford, drinking any amount of alcohol causes damage to the brain.
The number of life insurance policies sold jumped 11% in the first quarter from a year earlier, the biggest gain since 1983, according to the industry research firm Limra. The boost extends the sales increases that began last year as deaths related to Covid-19 led many consumers to buy coverage.

Things We’re Reading and Enjoying

Noise | Daniel Kahneman

In Noise, the authors show the detrimental effects of noise in many fields, including medicine, law, economic forecasting, forensic science, bail, child protection, strategy, performance reviews, and personnel selection. Wherever there is judgment, there is noise. Yet, most of the time, individuals and organizations alike are unaware of it. They neglect noise. With a few simple remedies, people can reduce both noise and bias, and so make far better decisions.

The Premonition: A Pandemic Story | Michael Lewis

We are still a nation of skeptics. Fortunately, there are those among us who study pandemics and are willing to look unflinchingly at worst-case scenarios. Michael Lewis’s taut and brilliant nonfiction thriller pits a band of medical visionaries against the wall of ignorance that was the official response to the outbreak of COVID-19.

The Long View | Brian Fetherstonhaugh

The Long View offers highly practical exercises that challenge you to rethink how to assess your skills, invest your time and expand your personal network, and provides a framework for facing tough job decisions. With insights drawn from interviews with a variety of professionals―who share both success stories and cautionary tales―The Long View will help you establish your own path for overcoming obstacles and making the best choices for a long, accomplished, and rewarding career.

Until next month,

-Your team at Noble Wealth Partners

“There is nothing noble about being superior to your fellow man. True nobility is being superior to your former self.” Ernest Hemingway

NWP Monthly Digest | June 2021