Friday, November 26, 2021

Investment Objective and Risk Tolerance

Your Investment Objective is a guideline you have chosen to define your goals and help identify your risk tolerance. Risk tolerance is the level of risk of loss you're willing and able to tolerate while pursuing these goals. All investments involve some amount of risk, including the potential for the loss of principal. Generally, equities (stock-like investments) involve more risk than fixed income (bond-like investments). Equities may have the potential for higher returns but also have the potential for greater losses. The higher your risk tolerance and the longer your time horizon, the more you may want to invest in higher-risk investments. Your investment objective is a factor to help define the ratio of equities and fixed income in your account. Increasing the percentage of fixed income may reduce volatility but may also reduce your potential return.

Reducing your exposure to equities and volatility may also reduce the probability of meeting your investment goals. Currently, interest rates are historically low, and returns on fixed income are correspondingly low. Rising inflation erodes the buying power of money, making fixed-income investments even less attractive. Equities in your portfolio may serve as a hedge against inflation. If you think prices will increase, owning equity in companies raising their prices may help offset the impact of inflation.

Your investment objective can usually be found on the first page of your investment account statement. The approach I recommend is to choose an investment objective that strikes a balance between taking enough risk to realistically pursue your financial goals while also allowing you to sleep well at night. Consideration should be given to how well you're prepared to reach your financial goals.

I do not try to time or jump in and out of investment markets. I choose investments I believe may do well in the intermediate to long-term based on economic and market data, adjusting equity exposure to align with a client's investment objective. Moving towards periods of economic weakness, I may adjust equity exposure towards the lower end of the equity range. Moving into periods of economic strength, I may shift the level of equity exposure to the upper end of the range for a specific investment objective. Below are the investment objectives we use for our clients. Investors should regularly review their investment objectives to maintain alignment with their current financial goals and risk tolerance.

Aggressive Growth – 90% to 100% in equities.

Emphasis is placed on the potential for aggressive growth and maximum capital appreciation. This objective is considered to have the highest level of risk and is for investors with a longer time horizon.

For retirement planning purposes, this is generally appropriate for people with more than ten years until retirement and a higher tolerance for risk. An aggressive growth investment objective may also be suitable for those whose retirement assets are below target. 

Growth – 70% to 90% in equities.

Emphasis is placed on achieving long-term growth and capital appreciation. This objective is considered to have a moderate level of risk and is for investors with a longer time horizon.

For retirement planning purposes, this is generally appropriate for people not yet retired who have a moderate tolerance for risk. A growth investment objective may also be suitable for those whose retirement assets are below target.

Growth with Income – 50% to 70% in equities.

Emphasis is placed on modest capital growth. Certain assets are included to 

generate income and help reduce overall volatility. This objective is considered to have a moderate level of risk.

For retirement planning purposes, this is appropriate for investors in retirement who have a moderate tolerance for risk and whose retirement assets are on target.

Income with Moderate Growth – 30% to 50% in equities.

Emphasis is placed on current income, with some focus on moderate 

capital growth. This objective is best suited for investors with little need for capital appreciation.

For retirement planning purposes, this is appropriate for investors in retirement who have a lower tolerance for risk and whose retirement assets are above target.

Income with Capital Preservation – 10% to 30% in equities.

This objective is generally considered the most conservative investment objective. Emphasis is on generating current income and minimal risk of capital loss.

For retirement planning purposes, this is appropriate for investors in retirement who have a lower tolerance for risk and whose retirement assets are well above target.

Saturday, November 20, 2021

CAUTION! Speed Bumps Ahead

 We are in the middle of one of the seasonally strongest periods for equity markets, yet we have some potential speed bumps in the weeks ahead.

President Biden is expected to announce his pick for Federal Reserve Chairman before Thanksgiving. It is anticipated that he will either renominate current Federal Reserve Chairman Jerome Powell (R) or Fed Governor Lael Brainard (D). Many believe Chairman Powell has done an excellent job and should be renominated. Others think President Biden may choose Fed Governor Brainard as an appeasement to the more progressive wing of the Democratic party who may feel they were forced to capitulate on recent legislative issues. Both are highly qualified, and neither are expected to change the Fed's current path; however, any change at the Fed could cause a ripple through markets. I don't have any inside information, but if President Biden wants to make a change at the Fed, it may come after the market closes Wednesday, giving market participants something else to digest with their Thanksgiving turkey.

We're about to revisit the debt ceiling drama. You may recall that Congress approved an extension of the national debt limit in October. U.S. Treasury Secretary Janet Yellen has shifted her estimate of how long the government's debts can be paid from December 3rd to December 15th. We have never defaulted on a bond payment, and it is expected that after a period of public theater, Congress will again raise the debt limit. Defaulting on our debt is a low probability, high consequence event that could move markets as we approach a potential default. A default could result in missed bond payments, social security checks, and military payroll being delayed. Markets would have a dramatic reaction if the U.S. were to default on any debt.

After Thanksgiving, we can look forward to a potential government shutdown dominating headlines again. Congress did not pass the necessary appropriations bills in September to fund the government for the fiscal year, which started October 1st. Instead, Congress passed a (CR) Continuing Resolution to avoid a government shutdown. Congress must pass the required appropriations bills or another CR by December 3rd to avoid a government shutdown again. It is expected that Congress will opt to pass another CR, kicking the can down the road into next year. There is a risk that politics could come into play and force a temporary government shutdown. Markets do not like uncertainty or instability; however, the reality is that a government shutdown is not a permanent condition. Previous government shutdowns have not resulted in lasting economic harm.

After impressive 2021 market returns, many are sitting on significant taxable gains. With the threat of changes to the tax code, some may elect to sell into yearend to realize taxable gains in 2021. If we begin to see tax-related selling, I expect those funds to come back into the markets in January.

In recent weeks we've seen a rise in COVID cases again in thirty states and areas around the globe. As winter approaches, more people in colder climates are spending more time indoors. This week Austria reinstated a lockdown and mandated vaccination for their population. In neighboring Germany, there are broad restrictions for public transportation, restaurants, and other public venues. In some places, they are canceling holiday events. When asked about a lockdown in Germany, the German health minister said nothing could be ruled out. The rise in COVID cases has caused doubt in the expectations for global growth. Crude oil prices have fallen 4% to a six-week low. Growing economies have higher energy needs. If growth estimates are revised down, the forecasts for energy prices are also revised down. Although there is nothing good about rising COVID cases, the silver lining is that a slower global recovery will put downward pressure on energy prices and inflation concerns and could give the Fed more time to adjust monetary policy.

Do you remember that time when everything was good, and there wasn't anything to worry about? Neither do I. I don't have a crystal ball; I can't see the future or defy gravity. I expect we'll have increased volatility in the coming weeks as the political issues play out. The economy is in good shape, corporate profits have been better than expected, and earnings estimates have been growing. I don't worry too much about things that could cause short-term market gyrations. I'm watching for conditions that could lead to a recession. I don't see anything like that currently. I will continue to monitor markets and the economy and will keep you advised. Please call me with any questions or concerns.

Saturday, November 6, 2021

Economic Update - November 6, 2021

 A video version of this content is available on YouTube: Link to Video Podcast

An audio version of this content is available: Link to Audio Podcast

There was a lot of market-moving economic news this week. Wednesday, the Federal Reserve ended their two-day meeting and announced their plan to begin reducing asset purchases. The Fed has been buying $120 Billion per month in bonds, $80 Billion of US Treasuries, and $40 Billion of agency mortgage-backed securities to support the bond market through the pandemic. The Fed will reduce US Treasury bond purchases by $10 Billion and agency mortgage-backed securities by $5 Billion in November and December. It is expected that the rate of decreasing bond purchases will continue, and the Feds bond-buying program will end in the Summer of 2022. Chairman Powell indicated that adjustments could be made should economic conditions change. Chairman Powell reiterated that there is a higher bar for raising the Fed funds rate; raising rates is not expected until after the Fed has completed the tapering of their bond-buying program. Many believe the Fed will begin raising interest rates later in 2022 in response to increasing inflation pressures. The Fed has done an excellent job of communicating their intended path and not being surprised markets responded well.

Thursday, the Labor Department reported that weekly initial jobless claims fell by 14,000 to 269,000. This number was better than expected and marked a pandemic period low—March 14th, 2020, pre-pandemic initial jobless claims were 256,000.

Friday, The Bureau of Labor Statistics reported that nonfarm payroll employment rose by 531,000 in October, and the unemployment rate fell to 4.6%. This report exceeded expectations, and equity markets rallied to new highs. We are all aware of the labor shortages. Unfortunately, there is no end in sight. The most recent data shows that we have more job openings than human beings to fill them. When I was in business school, an economics professor commented that full employment was 5%. He opined that anyone who wants a job has one once you fall below a 5% unemployment rate, and anyone worth hiring has been hired.

Pfizer announced results from their clinical trial of its experimental Covid-19 pill. When combined with a low dose of an HIV drug called ritonavir, hospitalization or death were reduced by up to 89% among high-risk patients. On CNBC Squawk Box, the former head of the FDA, Dr. Scott Gotlib, said, “By January 4th, this pandemic may well be over, at least as it relates to the United States after we get through this Delta wave of infection,” he said. “And we’ll be in more of an endemic phase of this virus.”

With Congress contemplating infrastructure bills, and the possibility of the pandemic coming to an end, the labor market should remain firm.

Coming into October, there were those warning that markets were at risk of a significant sell-off. Inflation, the possibility of rising interest rates, the threat from higher oil prices, and a policy misstep from the Fed were all cited as reasons the bull market could end. All those risks remain, and I will continue to monitor the economic data. You should never be so confident in your investment outlook that you discount the risks. For now, I see solid corporate profits, a strong labor market, an accommodative Fed, and a potential end to the pandemic outweighing the risks. This past Friday, I adjusted the portfolio models during a scheduled rebalance. The most recent changes increased diversification and slightly reduced risk.

We are in a seasonally strong period for equity markets. Considering the solid economic data, we could see equity markets continue their upward trajectory into year-end. As I always say. I do not have a crystal ball; I can’t see the future nor defy gravity. I can monitor markets and economic conditions and keep you informed. Please call me with any questions or concerns.

Monday, September 27, 2021

Market Update - 5%+ Correction

Link to accompanying YouTube Video: Link


Link to accompanying Podcast: Link

Monday, September 20th, the S&P 500 sold off 1.7%. It was painful to watch. By Friday, the market recovered the losses and ended the week higher. The primary reason for the sell-off was the potential loan default of Evergrande, a Chinese property development company that few had ever heard of. There was fear that the problems at Evergrande could be a symptom of a bigger problem. Over the week, global financial institutions assessed their exposure and the risk of contagion. All indications are that the financial risks are limited and could be mitigated by the Chinese government.

At the end of their October meeting, the Federal Reserves' decision not to raise interest rates or begin tapering their bond purchases calmed markets. In the press conference, Federal Reserve Chairman Jerome Powell struck the perfect balance, assuring markets that they were aware of rising inflation concerns but would remain accommodative until they were confident that the job market had stabilized. The Fed lowered their 2021 GDP forecast to 5.9% (down from 7.0% in June) and raised their GDP forecast for 2022. They acknowledged inflation is running higher than anticipated. The Fed believes that some of the inflation is temporary and will moderate once supply chains have healed.

In investing, two of the most important things to control are our emotions and our expectations.

Expectations - Market pullbacks can be unpredictable but should be expected. In this chart, we see that since 1980 there have only been three previous years without a pullback of 5% or more. There have not been two years in a row without such a pullback. A drawdown of 5% or more before year-end would be typical. To go the next 15 months without a correction of 5% or more would be a statistical anomaly.

Emotions – When markets make sharp corrections, it is normal to feel anxious. Those who have invested through recessions are reminded of how they felt during those times. Drawdowns of 20% or more that last for more extended periods, called bear markets, are often associated with slowdowns in the economy or recessions. It's important to remember that every correction does not lead to a bear market. Before making an investment change during a market pullback, separating facts from feelings is essential. Consider all the economic data to recognize the difference between a normal market correction and a market signaling future economic weakness. Emotionally driven financial decisions often don't end well.

Finally, we can be tempted to try to predict market corrections. To successfully time the market means you must be right twice. You need to know when to sell, which would be at a market top when everything seems fine, and then you would need to know when to buy, at a relative bottom when things don't feel so good. Market timing is a fools' errand. Those who have tried to time markets have lost more money than they would have lost in the correction.

At this time, I do not see any economic data that suggests we an economic recession in the foreseeable future. I will of course provide an update if I see anything that changes my view. Market corrections can be unsettling but are part of regular market activity and should be expected. Acting on changes in economic data rather than our emotions leads to better financial outcomes and less portfolio-related stress in our lives.

Sunday, July 11, 2021

Charitable Donations

Americans have a history of being charitable. According to the Giving USA Foundation's annual report, individuals, corporations, and foundations gave a record $471.44 billion to charities, social causes, and other qualified organizations in 2020. The US tax code encourages charitable giving by providing various income tax incentives to charitably minded taxpayers.


Some of the more common tax-favored charitable donation methods are Cash DonationsQualified Charitable Distributions, and the donation of Long-Term Capital Gain Property.


Cash Donations - Under the CARES Act (2020) and the Coronavirus Response and Consolidated Appropriations Act (2021), you may temporarily deduct up to 100% of your adjusted gross income donated to qualified charities and organizations provided you itemize deductions on your tax return. If you take the standard deduction, you may deduct $300 for individuals and $600 for married couples for donations made to qualified charities and organizations.


Qualified Charitable Distribution (QCD) – Donations may be made directly to a qualified charity or organization from an IRA if specific rules are followed.

·      The IRA owner must be over age 70½.

·      QCD's are limited to $100K per person.

·      The donation must be made directly from the IRA to the qualified charity or organization

·      QCD's can only be made if the donation would have been deductible if it had not been made from an IRA.


It is crucial that you accurately report a QCD on your tax return to realize this benefit. There is no code or box on the 1099-R that differentiates a QCD from other IRA distributions. The IRA custodian does not report QCD's to the IRS or the taxpayer. You must retain documentation from the qualified charity or organization as you would for a cash donation. Report the full IRA distribution on form 1040 and then the taxable amount on the appropriate line. Enter QCD in the margin next to the IRA distribution line.


Qualified Charitable Distributions most benefit those who do not itemize deductions and plan to donate more than $300 for individuals and $600 for married couples per year to qualified charities or organizations. It would also be of particular benefit to those who do not itemize deductions and are subject to Required Minimum Distribution (RMD).  Qualified Charitable Distributions count towards satisfying Required Minimum Distributions.


Long-Term Capital Gain Property – Property you've owned for more than a year may be subject to long-term capital gains tax should you sell it. One way to avoid this tax is to donate the property to a qualified charity or organization. You can generally deduct the donation's fair market value, not just your basis, up to a percentage of your Adjusted Gross Income. The donated property may include stocks, bonds, ETFs, or mutual funds. The property or shares must be transferred directly to the qualified charity or organization to realize this benefit.


Congress makes periodic changes to the tax code that may impact the income tax advantages of charitable donations for a given year. There have been multiple changes in recent years. You should consult a tax professional to determine how the tax code may apply to your charitable plans for a particular tax year. You can find more information regarding the tax treatment of Charitable Contributions in IRS publication 526.

Sunday, June 20, 2021

June Swoon

In my May 29th client email, I said, "I still expect we may see a Summer Swoon. This isn't unusual between Memorial Day and Labor Day and would not be a cause for alarm." And right on cue, a couple of weeks later, we see a June Swoon.

As we get into July, we'll begin to get second-quarter earnings announcements. I expect corporate earnings will continue to be good. Ultimately earnings and earnings expectations are what drive equity prices. Until we get into second-quarter earnings, I expect markets will remain focused on inflation and the Fed. As a result, volatility may continue.

Last Tuesday, the Federal Reserve ended a two-day meeting. In the press conference Jerome Powell, Chair of the Federal Reserve, said, "Inflation has increased notably in recent months." One of the Fed's preferred measures of inflation, (PCE) personal consumption expenditure was up 3.6% in April, and the May (CPI) Consumer Price Index was up 4.99% in May. The Fed's position is that much of the price inflation is transitory and related to the economy reopening. There is some evidence to support this theory. If you dig into the data, about a third of the spike in inflation is transportation-related. We've seen a big jump in used car prices and the cost of airfare which likely won't continue to rise at an elevated rate. Earlier this year, we also saw a spike in lumber and grain prices which have since subsided. These sharp changes will distort the inflation data until supply chains normalize. The Fed also raised its forecast for 2021 GDP to 7%, which would be the fastest growth we've seen in a long time. The Fed moved forward their timeframe for raising interest rates to 2023.

My big takeaway from the Fed meeting is that the economy is recovering faster and growing more than they thought; inflation is running hotter than they thought. As a result, they will have to tighten monetary policy by reducing bond purchases and raising interest rates sooner than they thought. So, if you are considering buying or refinancing a home or financing a large purchase, now is a good time. The Federal Reserve has told us that they plan to begin raising interest rates in 2023 or sooner.

I'm not paying much attention to those sounding the alarm of rising inflation. The reality is that nobody knows. We've never stopped the economy and increased the money supply by a third before. There isn't a playbook that guides us on what happens when you take a large economy from stop to go. The deflationary forces that have been at work for decades are still at work. I pay close attention to the bond market to inform my views on inflation. So far, the bond market is signaling that inflation isn't going to be an issue.

Economic theory tells us that the extraordinary moves central banks have taken; increasing the money supply by printing money and buying bonds, should result in inflation. The reality is that it hasn't. Japan embarked on this policy in the '90s. The rest of the world followed during the financial crisis of '08. The experts have been warning of runaway inflation in the US for more than a decade. It never materialized. My views on inflation have evolved since business school. I don't think inflation is necessarily caused by expanding the money supply but rather by what is done with that money. Inflation can only happen if people's desire and ability to spend exceeds the economy's capacity to deliver goods and services. Suppose central banks distribute currency and people pay down debt, increase savings or purchase non-productive assets like cryptocurrencies. In that case, the new money creates little pressure on the supply or prices of goods and services. The bottom line is we're just too early in the reopening process to determine that inflation trends have made a lasting change.

Nothing in the Fed statement or the economic data suggests a recession or slowing of the economy, which I would be concerned about. Some market participants are reacting to the possibility that the Fed may have to take steps to slow the economy in the future. It gives perspective to say it out loud. The Fed may have to take steps to slow the economy in a year or two. So, our strategy remains the same. Watch the data and adjust accordingly. Ignore the noise and emotion.

Saturday, May 29, 2021

April Inflation

This week the Bureau of Economic Analysis reported April PCE (Personal Consumption Expenditures) excluding food and energy, the number rose 3.1%. This marks the first time this number has been over 3% since 1992. This is an economic number that the Federal Reserve watches closely as an indication of inflation at the consumer level. The Federal Reserve has communicated that as the world emerges from the pandemic, disruptions in supply chains will result in a transitory inflation spike. The Fed's position is that inflation will moderate with policy adjustments and the normalization of the economy. An indication of market participant's inflation concern is reflected in bond yields which were little changed on the news. The Federal Reserve has made it clear that its goal is to create inflation above 2% with a longer-term average of 2%. The reaction in the bond market suggests that, at least for now, market participants believe the Federal Reserve can keep inflation under control.

Currently, the Federal Reserve purchases $120B in bonds monthly, which is viewed as inflationary. Recently several Fed Presidents have suggested that recent economic data is strong enough to justify talking about a policy shift. I think the Fed will begin signaling its intent in the coming months to reduce its bond-buying program, and equity markets could have a short-term adjustment. I believe inflation fears are premature. We continue to have strong deflationary forces through the globalization of labor and manufacturing and increased productivity due to technology utilization. I would be concerned about a protracted period of rapid inflation; historically, that economic condition is corrected by a recession. As always, I will monitor the economic data and adjust accordingly.

Sunday, February 21, 2021

My View on Bitcoin

Video Podcast

Audio Podcast

Recently I've received many questions about Bitcoin and cryptocurrencies. The topic has become increasingly popular on news and social media. I've spent some time exploring the subject looking at it from a technological, economic, and social standpoint. Let me offer some insight, my opinion, and answer some of the most common questions. 

What is Bitcoin? Bitcoin is a digital unit of value. It is an encrypted text file stored on the Bitcoin blockchain. The Bitcoin blockchain is an encrypted, decentralized ledger on a global public computer network. That is as technical as I'm going to get. Let's focus on the idea of a ledger. When you deposit money in your checking account or write a check against the balance, your bank keeps records of the inflows and outflows on an account ledger on their computers, and it is denominated in dollars. But it is still just an encrypted text file that represents value. We trust that we can exchange the value represented by that text file at the bank for physical currency or transfer the value to others to buy goods and services.

When you buy Bitcoin, you are exchanging Dollars for a value denominated in Bitcoin recorded on multiple, identical ledgers on privately owned computers around the world on the Bitcoin blockchain network. The currency exchange is not unlike exchanging Dollars for Euro, Yen, or any other currency. The value of a currency is a function of the currency's supply and the demand for it by others. Most people buy another currency because they need to settle a transaction in that currency. If people in Europe want to buy US Bonds, they need to buy Dollars to complete that transaction. Or if a company in China buys equipment from a US company, they need to buy Dollars to settle the transaction. Unlike other currencies, there is no demand for Bitcoin for the settlement of foreign commerce. This eliminates a natural source of support that other forms of currency enjoy. 

Why does Bitcoin have value? The short answer is because people think it does. The value of anything is what someone else is willing to pay for it. From an academic standpoint, value is a function of utility and scarcity. The air we breathe has a lot of utility, but it's not particularly scarce, so it would be difficult to sell. If we are going scuba diving, we're willing to pay for air in a tank. The air has the same utility, but it's scarce where we're going. Bitcoin has technological scarcity as there is an absolute limit of 21M coins that will ever be created. The last Bitcoin will be created in 2140. From 2009 through 2020, 18M Bitcoin have been created, meaning only 3M more can be created. The limit of 21M coins theoretically gives Bitcoin scarcity. Bitcoin's utility is evolving. Some use it as a store of value. Some believe that it may be used as a medium of exchange as a cash alternative in the future. But its primary value is linked to its demand as a store of value.

Can the price of Bitcoin continue to rise? Absolutely! I have seen estimates as high as $146K per coin. However, Bitcoin is an unproductive asset. Unlike investing in a company's stock, it does not produce a product, have earnings, or pay a dividend, making it very hard to value. It is difficult to know if it is cheap or expensive. It is also impossible for it to disappoint investors by not meeting growth or earnings estimates, so it's difficult to anticipate the catalyst for a downturn. The only reasonable metric I've seen to estimate its price is a stock-to-flow ratio. Stock-to-flow models are used to evaluate the current inventory of a commodity, like gold, against the flow of new production available in a given year. Using a stock-to-flow, I would expect Bitcoin's price to rise in perpetuity; however, this model did not predict previous price declines. It can continue to rise in price as long as there is a collective belief that it will.

Is Bitcoin a currency? Technically No.

A currency is a medium of exchange that is generally accepted and used to pay taxes, debts and pay for goods and services.

·      Bitcoin is not yet generally accepted as payment.

·      There is no legal requirement to accept Bitcoin as payment for debt as exists for Dollars.

·      The IRS has determined that Bitcoin is a property for the purposes of taxation.

WWhy do people buy Bitcoin when we already have a currency?

I've identified five reasons some are choosing to trade their dollars for Bitcoin.

1.     The belief that they will be able to sell their Bitcoin to someone else at a higher price in the future. These are generally people who don't know much about Bitcoin other than it has recently gone up in price and see an opportunity to get rich quickly. This is referred to as "The Greater Fool Theory." This is the idea that regardless of the price, there will be a greater fool who will pay more than I did.

2.     The belief that the expansion of the money supply by global central banks will lead to the devaluation of the US Dollar and hyperinflation. Bitcoin is seen as a hedge against inflation and a falling dollar. These are people buying Bitcoin for its long-term economic potential. Because the quantity of Bitcoin is fixed, it is impossible to produce an unlimited amount as is possible with fiat currency. 

3.     The interest Cryptocurrencies rose out of the financial crisis in 08-09. Some feel that the government took on too much debt to bail out Wall Street firms and large banks, that banks take unnecessary risks with people’s money and can’t be trusted. Cryptocurrencies are seen as a path to taking control of money out of central governments' hands through the adoption of decentralized digital currencies. These are people investing in Bitcoin for ideological reasons.

4.     Cryptocurrencies like Bitcoin are applications that run on blockchain networks. Some believe that Blockchain networks are the next iteration of the internet. Developers and technology investors own cryptocurrencies as technology investments and fund their applications on blockchain networks with the native cryptocurrency.

5.     There have been businesses that have added Bitcoin to their balance sheets. Most are actively or planning to provide cryptocurrency financial services. A few have replaced a portion of their cash reserves with Bitcoin. It isn't clear if this trend will continue should interest rates rise. 

Is inflation a real concern? Inflation is the economic condition of rising retail prices or declining currency value. In the 1970's we experienced a period of hyperinflation in the US.  Some are concerned that the Federal Reserve's easy monetary policy will lead to a return of inflation. There have been warnings about rising inflation since the Federal Reserve began their quantitative easing policy in 2009. Despite a decade of interest rates near zero, rising government debt, and the Federal Reserve's balance sheet expansion, inflation has remained low. Historically easy monetary policy has provides liquidity for increased economic activity leading to increased demand. The increased demand would lead to a tighter labor market. The tightening labor market would lead to upward pressure on wages. Increased labor costs would be passed on to the consumer in the form of rising prices, creating inflation. One meaningful difference now is that Central Banks all over the world are following the same path. So, when we talk about a weak Dollar, you have to ask the question, "weak compared to what?" 

Why does the Federal Reserve have a 2% inflation target?

Wouldn't it be better if prices never went up?

The reality is we need some level of inflation to keep the economy moving forward. Inflation is why you buy something today, rather than waiting six months. The expectation is that things will gradually cost more in the future than they cost today, so we buy things we need today to avoid paying more for them tomorrow. The Federal Reserve has a dual mandate from Congress to maintain maximum employment and price stability. Currently, the Federal Reserve is focused on encouraging inflation and economic activity by keeping interest rates low and liquidity readily available.

Historically a driver of inflation has been increased labor costs following spikes in consumer demand. That hasn't been the case in recent years. There are currently two primary forces keeping inflation in check: globalization and lower labor demand due to increased productivity from technological advancements. 

Globalization – For decades, there has been an increasing trend for companies to transfer labor-intensive activities to places in the world where labor is less expensive. We may not like jobs being exported to other countries, but it has served to keep consumer prices lower.

Technological Advancement – COVID highlighted the role of technology in maximizing the productivity of labor. People can leverage technology to do more. In manufacturing, we've seen increased use of robotics. In retail, we've seen increased use of kiosks and mobile phone applications to complete functions that once required human labor. All of these incremental changes serve to reduce demand for labor and upward pressure on wages.

One would think that there is some amount of liquidity injection from the government and the Federal Reserve to generate inflation. Given the anticipated increase in consumer demand combined with the unprecedented amount of economic stimulus, I think we have the best chance of seeing some level of inflation.

Will Bitcoin replace the US Dollar? No. I am absolutely positive that will never happen.

1.     The US Government is not going to surrender control of the currency. There will be some that think that the government can't stop that from happening. They are wrong. At the beginning of the Great Depression, people began hoarding gold. This prevented the Federal Reserve from expanding the money supply to stimulate the economy. President Roosevelt signed an executive order which prohibited people from hoarding gold or silver coin or bullion or certificates, under penalty of $10,000 and/or up-to ten years of imprisonment. Americans were ordered to sell their gold to the US Govt. for a fixed price. Americans could not legally own more than 5 ounces of gold until President Ford repealed the executive order in 1974. The government does not have to ban Bitcoin to discourage its use. The Federal Reserve could issue regulations limiting regulated banks' holdings due to Bitcoins' volatile nature. Congress could change the tax rate on gains on cryptocurrencies making it less advantageous to hold. The SEC could choose to regulate cryptocurrencies as securities and treat crypto exchanges as securities exchanges. Increased regulation would increase the cost of buying and selling cryptocurrencies.

2.     Due to its fixed quantity, Bitcoin is deflationary, and its use as a primary currency would wreck the economy. We exchange our time for money. Anything can be used as money; rocks, shells, beads, and precious metals have all been used as money and stores of value. If what we hold as money or a store of value is appreciating at a rate faster than the goods and services we can buy, people are incented to save their money rather than spend it. A deflationary economy is the opposite of an inflationary economy. In deflation, prices are falling, and the currency is increasing in value. People begin to delay engaging in the economy under the assumption that their money will buy more later. As consumers reduce engagement with the economy, retail demand falls, the need for labor is reduced, and unemployment rises. There is less money earned with more unemployed people, and demand falls further, requiring fewer and fewer employees. Unless the deflationary forces are addressed, a recession is likely, and a depression is possible. 

Should you own Bitcoin?

I have not recommended anyone buy or sell Bitcoin. It is speculative and volatile. Its uses aren't clearly defined or proven. It has been banned in some countries, and others are considering banning or limiting its use. If you choose to invest in cryptocurrencies, you should take time to educate yourself about what you're buying and why. Buying anything just because it is going up in price is never a good idea. There is a risk that if the vaccine is successful and people begin reengaging with the economy, some may find a better use for their wealth rather than holding it in digital currency. Any weakness in the price could discourage holders who do not have a firm conviction, and a downward price cascade could ensue. This is, of course, just speculation on my part. I hope you found this helpful.


Saturday, February 13, 2021

Is Inflation Just Around the Corner?


Video Version


Podcast Version

The Bureau of Labor Statistics released the January Consumer Price Index (CPI) report this week. CPI is a measure of inflation at the consumer level. CPI rose1.4% year over year. I know, it's thrilling! It seems people either yawn at this number or don't believe it accurately reflects what's going on in the real world.


So, what is inflation, and why is it something we need to watch right now? Inflation is an increase in prices or a fall in the purchasing power of money. Some believe that Washington's response to the Financial crisis and actions by the Federal Reserve will be inflationary.  


Congress has charged The Federal Reserve (The Fed) to use monetary policy to maintain maximum employment and stable prices. The Fed has many financial tools to help it achieve these goals, most notably adjusting interest rates and controlling the money supply. The Federal Reserve has set a target inflation rate of 2% with the belief that 2% is the rate most likely to produce financial conditions to achieve its goals. Despite their accommodative interest rate policy and bond-buying programs, 2% inflation has been elusive. 


The market interpreted the recent CPI report of 1.4% as giving Congress and The Federal Reserve cover to move forward with the planned $1.9T economic relief plan. However, I think a more in-depth look at the data and the world around us may be telling a different story, and inflation may be just around the corner.


CPI is a combination of inflation rates from different categories of economic activity. When we look where inflation is and where it isn't, I see the potential for a rise in inflation in the coming months. Used car prices rose by 10% as people began traveling more by car than by airplane. We saw an increase in the cost of food, utilities, and most other economic categories. Those increases were offset by decreases in prices of Airfare, Gasoline, and Energy. These are areas that we would expect to see prices rise as more people are vaccinated and reengage with the economy.


Since the Financial Crisis in 2009, the Federal Reserve has kept interest rates low, expanded the money supply and its balance sheet to encourage economic growth in pursuit of its Congressional mandate. Historically there has been a direct correlation between an expansion of the money supply and CPI. As the country emerges from the slowdown caused by the Pandemic, the Federal Reserve may need to turn its attention to price stability should inflation quickly exceed its 2% target. However, after more than a decade of aggressive monetary policy inflation has remained tame. I'll be paying close attention to future reports. Should inflation begin to accelerate, we would want to position investment into the areas that would benefit from rising inflation.

Sunday, February 7, 2021

How to Avoid Online Romance Scams

Several months ago, I had the opportunity to attend a webinar put on by the National Cybersecurity Alliance. The topic was general cybersecurity practices for businesses. Periodically they send me information on other cybersecurity topics. Recently, they sent an email titled "How to Avoid Online Romance Scams." With Valentine's Day approaching, I thought this would be an excellent time to take a deeper dive into this topic.

According to the Federal Trade Commission, in 2019, online romance scams were the costliest category of any scam reported, with losses totaling over $200 million and the median individual loss being $10,000. And that's just the losses that were reported. We don’t have the 2020 numbers yet but I suspect the increased isolation brought on by the Pandemic has increased the number of victims and losses.

Many people find love online. Dating applications are some of the most frequently downloaded from app stores. Most people on online dating sites are good people sincerely looking for companionship. Just as we are aware when traveling that there are pickpockets, you should also be mindful that some people online are con-artists intent on stealing your money by pulling on your heartstrings.

Anyone, at any age, can be the victim of a romance scam; however, the most common demographic is divorced or widowed women over the age of 40. Scammers are predominantly men, and women over the age of 40 tend to have more wealth than their younger counterparts.

In a recent news report David McClellan, CEO of, said they interviewed a Nigerian scammer who revealed that about 1 in 10 people would give him some amount of money.
Here are some of the red flags that someone you've met online may be a scammer.
  •     They will not meet in person. They make plans to meet but repeatedly cancel. Even if they're not a scammer, don't invest yourself in people that don't value your time.
  • There is a fantastic story or drama that creates an emergency that leads to an urgent need for money. They may claim to need money to travel home or pay for medical expenses for themselves or a family member. Even if they're not a scammer, don't get involved with someone who has more problems than you do.
  • Scammers often claim to be a Doctor working for an international organization, work on an oil rig or be in the military.
    • The US Army receives hundreds of complaints per month from victims of online scams perpetrated by people claiming to be soldiers. These people will often claim financial hardship due to a lack of support from the military. This is a common ploy by con-artists to leverage a person's guilt in persuading someone to send money. 
  • The person sends you a picture of someone who looks like a supermodel. Unless you typically date supermodels, this should be a red flag.
  • They quickly declare their love for you. People don't typically fall in love with someone they've never met. Even if they're not a scammer, this could sign some mental or emotional issues.
  • He or she doesn't use good grammar or punctuation. Most scammers are not located in the United States, and English is not their primary language.
  • A scammer's social media accounts may have few photos with posting dates that are close together. They may have few followers and few comments on their posts.
What are some things you can do to protect yourself if you suspect you’re communicating with a romance scammer?

  • Stop communicating with the romance scammer.
  • Copy and paste the emails and text messages into a search engine. There are websites that collect these message templates. You may find the same message has been sent to thousands of others.
  • Do not send money to anyone you don’t know. If you wouldn’t loan someone your car you shouldn’t give them money.
  • Don’t send pictures to a stranger that aren’t already on your social media profile. Scammers have been known to blackmail people after asking for revealing photos.
  • Trust yourself. Trust your gut. Trust your instincts. If something doesn’t feel comfortable there may be good reason.
If you have been a victim of a romance scam, say something.
If you gave someone your bank or credit card information, contact the card issuer immediately.
File a complaint with the FBI Internet Crime Complaint Center
File a fraud report with the Federal Trade Commission
Social Media platforms have methods to report imposters profiles.
Facebook – On the persons profiles there is a three-dot menu. Go to the Find Support or Report Profile option and report the profile.

Twitter -

Instagram -
Amazon Gift Card - If you gave someone the number from an Amazon Gift Card, keep the card itself and your receipt and call 888-280-4331 or go to:
Ebay Gift Card - If you gave someone the number from an Ebay Gift Card, keep the card itself and your receipt and call 866-305-3229 or go to:
Google Play - If you gave someone the number from a Google Play Gift Card, keep the card itself and your receipt and call 855-466-4438 or go to:
iTunes - If you gave someone the number from an iTunes Gift Card, keep the card itself and your receipt and call 800-275-2273 or go to: