Slow Population Growth = Slow Economic Growth

This article from the Wall Street Journal shows that US Population Growth is at its lowest percentage level since the 1920s. Because of lower fertility rates and lower immigration rates, the rate of growth of the US Population fell to below 0.5% last year, down from about 1.4% in the early 1990s and over 2% during the late-1950’s height of the Baby Boom. If this lower growth trend remains in place for a relatively long time, and many demographers believe it will, the ramifications for the economy and particularly for economic growth will be significant. Without a significantly growing population, it is very difficult to sustain significant economic growth.

The US Population Rate of Growth is Slowing

Why?

Why should economic growth suffer if population growth slows? Think about it. If population growth slows, then that means the average age of the population will get older because there won’t be as many younger or new people to replace the older people as they retire. If the workforce isn’t adding as many workers, then the only way to grow is to improve the productivity of the workers already in the workforce. Advancing technology has helped, and perhaps the increased use of Artificial Intelligence and robotics will help some more. However, the US Bureau of Labor Statistics shows that workforce productivity has remained relatively stagnant for the past 9 years. Why is this the case? Well, in your experience, as people get much older, do they get more adept at using technology or less adept? There is probably a curve, but people from their late 40’s onward likely are not as adept at technology as are younger people. We need a continuous influx of new, younger workers to stimulate productivity and to stimulate economic growth.

Japan

Look to Japan as an example of how falling fertility has led to economic stagnation. Japan’s population growth has not only slowed down, but it has also actually been declining for the better part of the past decade. This link says that Japan’s population is projected to shrink by 16% from its peak in the next 20 years. Partly as a result, this link shows that Japan’s GDP is lower now than it was 10 years ago, although growth has been picking up in recent quarters. As we know, Japan limits immigration, so its population growth is almost entirely dependent on its fertility rate. Japan’s economy is now 3rd largest in the world behind the US and China, and without a drastic change in its fertility rate, Japan is destined to stagnate. Japan has been an economic powerhouse that has produced great cars and great technology since the end of WWII but its days as a growth economy are likely over, due to its aging demographics.

IMO

I believe there is hope in the US to right the ship toward increased population growth. We could at any time let more people and more workers immigrate into the US, which would help a lot to ease the existing shortage of workers (3.5% unemployment rate!). As to policies that encourage a higher fertility rate, it is anyone’s guess as to how to do that, but there are pockets of higher fertility (such as in Utah) and we might think to emulate policies that seem to have resulted in higher fertility where such is the case. We read a lot about how we need more younger people to pay into Social Security so that Social Security remains solvent. We don’t as much read about the direct link between population growth and economic growth. If we want our economy to continue to grow, we need more young people who will eventually enter the workforce. Watch for demographic trends as a precursor to future economic trends. If you don’t watch, I will and I will let you know about them.

Writing Call Options

One of my favorite and most consistent investment strategies has been to write call options against long positions that I own. This is also called Covered Call Writing. In this post, I would like to explain this strategy, how it works, and why it is one of my favorites.

Call Options

Call options are options to buy an underlying stock at a specific price, called a strike price. Usually, 1 call option gives the owner the right to buy 100 shares of the underlying stock. It costs money to buy the call option. How much does it cost? It’s a function of what the strike price is relative to the market price of the stock at that time. The higher the strike price is relative to the market price of the stock, the less the options will cost, and vice versa. Call options typically have an expiration date which will also affect the price of the option; the longer until expiration, the more the option will cost, and vice versa. The opposite of call options are put options, which give the owner the right to sell at a specific strike price. My strategy typically does not involve put options.

Writing

Writing is another word for selling, at least in the options world. When you sell anything, whether it is a used car or a stock option, you get money for it. In the options world, as in the stock world, you can sell something that you don’t own. When you write a covered call, you already own the underlying stock, but then you sell the right to purchase more of that same stock. What is the net effect of all of this? First, you get money for having sold the call option (even though you didn’t own the call option when you sold it). Second, although you hope not to, you may be obligated to sell your stock at the strike price of the option. I’ll explain.

At Expiration

My objective when I sell a covered call option is that the option will expire prior to its being called and I get to keep my long stock position and all of the money I made when I sold the call. How does that happen? Let’s use an example to demonstrate. Let’s say I own XYZ stock and it is currently trading at $50 per share. I look and I see that XYZ has call options related to it at a strike price of $55 per share that are selling for $6 per option. How do I come up with $6 per option? It’s basically the $5 difference between $55 and $50, plus a little bit for the time between now and its expiration date. I think XYZ probably won’t rise from its current $50 to $55 between now and when the call option expires (probably a month from now), and so I decide to sell the $55 call option and pocket the $6 today. At the expiration of the call option a month from now, 1 of 2 things will happen: 1) If the market price of XYZ is below $55, the call option will expire worthless and I get to keep the $6 plus hold on to my XYZ position. However, 2) If the market price of XYZ rises above $55, say to $60, then my long position in XYZ will get called away at the strike price of $55. I still get to keep the $6 I got when I sold my call option, but I have to sell my XYZ at $55 even if it is trading at $60 at that time.

IMO

Writing call options and/or a covered call investment strategy is considered to be a relatively conservative way to use existing long assets to generate current income and total return. Because I already own the stock and I only write options to the extent that I own the stock, my downside is that I potentially give up some of the stock’s upside in return for generating current income. Of course, there is always a downside in owning a long position, but that downside is not magnified by writing a call against that long position. If you don’t mind taking the risk that your stock might go up more than you figured and that you might have your stock called away from you, then you too should consider a covered call writing strategy in order to generate current income. I plan to blog more about this in the coming weeks, so please stay tuned, or just go ahead and contact me now if you can’t wait to get started with your own covered call strategy.

Tesla: I Was Wrong (So Far)

My June 29, 2018 blog post on Tesla stated why I thought Tesla (TSLA) was not a good stock pick. The elimination of government tax credits combined with increased competition from new entrants in the electric car market would make it difficult for Tesla to make a profit on its electric car business and therefore make it difficult for Tesla to survive.

Weekly Chart of Tesla from Finviz.com

Stock Performance Since Then

It looked for a long time like I was right, especially when TSLA bottomed at under $200 during 2Q 2019. However, Tesla’s rally over the past several months shows me I wasn’t right. On June 29, 2018, when I posted my Tesla blog, Tesla closed at about $343 per share. It has been a rocky 18 months since then, but as I write this, TSLA is trading at almost $471, an increase of 37% in 18 months. Tesla is showing it can deliver cars, if not at the rate they would like, then at least at a rate with which investors are satisfied. The latest good news is that Tesla’s China manufacturing plant is up and running and delivering cars.

Why Is Tesla Stock Delivering?

Tesla is showing that demand for its cars is relatively price-inelastic. People still want to buy Teslas despite the run-off of the tax credit. Tesla cars are proving to be the cream of the crop among electric vehicles and there is always a demand for top of the line products in any marketplace. Moreover, we are at a time where Tesla is out there producing cars while other electric car alternatives, while promising, are not yet on the market for sale. Tesla still owns a relatively unique place in the electric car market.

Not Out Of The Woods

How long will Tesla’s unique market position last? According to the Wall Street Journal’s car columnist Dan Neil, Tesla will have a lot more competition by this time next year. This article describes, automaker by automaker, all of the new electric car options that are about to hit the market. Some are stand-alone electric car makers, such as Tesla, but most are divisions of well-financed worldwide automakers (such as Ford, Volvo, and Jaguar) who will be introducing electric cars not so much to make a profit (although profit does play a part, for sure) but to comply with company-wide fuel economy mandates. It still remains that, although Tesla needs to make a profit on electric car sales, the likes of Ford, Volvo, and Jaguar do not, as long as they can recoup any losses from electric car sales through increased profits in standard gasoline-powered cars.

IMO

Can Tesla stock continue this torrid pace and continue to rise, even above its current lofty $471 per share? It certainly helps that they are successfully delivering cars here in the US and in China. It also helps that Tesla is still perceived as the highest quality electric car available. However, the longer-term future is not clear. Let’s see how the Fords and the Volvos of the world market their electric cars. They could succeed, but they could also fail miserably, precisely because their entire existence is not predicated on selling electric cars. Tesla gets it right because they have to. I am not optimistic that Tesla stock will continue to outperform because of the competition, but Tesla does look better to me now than they did when I first wrote about them in June 2018.

Iran and Oil

The US military droned Iranian bad guy Soleimani on January 3, and what was the world oil market’s reaction? Meh. Granted, the near-term future price rose about $2/barrel from about $61 to just over $63, a 3+% jump that is not insignificant. But this was a major military action by the largest world oil producer against another large oil producer, and all we have is a 3% jump in prices? As I said, Meh. In prior years and prior decades, a similar military action could have moved world oil prices ten times that. For instance, when Iraq invaded Kuwait in 1990, the spot price rose from $21 to $28, a 33% jump, before ultimately reaching $40. Then, when the US invaded Iraq and it soon became evident that Operation Desert Storm would be a smashing success, prices dropped to $20/barrel, a 50% change. (See this article for backup). So, why the ho-hum reaction to the US’s takeout of Soleimani?

Drill, Baby, Drill!

The Emergence of US Production

The most significant reason is the huge increase in US oil production such that the US is now the leading daily oil producer in the world. There is a greater abundance of oil available in world markets than there was 30 years ago because US producers have ramped up due to technological advances such as hydraulic fracturing. According to the Energy Information Administration, in 2019, the US was the leading producer with almost $18 million barrels per day or 18% of world production, far ahead of #2 Saudi Arabia which had 12% of daily world production. Thank US frackers for keeping world oil prices relatively steady despite heightened geopolitical tensions.

The Information Economy

Secondly, as the tech sector has grown, the importance of oil has shrunk in that the percentage of the US and the world economy that is dependent on stable oil prices have declined. The price of your new iPhone or your new Lululemon outfit is not a huge function of the price of oil or where the oil is coming from. Granted, we still drive cars that burn gasoline, and oil is a part of chemicals and plastics that are part of new-age products. However, oil is not nearly as central to the US economy as it was when the Iraq/Kuwait situation developed during the Bush I presidency.

Alternatives

Lastly, at least for this posting, we have developed alternatives to oil on a massive scale. Electric cars are nice, but the power source that is charging electric cars is likely natural gas or perhaps even solar. Nearly all of the natural gas consumed here in the US was produced here in the US (or perhaps in Canada or Mexico). Crude Oil is not a major factor in US domestic energy production and is less of a factor now than it was 30 years ago.

IMO

If you are looking at heightened tensions and perhaps war (of some scale) between the US and Iran as an opportunity to go long on oil futures and make a big killing in the process, think again. Oil may go up or at least not go down as long as the US and Iran are at loggerheads, but oil prices could drop quickly if there is a perceived easing or lull in the tensions. The world of oil has changed a great deal in the past 30 years.

Happy New Year! Time to Rebalance?

Hope your Holiday season was peaceful and that you enjoyed your New Year’s festivities, especially the football! I love the Holidays but I also love cleaning up after the Holidays and getting ready to hit the ground running in the New Year.

Rebalance?

The turn of the calendar makes for a logical time to look at your portfolio and think about what you are trying to accomplish. You are another year older – should you be in more “safe” assets in your investment portfolio? Are bonds “safe”? Has one part of your portfolio outperformed while another has underperformed? If so, should you sell the winning part so you can buy more of the losing part? It seems counterintuitive but that’s what a Rebalance is.

My Recommendation

Let’s say you had wanted to be 60% in stocks and 40% in bonds in your investment portfolio at the start of 2019. Stocks were strong in 2019, particularly tech stocks, and so let’s say you ended up 2019 at 62% stocks and 38% bonds because stocks outperformed. Now, should you sell 2% of your stocks portfolio and buy 2% more of bonds? Up until now, I would say that the transaction cost and the bother of it all weren’t worth it. However, if your stocks are (properly) invested in index mutual funds or ETFs, and you have your money in an account that charges little or nothing for commissions, then go ahead and do the rebalance, even for only 2% of your portfolio. If all it takes to rebalance is a couple of clicks, then go for it. Also, if you are contributing to your retirement account on a per-paycheck basis, make sure your election of how that money is invested fits with your portfolio composition objectives.

Another Recommendation

Within your “Stocks” allocation, you have likely sub-allocated a portion to Tech, a portion to the S&P 500, and perhaps portions elsewhere. Whereas Tech outperformed in 2019, I believe there will likely be a reversion to the mean in 2020. Therefore I believe you should reallocate somewhat out of Tech and into other sectors, including International stocks. For instance, the EEM, which is the ETF for Emerging Markets, has been on a pretty steady rise since August 2019 and is hitting new highs now. I believe other world economies will emulate the US economy in 2020 and show growth, not the other way around as some economists have predicted. Don’t bet the farm, but I believe it is prudent at least to have some money allocated so as to participate in world economic growth.

IMO

I believe the zero commission world makes it easier and less costly to reallocate and so I believe you should go ahead and do so, even for small percentages of your portfolio. Now is a very good time to reallocate, and you should make it a habit to do so every New Year’s Day. In fact, as you watch the Rose Parade every year, open up your laptop and do some simple math (if it isn’t already done for you) and make sure your portfolio allocation is in line with your objectives. Then go clean up the mess from Christmas after that.

Enabler

“Enabler” is now a pejorative term. Due to pop psychology, when we think of someone who is an enabler, we think of someone who allows and makes excuses for someone else’s bad behavior. A spouse may enable their spouse’s drinking problem by not confronting them about it and forcing them to change their behavior. A company may enable an employee’s bad behavior toward the opposite sex by allowing them to keep working there because they are a high producer. These are examples of enabling bad behavior.

Good Enabler

However, as a Financial Planner, I like to think of myself as a Good Enabler. In my job, I try to provide advice and help clients set goals that enable them to achieve their financial and life dreams. I provide clients assurance that their investment portfolios are soundly constructed so that they can sleep at night and that they can thereby focus their attention on where it should be, on their families and their jobs. This is enabling clients in a good way, in an effort to promote their good behaviors.

Too Busy

Are you too busy to deal with your own finances? There are a lot of people out there who are so busy with their day-to-day routines of working mega-hours, commuting, caring for family members in need, and, right now, getting ready for Christmas, that they don’t have time or perspective to deal with stuff like looking at their retirement fund allocations or setting goals in an effort to make sense out of why they are engaged in their routines. As a result, they feel caught in a trap and perhaps losing motivation. If this somewhat describes your situation, or if you have a friend or family member who sounds like what I am describing here, then perhaps I can help. I can enable them to set goals so that they can re-charge themselves and go forward with a better perspective on the meaning of their own lives.

IMO

What I am saying here is that the job of a Financial Planner is much more than someone who helps with the once-a-year reallocation of their portfolio. Instead, a good Financial Planner is a good enabler, someone who helps to prop up sagging motivation or who helps give a client meaning to their daily routine. These are “high-touch” skills that are difficult for a robot or a computer to replicate and are the real reason one should work with a Financial Planner. Please contact me if you want me to enable you to achieve your own piece of mind!

Bias In Investing

The Horowitz Inspector General’s report concluded that no one testified that political bias let to certain actions that resulted in FBI surveillance on the Trump Campaign for President in 2016. This means that the word “Bias” is back in the news in a big way.

Investing Bias

This led me to think about various forms of bias that we find with investors. We should all be aware of these biases and make sure to avoid them in lieu of unbiased rational reasoning, if possible. This is hard to do, but we can try. Here are some common biases we find in investing:

  • Anchoring Bias: This is where an investor gets caught on one piece of the puzzle and doesn’t see the entire picture. For instance, think about someone who bought GE all the way down to its current price of about $11 (although it hit $8 earlier this year and may be on the rebound). That person may have thought, “It’s GE, for cripes Pete! It has to turn around!” And it may, but that investor may have lost a lot of money on the way down because they were anchored in GE’s past glory and not in GE’s troubled waters ahead.
  • Confirmation Bias: This is where an investor has a preconceived notion of a company’s direction and then seeks and promotes data that only promotes that notion and disregards countervailing data. For instance, a customer may have a bad experience in a restaurant that is an outpost of a publicly-traded company. The customer decides, as a result, the company is going under and so they short the stock. Their anecdotal experience may reflect on the entire company, or more likely it reflects on that customer’s unrealistic expectations, or maybe something like the Yogi Berra phenomenon of “nobody goes to that restaurant anymore because it is too crowded”.
  • Overconfidence Bias: This is where an investor or perhaps an investment advisor thinks they are better than they really are. Think about Garrison Keillor and his fictional Lake Wobegon, where everyone was “above average”. Overconfidence and failure to consider that one may be wrong about an opinion can lead to poor decisions. For instance, maybe you have invested in 3 new stocks over the past few months and all of them have gone up. Now you think you are either on a hot streak or have gained some wisdom that others don’t have and so you bet the farm on the next play you see because of your high level of self-confidence. What could go wrong?

IMO

These are just a few examples of bias that we Financial Planners see. They are part of the growing fields of Behavioral Psychology and Behavioral Finance. It is difficult for someone to be sufficiently self-aware that they see these biases in themselves. This is another reason why you should work with a Financial Planner: To get a third-party (hopefully) unbiased take on whether or not you are biased in some capacity when it comes to your own finances.

Data-Driven vs. Data-Informed

The terms “data-driven” and “data-informed” come up when the Federal Reserve Bank makes a statement regarding the economy and the Fed Funds Rate. Their latest statement on December 11 was that the Fed would hold rates steady, and then this:

“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

With this statement, is the Fed being “data-driven” or “data-informed” about future interest rate moves? What is the difference between the two?

Data-Driven

“Data-Driven” means you let the data guide your decision-making process. You don’t have any particular agenda you want to accomplish and you are being reactive to data as it avails itself when you make decisions or change your tactics as they relate to future policy. With respect to the Fed, as an example, if it were data-driven, if the unemployment rate spikes, even a little, then the Fed might decide to lower the Fed Funds rate, or at least not to raise it, in an effort to stem weakening economic conditions. Likewise, if inflation spikes, even a little, the Fed might raise rates. In these examples, the Fed is reacting to data in an effort to follow their twin mandates of low inflation and high employment.

Data-Informed

“Data-Informed” is sort of the opposite of “data-driven”. Data-Informed means you let data act as a check on your intuition or bias. You have a preconceived idea of where things are headed and you analyze all data to confirm that your preconceived idea is correct or not. If you read the italicized statement from the Fed, it sounds like the Fed is now more data-informed than data-driven. The Fed has an objective of 2% inflation and will set interest rate policies in an effort to achieve 2% inflation. The Fed has a preconceived idea that 2% inflation will be good for the US economy. True, the Fed will consider data for the next interest rate decision, but they are showing an intuition as to the level of inflation they feel appropriate and will check future data to see if the economy is heading in the direction they want.

IMO

What does this all mean for you? Think KISS – keep it simple, stupid. Rates are low and staying that way. The Fed doesn’t see out of control inflation – quite the opposite, they want to see a bit more inflation than they have recently. They certainly do not see a recession on the horizon any time soon. All of this is bullish for the financial markets. The Fed may be more data-informed than data-dependent, but they are not being overly active at this time, and that is good news for the economy.

5 Things I Do To Get Stuff Accomplished

I have my own company and work by myself quite often. I set my own agenda. Sometimes my temptation is to forget all of my work for the day and go and do something fun instead. To counter this temptation, I have several mechanisms I have developed over the years that help me get stuff accomplished. Here are 5 of these mechanisms:

Have a Set Routine: My “get up in the morning” and “go to bed at night” hours are pretty set. Even on the weekend, though I may sleep in an extra hour, I try to go to bed at about the same time. During the week, I wake up, check the markets and the messages, then I usually do some exercise before sitting down for the day. If you have a set routine, you know when you are available for any outside calls or meetings and you can more easily schedule them accordingly so as not to cause major interruption with the rest of your schedule. It also lets you slide into the productive part of your day without having to think about it.

Write Stuff Down: I have a notebook in which I write anything of note, and I carry that notebook everywhere. That way, if I am not at home, I most likely have any notes I need with me. I am more likely to remember to do something if I have written it down. Some people use their Notes function on their computer or smartphone – that can work as well.

Do the Hard Stuff First: If you have the choice to do so, I recommend doing whichever task you have that takes the most energy or brainpower first, or at least early on in the day. I get more tired and addled as the day wears on and so I can think more clearly during the early part of the day. I write most of my blog posts early in the morning, for instance – I don’t know how brilliant they read, but at least I have made the effort to write them. When you finish your most difficult task early in the day, you can take a deep breath because everything else for the rest of the day should be a breeze by comparison. You can give yourself a pre-lunch pat on the back.

Leave A Task Unfinished: Instead of aiming to finish everything you have planned for the day, leave something unfinished. That way you can wake up the next morning and easily slide into the next day by finishing what you started the previous day. You will probably finish that task quickly because your brain will have had all night to sort through how to get it done. When I read a book, I often quit reading right in the middle of a good part because then I will be eager to get back to it as soon as I can.

Make a Plan For Tomorrow Before You End Today: Don’t wake up in the morning without a plan or a goal for the day. Instead, make your plan before you go to sleep the previous evening. Maybe the day’s plan is already set for you – if so, great! No thinking involved. However, if you have to self-motivate yourself (as I do many days), you will be motivated to get out of bed and get stuff done if you have already planned what to do the day before. You will find that your level of productivity and sense of accomplishment will increase if you don’t always have to think about your next step because you have already done so.

IMO: A lot of these pieces of advice fall into the Yoda category: Don’t think, do! Now for those of you who have an outside job and whose schedules are already over-filled, this column may not have as much relevance. However, perhaps you are sick of that over-scheduling and are contemplating retirement or at least wishing you had more free time. If that’s the case and you are one who likes to get stuff done, then consider my pointers here. Also, how does this relate to financial planning and investing? Well, what is the second word in financial “planning”? You have to plan in order to be successful with your financial life. Don’t put it off: Develop your financial plan and then live your life accordingly. Put your plan in action.

December Sell-Off?

Don’t be surprised if we have a sell-off in the stock market during December. Why? Because sell-offs happen when you least expect them, and because markets have been moving up a little too smoothly with decreased volatility during the past year. It all could be a bit too good to be true. I believe we could see a return to higher volatility and a market downturn between now and December 31.

Chart for SPY (S&P 500 Index ETF) March to December 2, 2019

YTD 2019

The S&P 500 ended November up about 25% YTD and with the VIX Volatility Index at about 12.6, at the low end of its recent range. The S&P 500 has gone up almost in a straight line since October 1, despite major headline headwinds. Larger institutional investors may look to sell and book some profits this year despite underlying fundamentals (low unemployment, low interest rates, positive GDP growth) that point to improving market conditions. My thought is these large investors sell now, book a positive 2019, and re-invest in 2020 and see what happens then.

What Should You Do?

If you are a long-term investor, just hold tight. Don’t sell in advance of something that may not happen, but don’t add to positions either. A market sell-off may feel like a short sharp shock, but typically a sell-off will have a basic pattern and will play itself out over a time period. If a sell-off does happen, I would view it as a technical sell-off, not one based on declining market or economic fundamentals, although the financial press may try to put that false narrative out there. If that is the case, and I am right about large investors wanting to book 2019 profits, then look to re-engage sometime right after 1/1/20.

IMO

I get the most worried when things are going a little too well. Now is one of those times. Though I am not losing sleep, I believe we could see some rough sees for the remainder of 2019. I recommend you hold your ammo for now until we get some confirmation first of a sell-off and then of an uptrend that ends the sell-off.