The Almighty Dollar

I recently listened to a portion of The Glen Beck show on AM Radio. During this portion, Beck opined that the days of the US dollar’s status as World Reserve Currency are coming to an end, which will lead to soaring inflation in the US since products (such as oil) will no longer be paid for in Dollars but in some other (unnamed) security or basket of securities. Beck says the reason for the demise of the Dollar is the US Federal Reserve and their policies for the last several years, especially with the explosion in Fed activity since the onset of Covid. Citizens can protect themselves, says Beck, by buying Gold. By the way, Beck is compensated by a Gold brokerage company. Beck is not alone in this belief: it has been out there since the US removed itself from the Gold standard nearly 50 years ago and it gained new traction 12 years ago during the last Financial Crisis.

Supporting Evidence

There is some evidence to support this thought. Since before Covid, the US Dollar Index has fallen about 6-7% and the price of Gold has risen about 25%. Investors in the Futures of these assets believe that higher inflation as a result of the recent expansion of the US money supply is in the offing and that the US Federal Reserve’s target of 2% expected inflation is too low. A 6% decline in the value of the Dollar is equivalent to 6% inflation of the cost of goods purchased using other currencies. Anecdotally, prices in the grocery stores are up as are prices in restaurants, whether to eat in or to take out. Of course, these are unusual times, which could explain these price increases. Dormant for many years, inflation may be making a comeback, which could cause the Fed to raise interest rates with the thought that a rate increase could address higher inflation. The point is, there may be some supporting evidence to this “End of the Dollar World” theory.

The Problem

My problem with the theory is and always has been, What will replace the US dollar as the Reserve Currency? The Euro is the second most-used currency in the world, but the Euro zone has its own issues with Covid and with lagging economic growth. In addition, the Euro has only been in existence for 21 years, so now is not the time to switch the majority of global payments to such a young currency during such uncertain economic times. What about the Chinese Yuan? No way the Yuan, controlled by the Chinese Communist Party will become the World Reserve Currency, no matter how large the Chinese economy continues to grow. In short, there are no other currencies currently circulating in the world that can come close to matching the value and the stability inherent in the US dollar, even after a 6% decline in the Dollar Index.

Gold

One interesting theory is that the Dollar will be replaced by Gold as the Reserve currency. That would mean the the US would have to use Dollars to buy Gold in order to pay for oil, among other products. Alternatively, the US could re-adopt the Gold Standard for its currency that was jettisoned during the Nixon administration. President Trump’s latest nominee to the Federal Reserve Board, Judy Shelton, is an advocate of the return of the Gold Standard, and her nomination is considered controversial as a result. My take: A change from the Dollar to Gold as World Reserve Currency would only widen the gulf between the haves and the have-nots during a time when social engineering thought is heading in the opposite direction. Keeping the Dollar as the reserve currency, with all that it entails, still helps with the issue of wealth and income inequality, at least more so than would a Gold standard. While I believe there are some arguments that have merit with respect to the US returning to the Gold standard, especially that it helps to maintain fiscal and monetary discipline, perhaps at the cost of limiting economic growth, I don’t believe that there is the political consensus here in the US to return to the Gold standard. If Beck and others who fear Weimar- or Argentina-like inflation turn out to be right, then perhaps the consensus will shift. A 6% decline in the Dollar Index is not enough to tip the scale.

IMO

Like it or not, I don’t side with Beck and the others who the US economy is about to collapse due to runaway inflation. Perhaps higher than 2%, but not runaway inflation. I see the Dollar remaining as the World Reserve currency because there are no good alternatives out there. Everybody everywhere, not just the US, is affected by Covid and the economic shutdown. Vaccine or not, Covid will be with us for many months or years. Despite its higher case count, the US economy remains the world’s strongest, and the US is best positioned to lead the world to economic recovery. As I believe World Reserve Currency status is a proxy for World Economic leadership, so to do I believe that the crown will continue to remain on the head of the USA. The almighty Dollar will remain almighty.

Combobulate

Someone recently told me that things in their life were discombobulated. That is a common word that means out of sorts. That got me to thinking, what is the opposite of discombobulated? Is there such a word as combobulated, and what does it mean?

Combobulate

I looked it up and it turns out that combobulate is a word, and that its meaning is relevant to how one might build an investment portfolio, particularly during this Covid period. “Combobulate” means to put together in a mysterious manner, or to bring something out of a state of confusion or disarray. Doesn’t it seem that we are constantly in a state of confusion or disarray, perhaps more so right now with Covid, a looming Presidential election, international economic uncertainty, and any number of other issues. Among all of this, we are expected to put together a financial plan and/or to stick to a plan that we previously put together. How do we do that amid all that is uncertain? We combobulate it! Despite the state of confusion and disarray out there, we go to work every day (or perhaps today we log into a video conference); we invest our savings according to some formula that works for us; we carry on with our lives as best as we can.

Wizardry

While I am making the practice of Financial Planning sound like wizardry or alchemy, it really isn’t, or at least it doesn’t have to be. We are not mysteriously creating gold out of common elements. Instead, it is the “Planning” aspect that is important. We design a financial plan that will sail despite the roughness of the seas. In order to do this, we set objectives that should be at least somewhat long-term. We believe that the periods of rough seas will likely be followed by calmer periods because they have in the past. If we have a goal or objective and a plan that we believe should get us there, we can rise above the confusion and disarray (especially that which is propagated by the financial and general news media) and achieve our goal. This especially if we believe the future will be anything like the past.

IMO

If you want to feel like a wizard, if not actually become a wizard, just think of yourself as such as you combobulate your financial life plan and your investment portfolio. Even if you do something simple like go to work, store your extra scraps into a retirement account, and allocate those scraps according to some stocks vs. bonds formula that works for you, then you should feel like you have achieved some sort of wizard status because you have done so out of a state of confusion and disarray. Or, if you don’t feel too wizard-like and unable to combobulate yourself, please contact me for some help!

Saratoga As Never Before

Saratoga Race Track opened on July 16 to thoroughbred horse racing with no fans in attendance. Only a limited number of horse trainers and owners are permitted to be at The Spa to watch their horses. The verdict so far: A huge success!

Big Fan

I am a big fan of the Saratoga thoroughbred meet, which this year spans 8 weeks, and I have written something about it in past blog posts. My past posts have been about the mathematics of odds and gambling and how investing in the stock market is different than gambling at the horse track. The horse track should be viewed as entertainment, as opposed to a place to earn a living, and the money you gamble should be a part of your entertainment budget that you are willing to lose. Unless you work in the horse racing industry, if you view horse racing as something more than just entertainment, then perhaps you have a problem.

Handle Up

That said, I am interested in the meet’s economics, and the news here is very good despite the “no fans” policy. The New York Racing Association (NYRA), which operates Saratoga, Belmont and Aqueduct, reports that the Week 1 handle was up about 9% this year over last year. More recently, last Saturday August 1’s handle was up about 13% over last year’s record handle, Saturday having been Whitney day with several graded-stakes races. It’s good for the horse racing industry when the handle is up, even though it may not be so good for those who have a gambling problem, so a rising handle is good news on the whole.

More Accessible

How is it that the handle (the total amount of money that people bet on a given race or a given day) can be up when nobody can go to the track? The answer is increased accessibility. As the in-person experience has become unaccessible, other ways to experience the Saratoga meet have become more accessible. First is online betting. As the array of online stock trading platforms have transformed the investment business, so too has online horse betting transformed its own industry. Online betting on horses now seems to be hitting a critical mass as people seek an entertainment outlet as they work at home.

Increased TV Coverage

The second factor that is spurring growth is increased live TV coverage. Specifically, Fox Sports is now airing the entire Saratoga card every day live, with its coverage devoted exclusively to Saratoga. Coverage in prior years was either not live or not of the complete card or not exclusively Saratoga, and its objective was to cause people to want to go to the track in person rather than to bet on the races online. The exclusive live full-card TV coverage of each Saratoga race makes the entire meet more accessible to the betting public, which results in a higher handle.

Not Everybody Wins

Just because the handle is larger doesn’t mean that everybody wins in this newly-emerging economic model for the Saratoga meet. For instance, people are not buying food, drinks, or souvenirs while at the track, and hotels and those who typically rent out their houses to horse people during the meet aren’t doing so this year. But Covid is still with us now and we hope it won’t be next year or the year after. Let’s hope that the beneficiaries of the in-person racing experience will bounce back when (not if) fans are allowed back to the track.

Good News Among Bad

The good news about increased handle comes at a time when the industry can really use it. Headlines in the past few years pre-Covid in the industry have been about the deaths of horses and the closing of tracks amid fewer horses racing. These issues are also still with us. Though they look big and strong, thoroughbred horses have some very fragile parts, and they are inbred. Trainers who bend the rules by using performance-enhancing substances also don’t help the image of the sport. But the horses themselves are beautiful and watching them race has aesthetic appeal. Let’s hope the increased handle will somehow be used to address some of the problems that have beset the horse racing industry in recent years.

IMO

I believe the cat is out of the bag with respect to more accessible online betting and more complete and exclusive coverage of the Saratoga meet. Fans will eventually return in person to the track. When they do, let’s hope that they add to the track handle and the overall track economics without cannibalizing any of the handle through online sources. And let’s hope that this all spurs improvements in horse (and jockey) safety and more money invested in the beautiful thoroughbred horses!

George Costanza

In a famous “Seinfeld” episode, the character George Costanza laments after a walk on the beach that his life hasn’t turned out the way he expected, that his decisions have been wrong and he would have been better off had he done the opposite of what he decided to do. I’m sure you have gone through periods in your life when you have felt the same way, as I have, especially with respect to investment decisions. But is there a way to insulate yourself such that your investment performance is not subject to your moods and/or the decisions you make on a periodic basis? I believe there is and that you needn’t live your life like George Costanza, rueing the decisions you have made.

Jason Alexander as George Costanza

The Keys

I believe the keys to stable long-term investment performance are asset allocation and a goal to hit singles and not necessarily home runs. If you develop a plan and stick to it somewhat regardless to what the market does on a periodic basis, you will find success no matter what decisions you make based on your thoughts on any day.

Asset Allocation

Asset allocation means you have a certain percentage of your investable assets in stocks, bonds, alternatives such as real estate or gold, and cash. When you are younger, you can afford to take more risk so you allocate a greater percentage toward riskier assets; when older, allocate more away from risk and into short-term bonds and cash. Though a 60% allocation toward stocks is normal, I advocate a higher percentage in stocks unless you truly need more money in the short term and can’t hold stocks long term. You might look to reallocate every year or so, but not more frequently. Keep it simple and your performance should work out for you in the long run.

Hit Singles

If you invest in individual stocks, you are trying to hit home runs. If you invest in stock index funds, then you are aiming for the 3.5 hole, as Hall of Fame singles hitter Tony Gwynn used to say. Go ahead and take a swing for the fences once in a while and with a very small percentage of your portfolio, but keep most of your money allocated to stocks in index funds. Stocks in general outperform over time, but specific stocks are subject to specific company risks. Don’t let the appeal of the long ball get in the way of developing and sticking to an investment formula that works for you.

IMO

Don’t regret your decisions and don’t do the opposite of what you believe. If you stick to a long bias and long-term investment approach, you will more likely achieve your investment goals and you will not decide that you are a poor decision-maker after a walk on the beach. This is very important to your future and so you should take it seriously, even if it means you forego some opportunities along the way. Some of those opportunities may pan out, but others may not, and a long-term approach usually does pan out.

Tax Rate Roulette

Back in February, I wrote in my blog post titled “Retirement Income” that I recommend that people wait until at least Full Retirement Age (FRA) to file for Social Security rather than file at age 62 when you are first eligible. While this wasn’t the main point of that blog, the point does reflect my position. If you can wait until FRA and you don’t have extenuating circumstances such as poor health, you should wait to file because your benefits increase by about 8% per year for every year that you wait.

Reader Response

A reader responded to that post with a good question: What if you file for Social Security at 62, use that money to pay bills and live on, and instead refrain from drawing on your IRA/401K and allow those accounts to continue to grow tax-deferred at perhaps 6% to 8% per year? Wouldn’t you be better off then instead of waiting to draw your Social Security at FRA?

Tax Rate Roulette

My first thought is it doesn’t matter at one level. If you are in the situation such that you need to draw either Social Security or your IRA to pay your bills and both offer an 8% tax-deferred return by not drawing, then it doesn’t matter whether you draw from Social Security or your IRA. Both are taxable income to you, but if you are in the situation that you need to draw to pay bills, then you likely aren’t paying a lot of taxes. However, while it is pretty certain that your Social Security benefits will grow 8% per year, it is not at all certain that your IRA will, and some years will be better than others. On balance, I say draw the IRA before Social Security.

On another level, the answer depends on tax rates. Do you think tax rates in the future will be higher than tax rates today? Especially now that the Government has pumped an additional $3 Trillion into the economy, thereby adding to the deficit? If you believe tax rates are going up, and you have income out there to draw now vs. draw later, then it makes sense to draw more now at a lower tax rate than to save it and draw later at a higher tax rate. Since your Social Security benefit is fixed and your IRA draw is up to you (until you reach age 70.5), then you can opt to draw more of your IRA now and save your Social Security until later and perhaps save on your lifetime tax bill. There are so many variables in this equation that it is not an apples-to-apples conversation, but all things being equal (which they admittedly are not), then paying a lower tax rate now may be the better alternative for you. Then again, the equation changes if you have other sources of income that can tide you over such that you needn’t draw on either Social Security or your IRA until you truly retire.

Slott

Regarding the tax rate now vs. tax rate later argument, I am quoting Ed Slott, regarded as one of this country’s foremost IRA experts and who I have heard speak in person. I recommend you look at Ed’s website, irahelp.com. He has lots of great information about strategies regarding when to draw on your IRA. There are free sections and paid sections to Ed’s website – don’t pay unless you are really into the subject. Ed’s is the best website I have seen about this topic and I highly recommend it.

IMO

Everyone’s situation is different. Here I am providing you a big-picture way to analyze and make this decision using projected rates of return and tax rates. You can use that as a framework but your own specifics will dictate the decision. My ask: If you are facing this decision and aren’t clear how to analyze it or as to which factors are important and which are not, please contact me to help sort through the situation. Yes I charge a fee but hopefully you will make a better decision.

A Grain Of Salt

Famous investors – hedge fund managers and the like – appear on CNBC and other financial media outlets frequently. Leon Cooperman, Jim Chanos, Ray Dalio, Carl Ichan and Paul Tudor Jones are familiar to CNBC addicts. Most famously, William Ackman said “Hell is coming” back in March on CNBC, at the outset of the Covid-19 economic shutdown and related stock market downturn. When you see, hear, or read one of these managers make a statement, what should you do as an individual investor? After all, these guys are billionaires, so they should know what’s up, right?

A Grain of Salt

It turned out that Ackman’s fund made a $2 billion profit by shorting the market during the March downturn. Did he use his platform on CNBC to manipulate the stock market so as to maximize his profit from his short position? I wouldn’t go that far, and the SEC hasn’t investigated him – yet. However, mega-investors can be ruthless and don’t seem to care about their public perception as long as they make money for their clients. I believe that a lot of the managers you see on TV have an agenda greater (to them) than to inform the public what they think the stock (or bond) market is about to do. They want to make money for their clients or investors, and if you are watching them on TV, you are most likely not their client, and so you are not their primary interest. So, be skeptical when you hear something from one of these investors. Understand where they are coming from, especially if the TV interviewer doesn’t do a good job of cross-questioning the investor. Be skeptical, and take what they say with a grain of salt, as the old saying goes.

Buffett

What about Warren Buffett? The soon-to-be 90 year old “Sage of Omaha” is in financial media as much as anyone. His track record as an investor is unparalleled, and he seems like a friendly old man. Why shouldn’t you trust everything he says? Because even he has his own agenda, which is to maximize the value of his company, Berkshire Hathaway, for his shareholders. While Buffett may not use the media to talk up or talk down a particular stock or an entire sector or market the way others may do, he is projecting an image for himself and his company. He and his bridge partner Bill Gates started the Giving Pledge, which is a really good thing, but Berkshire Hathaway is not part of it. Buffett wants to make as much money for himself and his investors as he can, just like any other manager.

What To Do Instead

Instead of listening to what one of these managers says and acting accordingly, you should do what they do, not as they say, especially Buffett. Buffett’s formula is: Do your homework; buy stocks that you believe are undervalued; hold them for the long term; only sell when you think the world has changed for that stock. That’s a great formula to emulate, and one that has served many managers well over the years, especially Warren Buffett.

IMO

The financial media is like the rest of the media, especially with respect to talking head interviewees. Be very skeptical of what they say and don’t react solely based on their words. Instead, be confident with your own strategy and methods. Just because you aren’t being interviewed on CNBC doesn’t mean you aren’t as smart as whoever is being interviewed.

The IRS and COVID

If you think the place where you work is in bad shape or at least less efficient because people are working remotely due to Covid, then imagine what the IRS must be like! IRS offices have been shut down, and while some have reopened, they are not yet fully back and there remains a backlog, meaning your tax refund, if you are owed one, could be delayed.

July 15

This past Wednesday, July 15, was the deadline to file your taxes and make any payments due on 2019 taxes. I trust that if you did not file on the traditional April 15 date that you did complete your filing by Wednesday.

If you did complete your filing and if you filed via old-fashioned paper filing, it is likely that any refund you are owed will be delayed. According to this article in the Wall Street Journal, which I highly recommend as it will answer some FAQ’s that you might have, the IRS, while it has reopened somewhat, is still working through its backlog from April 15. After that, the IRS can start reviewing returns filed since April 15, including those filed on the July 15 deadline. I’m guessing that will take a long time. Electronic filers are faring better.

IMO

The IRS is staffed by people (believe it or not), and IRS people have been subject to the same Covid shutdown restrictions as other workplaces. In this light, filing your tax returns via old-fashioned mail-in doesn’t seem to be the best or most efficient way to do so especially if you are owed a refund. You probably have stopped hand-writing letters and post cards and sticking those in the mail, in favor of email or text messaging. If that’s the case, do the same with your tax returns and e-file them. I am likely preaching to the choir here, but if not, get with it! No time like the present to start making your tax filings online. A different government agency, the Post Office, loses out in the process, but that’s a different conversation.

The Inflation Picture

The US Department of Labor posted inflation data through June 2020 earlier today. The picture is mixed, but bodes well for continued Government intervention in the economy through continuance of such measures as the PPP and enhanced unemployment benefits. This is good news for a lot of people especially with the increase in Covid cases throughout the US which led to the semi-closure of the California economy as of yesterday.

The Specifics

Per this article from Reuters, the CPI increased 0.6% in June, which was the largest monthly increase in nearly 8 years. That sounds bad, but it’s not so bad if you dig further and look at “core” inflation, which is total inflation minus the volatile food and energy sectors. Core inflation was up only 0.2% for the month and was up only 1.2% for the 12 months through June 2020. My take: Food costs more (we know that by having gone to the grocery store) and the price at the gasoline pump increased but from a very low base, but we aren’t going out to eat and likely still aren’t commuting to the office so the total that we spend on food and gas is likely down.

If You Think About It…

If you think about it, it is probably right that food costs more, both at the grocery store and at restaurants. The food industry has been undergoing an unprecedented change in its business model, especially with respect to the supply chain. People stopped going to restaurants but they didn’t stop eating, and so food producers dramatically had to alter the way they supplied food. There are big differences between supplying food for restaurants and supplying food for grocery stores. There have been some shortages including some caused by Covid-19 outbreaks in food processing plants. It makes sense that food prices will be up now. Specifically in grocery stores, it goes back to supply and demand: supply is down (if only a little and if only temporarily) and demand is up so prices rise.

IMO

So far the US Government including the Federal Reserve seem to be pulling off their multi-Trillion dollar direct intervention in the US economy without stoking the inflation embers. The jury is still out (as it always is as economic data is released) but look for a continuation of interventionist policies, perhaps not to the same degree as we have seen heretofore, but still enough such that it will keep most US citizens above water. Look for food prices to stabilize as this supply chain issue works itself out, albeit perhaps at a higher level of prices than we were at pre-Covid. We remain in very strange and unusual times and it looks like we will stay there for at least the next several months.

Keep Up Your Charitable Giving

If you are stuck at home, you probably aren’t going to your place of worship or the theater or the museum or even the library. These are just a few of the organizations and institutions that make society an enjoyable place for most citizens. They also are able to function largely due to donations from people like you who frequent these places. When you stuck at home and not going, these organizations may move backward in your line of priorities. Out of sight, out of mind, so they say. However, now may be the most important time for you to be giving to charitable causes, especially to those who feed or otherwise help the needy among us either directly or indirectly.

Financial Planning

Why am I as a Certified Financial PlannerĀ® advocating that you give away even more of your money, especially now when money may be tight for people due to layoffs or other hardships? Because it is good for you personally and good for society as a whole to help to ensure that these charitable institutions that do good works are able to continue on. For instance, if your local library is closed, that means your favorite local librarian may be collecting unemployment. Now many libraries are offering pickup service wherein you can reserve a book and you can go to the lobby (or to the front door) and pick it up. Maybe now your favorite local librarian has been rehired to facilitate the to-go service. If you have continued to give to your library, then you are partially responsible for that librarian being rehired. If your library donations have lapsed, no better time than now to start it up again so that another librarian might be able to be rehired. You would be doing your small part to put our society back together again.

Itemized Deductions

Another reason charitable giving has perhaps suffered is the expansion of the Personal Exemption in the Tax Cuts and Jobs Act of 2017. The much greater Personal Exemption means that fewer people itemize their deductions or even file a Schedule A because their total Schedule A deductions don’t add up to as much as the Personal Exemption. While this is a disincentive to give, it is not why we should give to our favorite charities. We give because we want to and because society is better because of it. Don’t let a change in tax policy deter you from the goals you have that are part of your charitable giving.

IMO

Now more than ever it is time to continue or even increase your charitable giving. Keep it local if you like – the church, library, museum or food bank in your local town. Charities such as these likely don’t have huge overhead expense so most if not all of your donation goes to the intended target. We all need to take extra care to make sure our society continues to function and your continued charitable giving is an important part of that process. Don’t stop, and even step it up during this time of crisis!

Don’t Fight the Fed

The Nasdaq 100 index is at an all-time record high and about 8% above its pre-Covid high. The S&P 500 has not recovered as dramatically but is within 6% of its pre-Covid high. These metrics don’t seem to fit with the state of the US economy especially with regard to the increasing number of Covid-positive cases. What gives? Consider the actions of the Federal Reserve Bank. If you want to know why the stock market is as strong as it is, look no farther than the Fed.

Fed Pumping

In response to the economic crisis caused by the Covid lockdown, the Federal Reserve to date has pumped about $2.8 Trillion into our economy. Per the Fed’s website, the Fed’s balance sheet as a result has ballooned from about $4.2 Trillion pre-Covid to just over $7 Trillion currently, a 67% increase. The Fed has expanded its balance sheet through a variety of tactics including direct lending to companies (separately from PPP), lending to banks so that they will in turn lend to companies, and direct purchases of corporate debt. (For a full summary of Fed tactics, read this article by the Brookings Institution or Google it yourself).

According to this website and this website taken together, the US stock markets combined have added about $7 Trillion in market capitalization since the markets hit bottom and the Fed commenced its intervention program in late March 2020 until today. Might there be any correlation to the Fed’s pumping $2.8 Trillion into the economy and the $7 Trillion increase in stock market capitalization? You bet there is. The Fed’s explicit goal has been to prop up asset prices as well as to mitigate unemployment ramifications so as to avoid a total disaster in our economy. It seems they have been successful. By the way: Near-zero interest rates have also helped in the Fed’s endeavor.

Don’t Fight the Fed

It’s an old saying that means in this case that if the Fed wants to pump up asset prices, then asset prices will eventually rise. If you have been short the market since the Fed commenced its intervention thinking the worst is yet to come, then you have been fighting the Fed and it has been a losing battle so far. Of course, who knows what may happen going forward, but God help us if asset prices proceed to collapse from here despite the Fed’s actions heretofore.

IMO

If “Don’t Fight the Fed” remains a thing, then chances are one would be wise to heed the saying going forward and to be long stocks rather than short. Specifically, be long either index or other mutual funds or a very well diversified portfolio of stocks that you might compile yourself. The Fed is not in business to make money, meaning the concept of “don’t put in good money after bad” doesn’t apply to the Fed, meaning that the Fed will likely react to more bad Covid news by stepping up rather than stepping back its interventionary actions.