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Allen Stocker, CFP®
Allen Stocker, CFP®

The Land of Confusion

The year was 1986.  MTV was only five years old and played countless hours of music videos.   Reagan was in his second term as President of the United States.  He had survived an assassination attempt.  Many in the media believed that he may have lost a step or two.  In ’86 the English band Genesis had a video to their song, “The Land of Confusion”.  The video was in constant rotation on MTV with its animated cartoon figures poking fun at Reagan.

The Land of Confusion

 

I must've dreamed a thousand dreams

Been haunted by a million screams

But I can hear the marching feet

They're moving into the street

Now did you read the news today?

They say the danger's gone away

But I can see the fires still alight

They're burning into the night

There's too many men, too many people

Making too many problems

And not much love to go 'round

Can't you see this is a land of confusion?

This is the world we live in (oh, oh, oh)

And these are the hands we're given (oh, oh, oh)

Use them and let's start trying (oh, oh, oh)

To make it a place worth living in

kool radio ad

The 2024 election is in the books.  It will likely go down as one of the nastiest campaigns in US history.  Now comes the hard work.  To quote Phil Collins and Genesis….too many problems and not much love to go ‘round.

The United State continues to have the best economy in the world.  Hence, we have nearly half of the world’s investment capital.  That said, we are not without a few concerns.  Yes, the stock market has rallied following the election, BUT the bond market is unimpressed.  The confusion – the stock market doesn’t worry about the bond market UNTIL it worries about the bond market.   The concerns are likely to begin soon.

 

Debt vs Bond Market

  • The Federal Reserve is between the proverbial rock and a hard place…Trying to stave off inflation without killing the job market and to protect the banking system.
  • 18 months ago, we had a near banking crisis as the Fed had aggressively tried to tamp runaway inflation by raising rates.
  • Unfortunately, politicians continue on the post-Covid spending spree racking up massive amounts of debt.
  • In a normal environment, the Treasury would issue longer term bond to fund the debt.  However, this was an election year, the Treasury has funded spending by issuing Short-Term bonds (bonds that must be replaced in <2 years).  This held the stock market up.
600 - $900B of losses on bank balance sheet

30s - Curve is Bear Steepening

 $600 - $900B of losses on bank balance sheet in a higher rates world.
(Beartraps Report 11/5/24)

 

  • The Bond Market is beginning to speak, and We Should Listen.
  • Bond investors around the world are increasingly concerned about the amount of debt that we have accumulated.
  • For them to invest in US Government bonds (debt), they are demanding a higher interest for the additional risk of default.
  • Look at the last 4 months.  The Fed cut interest rates by ½% in Sept and ¼% in Nov, and the interest rate on the 10-year bond has increase by .7%

What does this mean and what are the potential problems?

  • The cost of borrowing for Americans may be going higher.
  • Business debt financing would likely go higher squeezing profits.
  • Banks, Insurance Companies and Pensions are large holders of government debt.
  • Holding large amounts of Long-Term bonds (> 7 years to maturity) could be unprofitable.  Again, when Interest Rates go higher, the price of a bond usually goes down.  Interest Rates and Prices have an Inverse relationship.
  • Take 2022 as an example, many bond mutual funds were down over 10% in price as the Fed raised rates rapidly.  Today the Fed may be cutting, BUT the bond market investors are demanding higher interest for the risk they are taking to invest in the US.
Mortgage Rates Higher ad

There are many other topics I would have liked to tackle with this note, but it may have taken a novel.  But just a couple of  things to put on your radar.  The wealth gap, labor relations and cost, and energy (Strategic Petroleum Reserve).

Where there are problems, there are ALWAYS Opportunity.  If you have been following our commentary over the past 3 years, we highlighted the coming inflation 3 years ago as it began to materialize in 2022.   We have been discussing the future transition to nuclear power for over 2 years now.


This is the time; this is the place…So we invest for the future not the past


Today, we are ringing the bell for a transition to a more balanced Investment Market (when I mention balance, I am not suggesting overdoing it on bonds).  The giant tech names represent over 35% of the S&P 500.  At a point in history (’80s), Energy, Industry, Materials and Metals was over 45% of the S&P.  Today, it is about 8%.  The markets trade on Fear and Greed.  Today, I would argue that it has been FOMO.  When the pendulum swings in markets, pegs often get knocked over.  We firmly believe that the markets will redeploy capital from the big winners into those areas that have been left behind for a couple of decades.  If you don’t believe me…. look at Gold.  It has enjoyed a far greater return than the stock market over the past 3 years.  And, it may have more to go.

The market has been setting up a transition this year.  You don’t want to be on the wrong side of history.  To our clients and friends that follow our advice, we will be seeking opportunities to deploy investment assets in areas of the economy that are likely to benefit from this realignment.   We are not alone in our thinking.   Goldman Sach recently put out a story suggesting that the S&P 500 may have an annual return averaging only 3% over the next decade.

You can’t have an abnormal annual return greater than 20% per year without some reversion to the mean.  For decades, the average returns have been just above 10% per year.  The bottom 90% of the market has been left behind.  The day of reckoning is not too far in the distant future.  “Can't you see this is a land of confusion?”  The first rule of investing is to NOT LOSE MONEY.  Pouring capital into the largest companies in the world regardless of fundamentals and the market at record highs is a recipe for pain.  We invite you to have us review your portfolio in the very near future.


Is It time to do consider the retirement funding strategy?


The SECURE Act was congressional legislation passed in 2019 going into effect in 2020.   It has significantly changed the thinking about retirement planning.  A couple of the highlights include

  • RMD (Required Minimum Distributions) must begin when you are 73 not 70 ½.
  • Your IRA beneficiaries must deplete Inherited IRA accounts within 10 years.  They can no longer “Stretch” the distribution over their lifetime.

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1Goldman Sachs 10-year S& P prediction CNBC October 22, 2024


What is the Plan? 

Well, it depends.  It depends upon the size of your nest-egg, your tax bracket and the tax bracket of your beneficiaries.  There are many ways to handle this issue.  The key is to plan early before it becomes too “Taxing”.  You could do some of the following:

  • Reduce the funding going into corporate retirement accounts
  • Roth conversions
  • Charitable giving directly from retirement accounts
  • Life Insurance Planning

Every situation is different.  At Patriot Asset Advisors, we are here to help you plan and prepare for your financial future.  We can help you identify areas for future concern and find solutions to minimize your future tax obligations and maximize your financial future.  Allow us to help you end the confusion…Let’s talk.