The Tech and Bitcoin Bubbles.  A Dual Threat?

Posted on by
Reply

Today is Black Friday, the biggest consumer FOMO Day of the year.  Shoppers go nuts to track down the best deals ever on that special something that someone can’t live without.  Items that will cost far more tomorrow, if not this afternoon.  Never mind that many of the items will be available for much less on December 26th.

Think back for a moment to the 2003 to 2007 period, our previous economic FOMO period.  We had low mortgage interest rates and lax underwriting standards for them.  Home buyers flocked to the cheap easy money, often with no income or other documentation required.  The housing demand generated by these loans drove prices up significantly.  Buyers were paying prices for homes and borrowing amounts they could not economically afford. 

Interest rates began climbing in this period, and by 2007 had reached levels that made the payments on the prevalent adjustable-rate mortgages unaffordable.  The owners of those houses could not make the new payments, and fewer new buyers could afford to buy.  This reversed the uptrend in housing prices and put many owners underwater, meaning they couldn’t make their payments or even sell the home.  It accelerated into a housing price collapse.

The crisis, which first hit banks and then the investment markets, tipped the economy into a recession.  Rising unemployment rates put more homes into foreclosure and deepened the recession.  It was the dual events of an artificially fueled housing bubble bursting and high unemployment from a real recession that brought the whole house of cards down, ending up with the the worst economy the US had seen since the Great Depression.

Fast forward to today and we face another FOMO Dual Risk.

The investment markets are currently floated by a small handful of companies in the tech sector.  If this bubble were to burst, many levered investors would be hit with margin calls.  They would face two choices: Sell those stocks into weakness often locking in losses and further weakening share prices.  Or, use cash or other capital to meet the margin calls.

But…

Today a notable amount of “other capital” is in Bitcoin and other similar crypto.  Crypto is not cash, but a commodity and would need to be sold to pledge against a margin call.  This could create a run on the bank in crypto, depressing those values – who knows how far.

And there we have it, another Dual Threat risk.  This could be even bigger than in 2007.

Stay Tuned…

The Bottom Line:  Understand all the risks.

–Michael Ross, CFP®

Convert The Dip…

Posted on by
Reply

Many of you may be familiar with the “Buy the Dip” strategy certain investors use.  It means that when a security or general market takes a dip in price, they use it as an opportunity to invest more money at a lower price – taking advantage of a temporary discount.  In other words, they see it as being on sale.

Deciding whether to convert a traditional IRA or 401(k) into a Roth is often a complex decision.  The decision process must consider current and future projected income, tax rates, deductions, tax preferences and other related programs such as student financial aid and Medicare costs.   Frequently, when a conversion strategy is developed for larger accounts, it will be executed over several years, to avoid moving into high tax brackets and loss of other preferences and benefits.

When a conversion is executed, it is usually done by transferring the current assets from the traditional account into the new Roth account, rather than liquidating the assets and transferring cash.  The income that is recognized is the value of the assets on the date of transfer.  The value being transferred is taxable to the account holder in the year the transfer is made.  Often, the plan will include transferring the assets with the highest short-term appreciation potential first to reduce the income recognized at transfer time.

Now let’s circle back to Buy the Dip.  Once a decision is made to convert a certain value of assets in a given tax year, it is a smart strategy to transfer those assets when their value is low.  That means more assets can be transferred with the Financial Plan’s dollar limit for that year.

Next time your favorite investment in your traditional IRA or 401(k) takes a dip, instead of just buying the dip, Convert the Dip.  When it recovers in price, the gain will be tax free forever.

The Bottom Line:  Convert That Dip.

–Michael Ross, CFP®

I Don’t Know and Neither Do You…

Posted on by
Reply

I Don’t Know and Neither Do You…

On November 5th we will all head to the polls  At stake is control of the Federal government for at least the next two years.  Hopefully, on November 6th we will know the results.

From a Tax and Financial Planning standpoint there are only 3 possible outcomes.  One party controls both the House and Senate and wins the White House (that’s 2), or we get split government.  The outcome will create many predictable events, laws and policies that are likely to affect the Financial Planning of almost everyone. 

Before I break down the different paths, I want to share some facts that are important to know.

 First, the individual portion of the 2017 Tax Cut & Jobs Act (TCJA) will expire on 12/31/25.  This means for 2026 the individual portion of the tax code will revert to the Obama era tax code.  Included in this are higher tax rates, lower estate and gift tax exemptions, higher capital gain taxation, and the elimination of section 199A – Pass through deduction  for small business owners to name a few biggies.

The party controlling the Senate will only need a simple majority to pass budget items (taxation and spending), unlike the usual 60 votes for almost all other legislation.

Regardless of who the winner is, there will always be some horse trading on minor items at the margin, those bi-partisan issues that they find some agreement on.

Now let’s take a look at the 3 possible scenarios and possible strategies:

A Republican Red Sweep.

  • The TCJA will be extended and made permanent.  I will guess pretty much as is.
  • The SALT deduction limitation may be amended, as it is not popular with Republican legislators from Blue states.
  • Tips and Social Security earnings may become tax free.
  • There may be some move to shore up Social Security, but through raising the retirement age (down the road), rather than through higher taxation.
  • Because changes are likely to be minor, most people will not have much planning to do in anticipation of tax code reform.  It is important to remember that personal income tax rates are not likely to decrease from these levels and will still have a future risk of going up from here.

Split Government.

  • The TCJA will expire and higher tax rates will go into effect for individuals and pass though small businesses for 2026.
  • It is not likely that there will be much modification to the reversion other than the aforementioned horse trading.  There could be some trade-offs between taxation and spending as well.
  • As tax rates will be going up, there are some general strategies that could benefit many people although because everyone is different there may be tradeoffs for some.
  • You will have two tax years (24 & 25) to plan implement these strategies.  That is an advantage allowing income acceleration to be spread out avoiding tax bracket creep.
  • Some specifics:
    • Accelerate ordinary income where possible.  Paying taxes at a lower rate will usually be worth more than the time value savings of deferral.
    • Consider recognizing capital gains while the rates are lower.  From a tax perspective, it may be time to sell your business or other assets such as highly appreciated stocks or investment real estate.  Exercise stock options.
    • Convert your traditional IRAs to Roth’s.  Change your 401(k) contributions to a Roth.
    • If you have assets in the $12 Million+ range, you might consider gifting some of them while you can take advantage of the higher gift tax exclusion.  You might also consider selling the assets, paying the lower cap gains rates and gifting the cash, so your heirs don’t have to pay higher rates at a future date.
    • Defer losses.  They will be worth more when rates are higher.
    • Defer charitable donations.  They will be worth more when rates are higher.
    • Analyze whether it may be prudent to convert your closely held pass through business to a C Corporation which will pay tax at 21%, in light of the expiration of the QBI.

A Democratic Blue Sweep.

  • The Democrats would likely attempt to raise taxes beyond the pre-2018 Obama rates.
  • Some of their proposals include:
    • Increasing the Medicare surtax from 3.8% to 5%.
    • Eliminating the cap on Social Security taxes (FICA).
    • Eliminating or capping the step up in basis on inherited assets.
    • Taxing some capital gains as ordinary income.
    • Unlike the other two scenarios, raising corporate taxes as well.
  • The strategies would be largely the same as under split government, but even more critical for many taxpayers.

It’s important to remember that today anything is possible.  On November 6th, we will have a good idea about what is probable.

The Bottom Line:  On November 6th, we will all know.

–Michael Ross, CFP®

Back To School…

Posted on by
Reply

Do you have a college student headed back to school, or going for the first time?  If so, this might apply to you.

Most people know that their aging parents should have a few documents as part of their Personal Financial Planning.  A Health Care Proxy, which allows someone to make medical decisions for them if they become incapacitated and they can’t.  A HIPAA Authorization, which would allow a medical practitioner to discuss their care with someone else.  A Durable Power of Attorney, which would allow someone else to handle financial and business affairs on their behalf if they are unable to, or wish someone else to do it on their behalf.

Aging parents often appoint one or more kids to do this so the powers are there in case they are needed or wanted.  What about College Students, or Young Adults?

You may not have thought about this, but when your child turned 18, you lost most of the legal power you held from the time they were born.  You no longer automatically have the power to make legal, financial or medical decisions on their behalf. 

Your child may be hundreds or thousands of miles from home.  While some of the aging parent fears, such as strokes, dementia, falls, etc. don’t apply much with young adults, things do happen.  We don’t want to think about it, college students sometimes get in serious accidents, or legal trouble.  When they do, they may not be in a position to make or execute decisions for themselves. 

Having these documents and the powers they grant to you can be priceless in a crisis situation, saving critical time or even avoiding a judge making a decision.

These documents are fairly standardized, and although they can vary from state to state, they can be modified and adapted to meet your needs.  If your child is attending school in another state, most states will accept documents properly executed in their home state, but you might want to inquire.

It’s a simple process to execute these.  Most attorneys will handle this for a nominal fee.  There are self- serve template documents as well, but a mistake could be a problem when you really need them.  Your child must agree to granting these powers to you. 

If you have a child on the fence, it might be helpful to let them know that they can rescind these powers at any time.  It’s also a good opportunity to push them further into the adult world.

The Bottom Line:  Welcome to the real world.

–Michael Ross, CFP®

Pop Goes The Power Supply…

Posted on by
Reply

Every now and then, an infrequent purchase comes up.  This week a power supply on one of our desktop computers died with a big popping noise.  It’s an easy swap, 4 screws and a couple of snap connecters – a less than 10 minute process.  I ordered one at the end of the day and it arrived at lunchtime the next day.

The new one cost $31.99.  In my head that was considerably more than the last one we had purchased.  I was right.  The last time we purchased one, it was $24.99 in January 2019.  That’s an increase of 28% in 4.5 years.  The first two of those years were in a lower inflation period.  It works out to an average annual increase of 5.6% – likely much more since 2021 started.  This is a commodity item that hasn’t changed (same wattage, and certainly no new patents apply). 

Purchases like this make it clear that inflation is running hotter than the official statistics the government puts in front of us.  It seems clear that for the foreseeable future, we are going to have to adjust to the new normal.  This is a reminder to adjust inflation assumptions in your Financial Planning.

The Bottom Line:  Incorporate the real world in your Financial Planning.

–Michael Ross, CFP®

Beware A Banker Bearing Gifts…

Posted on by
Reply

The other day, I got a glossy advertisement in the mail.  It was from a local bank that was offering me a “Premier Relationship.”  If I deposited $500K or more into a Premier Checking Account by May 21st, and kept the money there for at least 90 days, I would get a bonus of $3,500.

It sounds good so far.  They also promised waive a monthly $35 fee (which sounds steep to me), give me no ATM fees, and 24/7 phone support.  I read the fine print, got my pencil and a calculator out, and started working the numbers.

The actual interest on the account is 0.01% APY – yes you read that right.  The $3,500 bonus is only 0.7% simple interest if I kept the money there 90 days or more.  So on an annualized basis (assuming I could get future bonuses), the compounded interest rate would be under 3%.

For comparison, a 90 day T Bill will currently yield an annualized rate of over 5.3%, and that’s state income tax free (if you are in one of those states that imposes such a tax).  Amazingly, I bet there are people that are flocking to take advantage of this.  Don’t be one of them!

This is another great reason to have a competent Financial Planner who won’t let you make mistakes like this.

The Bottom Line:  This is an offer you can refuse. 

–Michael Ross, CFP®

There’s A New Fry Guy In Town…

Posted on by
Reply

For quite some time, I have been pontificating two things – well, OK more than two things, but these two came together for me today. 

I believe that investing in non-publicly traded startup and early stage companies offers the potential for returns that can dwarf the returns one can reasonably expect by investing in public companies.  There are many reasons for this, but the reality is, by the time the company goes public, via an IPO, the new investors are buying out the earlier funders and founders.  In other words they are selling to you.  What does that tell you?  These investments come with a much higher risk – requiring much more homework and verification, and statistically the failure rate is higher.  It’s an arena where nobody (except maybe founders) should put all their eggs in one basket.  However, all it takes is one real home run and the duds are long forgotten. 

Besides the higher risk, there is an additional caveat.  Most people cannot legally invest in them.  According to the SEC, you must be “accredited”.   You don’t have to pass a test, just have a high level of income and/or assets.  In other words the rich get richer.

I have also been a fan of AI Robotics.  AI is promising us the moon.  Most of it on a practical basis is still a bunch of hype and truly useful applications to date are far and few between.  I guess if you have a HS term paper due tomorrow, it could be helpful.  The ability to produce smart robots is one of the areas that hold short term economic promise.  A robot that can efficiently do complex non repetitive tasks in a varying environment has real value.  Most of the companies developing and producing these are relative cottage industries.

Today I stumbled across a company called Nala Robotics.  I did some digging.  They are based in Illinois and make a series of fast food kitchen robots.  You can see for yourself here; www.nalarobotics.com  The videos on their site are really cool.  I could only find information on one round of funding for $1.9 million, although I suspect there must have been more than that.

It’s hard to cull information on small closely held companies without really digging.  Since, I am not doing this on behalf of a client, I did a quick search.  Pricing info was vague, but they offer one of their products “The Wingman”, a robotic fryolator for rent at $2,999 per month.  If you do the math, that’s less than what it would cost in salary, taxes, benefits, and workman’s comp for one month of a $15/hr. minimum wage fry guy being available for all the hours a location is open.  I would guess there are other efficiencies.  No sick days. The ability to react instantly to demand as food is being ordered.  It even automatically cleans itself.

It’s hard to tell if Nala will be the grand slam home run in this field.  I would guess the makers of these machines that get the order from McDonalds and the other biggies will go to the head of the class.  It does seem that we are on the precipice of an explosion in this genre and many other AI robots.

This is clearly happening.  Stay tuned.

The Bottom Line:  Rosie Meets Edison

The American Experiment…

Posted on by
Reply

Earlier this week, I attended the Exchange Conference in Miami Beach.  One of the speakers was Jeremy Grantham, of GMO, a well-respected, multi decade institutional investor.

He went to great lengths to point out that while the equity markets in America are overvalued by many historical measures, we have the best economy on the block.  In fact, he noted that since 2015 the rest of the industrialized world has not participated in our economic boom.

He didn’t seem to be able to come up with a reason why.  For instance, they also had low interest rates and went on a Covid fueled fiscal spending spree.  Yet they almost all have slowed down in recent years.  Why not us too?

It made me think.  What is different here?  After pondering a bit, I now have a theory.  The Tax Cuts and Jobs Act (TCJA) took effect in 2018 and brought the corporate income tax rates down from the mid to upper 30’s to 21%.  It is a huge cut by percentage. 

It did a few things.  It brought our corporate tax rates down to levels comparable to most of the rest of the developed world.  No longer would our multinational companies have to keep profits earned overseas, offshore to avoid more taxation upon repatriating them, or be at a disadvantage competing with foreign companies.  It increased profits and Return on Equity for many, so they could raise additional capital at more favorable terms.  Most crucially, it created more cash and retained earnings that could be reinvested in growth, development, and technology.  This created jobs, efficiency and growth.

Was this the catalyst?  Did companies largely divert spending from Uncle Sam to investing in their own growth, productivity, and efficiency?  This investment has been despite higher interest rates.  Efficiency equals economic growth.

The overall earnings of the S&P 500 firms have moved up some 50%+ since the TCJA took effect.  This has meant more economic growth, more jobs, and more innovation, such as AI.  This is the real trickle down.  Every American benefits.

The Bottom Line:  Capital serves us better in the private sector than in government hands.

The Real AI Productivity Boost…

Posted on by
Reply

Yesterday, I was shopping in my local BJ’s Warehouse club.  I turned the corner down a new aisle and halfway down was this skinny machine that looked like a taller version of an oscillating vertical heater, and it was moving in my direction.  As I got closer it started emitting a chime that unlike most warning sounds was rather pleasant and not intrusive.

It had graphics on it that identified it as Tally, the Inventory robot.  It moved slowly down the aisle, stopping at each skid for a few moments and then moving on to the next.  It was very unobtrusive to shoppers.

Having a keen interest in AI robotics, I did some research.  It is manufactured by Simbe Robotics, a non-public company, that appears to have completed a few rounds of private equity capital raising.  Simbe also makes a similar robot for Stop and Shop supermarkets, called Marty.

The robot is part of a system that does inventory tracking, out of stock management, and planograms (making sure things are where they should be).  According to Simbe, it can scan 15 to 30 thousand items per hour, with a claimed 99% accuracy rate, compared to humans at about 65%.

I wondered what it cost?  While Simbe and BJs were tight lipped, some sources claimed the Stop and Shop version was $35K per copy.  This would be plus maintenance and repair, electricity, and the software to make the system work.  My BJ’s is open 96 hours per week.  If a $15/hr worker was assigned to this, it would cost them about $82K per year (including 10% for FICA and Workman’s Comp). 

It seems the age of the affordable AI robot is upon us.  How long will it be until we get its big brother that restocks the shelves?  If all of this seems like a great place to invest in the next wave of productivity and economic growth, it is.  Accessing investments like this is another matter. 

As a non-public company, Simbe and other similar companies can only directly solicit investments from “Accredited Investors”  (meaning already successful).  As they get larger, additional funding comes from private equity firms and funds, who’s investors are not only accredited, but can also pony up rather large minimum investments, often, $500K, $1MM, or more.  It often puts the most exciting and ultimately successful investments beyond the reach or access of almost everyone. 

The first time the general public gets to invest is the IPO, where they are buying out the private equity, which have usually made the lion’s share of gains for the foreseeable future.  Sadly, the game is rigged against most investors by the SEC, who is protecting the public from having an opportunity to make potentially life changing investments in the private market.   Thank your elected officials for their help.

The Bottom Line:  AI Robotics is the real deal.

–Michael Ross, CFP®

Choice Is Great…

Posted on by
Reply

A few years ago, I went to a social event at a friend’s house.  At the time he was employed in a tech sales position at one of the major tech firms.  I noticed all kinds of wires and devices connected to his TV in the living room. 

When I inquired he proceeded to tell me he had “cut the cord” from the cable company, and was able to replicate the service for a lower price.  He proceeded to show me, a digital antenna to get broadcast channels, a DVR to record programs, and some sort of router that made all of this available to all the TV’s throughout the house.

It all seemed so complex at the time, but he was one of those guys who could make it work and troubleshoot when necessary.  I do remember his savings were notable however.  It seemed cool, but at the time it was a tech mountain I wasn’t ready to climb.

Cutting the cord has become more of a thing in recent years.  Some of it was the young people who had no interest in linear TV, and were happy with Netflix and chill.  Others got tired of subsidizing hundreds of channels they mostly didn’t watch, especially expensive local and national sports channels which were must carry on basic cable and added notable cost to the monthly bill.  Who do you think pays for the multi-million dollar salaries of the players on the local NBA team?

In recent years I had watched the cost of my cable bill increase notably, probably a good 75 percent since the pandemic started.  Recently, the cable company instituted data caps on my internet service.  This meant I could buy up to a higher service level month in and month out, or pay an even higher penalty fee in months I pierced the cap.  Something had to give.

I started to dig.  First I found a few streaming services that were able to deliver the channels we most watched and the local ones (no antenna needed) on any TV in the house without the need for additional equipment rental, for a stunningly lower price.  That sounded great, but I looked into the cost of internet service only from the cable company and it seemed they had you. 

Or did they?  The old traditional phone company did not offer fiber optic service where I live.  Their DSL offering just won’t cut it in the 21st century.  I thought I was screwed.  But then I came across an ad for one of the cell phone carriers offering 5G service for the home.  I learned for that to work well, you need to be somewhat near the tower – 5G has limited range, and that tower can’t be oversubscribed.  They offered a free trial, so I took them up on it.  I ended up with great service and speed.

Now I have cut the cord.  I have everything I want for about half the price.  There is a lesson here.  Competition works for the consumer.  As long as we don’t allow monopolies, the invisible hand of economics works.

If you haven’t cut the cord, you might want to check it out.  Just don’t sign up for my tower.

The Bottom Line:  Believe in and take advantage of free markets.

–Michael Ross, CFP®