The Financial Preserve - Lonier Financial Advisory LLC

04/10/2022

Tumult and Tail Risk

Tail risk can be loosely understood as what happens when you catch a tiger by the tail. Russia, for example, is now in the grip of deep tail risk, in danger of losing more than they ever hoped to gain by going to war. And because, for the last 120 years Russian destiny has repeatedly entangled the rest of the globe, so are we.

Rumors of war mixed with rising inflation began unsettling the markets in February, 2022. Russia invaded Ukraine on Feb. 24, playing the nuclear card as air cover for a relentless campaign of indiscriminate bombing of populated areas, cities, and towns, killing hundreds, probably thousands of civilians.

The U.S. market dropped 5% to -15% off the January high and bounced around between -10% to -15% until mid-March, holding its breath hoping the war wouldn’t expand into the rest of Europe or escalate to an unwinnable nuclear exchange. Not since the Cuban missile crisis has the nuclear black swan been seen so clearly in the wild...

Retirement Investor Tumult and Tail Risk Michael Lonier, RMA April 7, 2022 Share Tail risk can be loosely understood as what happens when you catch a tiger by the tail. Russia, for example, is now in the grip of deep tail risk, in danger of losing more than they ever hoped to gain by going to war. A...

03/08/2022

Fighting Inflaton in Wartime

The dogs of war have been let loose again. Where they will rampage, for how long, who will be caught up, and how it will end are the ultimate uncertainties that run alongside the death and destruction of war. Markets attempt to manage the fog of war as they do any other uncertainty. Historically markets can rise during war unless the war appears lost. Losing a war is not good for stocks—capital is washed away and a country’s economy resets to zero.

After the battle of Midway in June 1942, just six months after Pearl Harbor, the U.S. market rallied and mostly rose throughout the rest of the war. Trading in capital markets was light. In Germany, after an initial drop the market rose steadily with Hitler’s rise in 1933 until late 1941 when it leveled off, sensing a turning point well before the defeat in Stalingrad, until it closed in 1944. The Japanese stock market closed with the surrender in 1945 and, like the German market, did not reopen until 1949 under the U.S. protectorate and following U.S. SEC rules.

In the early days of this war, the Russian market has crashed from the expected impact of global economic sanctions. On the other hand, oil—Russia’s most valuable export—is rallying, crossing above $110/barrel less than a week into the invasion. As one analyst put it, Russia is casting a long, dark, unpredictable, and very complicated shadow.

The U.S. economy remains strong even if we can anticipate aggravated supply chain issues from the war. The near-term concern is navigating the oil spike and its continuing impact on high inflation. The tightrope the Fed will begin walking in its mid-month meeting between raising the overnight rate too slow or too fast over the rest of the year has gotten tauter if more focused.

Powell’s Tuesday (Mar 1, 2022) discussion of a series of +0.25% increases would still only push the rate to 1% by late summer—well below recent inflation running above 7%. Tighten too fast and growth can be choked into a recession. Tighten too slow and inflation could run away leading to stagflation—an even worse inflationary recession.

We need only look to the OPEC oil shock of 1973 (when inflation increased to 7.7%) and the 1979 oil crisis sparked by the Iranian revolution that led to double digit inflation in the 1980s, to understand the risks.

Though tough on everyone, businesses can manage inflation more easily, by raising prices, than retirees on fixed income and portfolios, who must manage expenses lower. Frugality, whether by choice or necessity, can be a virtue in wartime.

Retirement Investor Fighting Inflation in Wartime Michael Lonier, RMA March 7, 2022 Share The dogs of war have been let loose again. Where they will rampage, for how long, who will be caught up, and how it will end are the ultimate uncertainties that run alongside the death and destruction of war. M...

02/09/2022

As the months of record market highs have ticked away and inflation has risen to a 40-year rate, we have known that winter would be coming to the markets. That the economy was not mortally wounded by two years of pandemic, springing back within months of the first wave of infection, igniting a long-smoldering housing market, and raising every homeowner’s net worth, was a kind of endless summer that persisted despite the mounting toll of lives lost and the enormous public debt incurred to keep the economy afloat.

And so the first inkling of winter has arrived, a 10% drop in January off a new market high at year’s end. A correction as the market calls it, as if we knew something was wrong all along that sooner or later had to be fixed.

Retirement Investor Winter Is Icumen In Michael Lonier, RMA February 7, 2022 Share Winter Is Icumen In -Ezra Pound It was evening all afternoon. It was snowing And it was going to snow. The blackbird sat In the cedar-limbs. –Thirteen Ways of Looking at A Blackbird, Wallace Stevens As the months of...

12/07/2021

What isn’t clear is if and when the inflation in the stock market might unwind. There is concern that as the Fed speeds up its response to inflation, inflation is mutating like the virus, and the Fed’s fix may end up mistargeted. Omicron complicates this view and may alter the Fed’s intended tightening.

Should the new strain infect the economy once again, the Fed may need to slow down its plan to end stimulus and raise its overnight rate. But if inflation mutates and continues at a high rate even as the economy reels from Omicron, the Fed may find itself with an economic vaccine that no longer works.

Retirement Investor A Vaccine for Inflation? Michael Lonier, RMA December 2, 2021 Share The COVID Delta variant killed over 10,000 a week in the U.S. from mid-August to mid-October in what has been dubbed an epidemic of the unvaccinated. Since the first of November, deaths have ramped down from 6,00...

11/01/2021

An Enormous Amount of Stuff

So here we are at another campsite on the edge of the cliff with the market once again at all-time highs. Inflation fears are being held in check, at the moment, by corporate earnings pumped up by inflated prices and pent up demand. Continuing Fed stimulus keeps the cost of money low and the bear of inflation away from the earnings campfire.

The Fed may begin cutting back on new wood for the fire as early as this coming month. Earnings may begin to suffer from higher cost money, consumer price resistance, and inflation may push back as it does when the Fed tightens. And by then it will be December and we’ll be back looking over the edge of the cliff again.

Retirement Investor An Enormous Amount of Stuff Michael Lonier, RMA October 29, 2021 Share In late September into early October, the markets sold off 5% from the early September all-time high, walked up to the abyss and peered over the edge. A confluence of macro forces were pushing investors from b...

10/11/2021

The stock market followed the bond market in September, and the bond market looked to the roiling waters in Washington to divine the price of money. Not much is clear except that money, grudgingly, is getting more expensive….

Michael Lonier, RMA October 5, 2021

Retirement Investor The Storm Before the Calm Michael Lonier, RMA October 5, 2021 Share Governments and economies are constantly buffeted by conflicting forces, both internal and external. The conflicting forces and the shifting equilibrium between them in the markets give rise to the risk that rewa...

10/04/2021

Markets and Inflation
From the third week of August, the U.S. stock market steadily gained 3.7% and set a new high just before the Labor Day break. In the two weeks since, the market has moved down, giving back about half the gain. Though inflation slowed somewhat in August, which suggests that Fed will continue bond buying stimulus and keep its overnight rate at 0%–.25%, it also means that growth may not be as strong as expected. So in this gap before quarterly earnings reports begin again, the market meanders looking for some sign of future value.

August CPI-U all-items inflation came in at 5.3% for the past 12 months, down slightly from July’s 5.4%. More telling, the monthly change was just 0.3%, following 0.5% for July and 0.9% for June. Inflation is cooling off. Though still high at 5.4% over the past 12 months, the forward rate is now 3.6%.

It appears at the moment that Powell may be right that the inflation spike may be short-term. It’s still early in the recovery, and the Delta Variant is still filling hospitals. There are bumps ahead, so markets and inflation will be choppy. For example the producer price index is still rising at 8.3% for August, the highest since the index was created in 2010. On the other hand, the historic long-term average for (consumer) inflation is 3.3%. From its June peak, we are turning back towards that level and way from the danger of hyper-inflation.

American Families Tax Plan
On Monday, the House Ways & Means Committee released a more moderate American Families Plan tax proposal, restoring some tax rates to the pre-2017 Republican TCAJ Act levels, many of which are set to sunset Jan 1, 2026 in any event. The plan was first released in April with higher tax rates and the controversial elimination of the step-up in basis for assets transferred at death. It was a starting point in negotiations, primarily with Democratic moderates since Republicans, at least publicly, claim to be opposed to any changes in the tax laws. The new plan is much closer to a final form than the April release.

Income Tax Changes
A major difference between the new plan and the April plan is that the new plan proposes a 26.5% top corporate tax rate instead of 28% (currently 21%, was 35% pre-2018) . The new plan also eliminates the April proposed tax on unrealized capital gains for bequests, preserving the tax-free step-up at death. To make up for those differences in planned revenue needed to cover the infrastructure bill, the new plan lowers the thresholds for some tax brackets and adds some additional taxes to ultra-high earners.

The new plan, as with the April plan, sets the top tax rate back to the 39.6% pre-2018 level starting in 2022, up from the 37% 2018 TCAJ level. The new plan lowers the threshold for the higher rate to $450,000 for married filing jointly from the current $628,300. There is also a proposed additional 3% surtax for high-earners with income over $5m, raising their top rate to 42.6%. The current 3.8% NIIT surcharge on investment income continues to apply to anyone with investment income stacked on top of ordinary income over $250,000.

The new plan changes the top capital gains tax from 20% to 25%, down from the April proposal of 39.6%--an important adjustment to the plan for all investors. The current top capital gains rate is 20% for gains stacked on ordinary income over $500,000. The new plan lowers the threshold to $400,000. Most of us will continue to pay the current 15% capital gains rate. The 1997 Tax Relief Act changed the then 28% capital gains rate to the current 20%, so this is the first increase in the rate since 1997.

Retirement Plan Changes
The new plan essentially closes the door on “back door” and “mega-back door” Roth IRA conversions. Direct contributions to a Roth IRA are limited to those with income under $198,000. Currently anyone can contribute $7,000 after-tax dollars to a traditional IRA, and then, if the traditional IRA has no pre-tax dollars, “convert” the funds in their traditional IRA to their Roth IRA, getting around the income limit to contributing to a Roth IRA. If there are pre-tax dollars in the traditional IRA, then the conversion to the Roth is pro-rata with tax due on the pre-tax portion.

If the plan is enacted, the back door Roth IRA ends this year. Roth conversions of pre-tax funds will still be permitted but the conversion of after-tax funds from the traditional to the Roth account would be prohibited.

The plan would also end all Roth conversions for those with joint incomes over $450,000 starting in year in 2032—so high earners have 10 years to get those Roth conversions completed. Why the delay? Congress is obviously of two minds—they need the tax revenue from the conversions to count against the infrastructure plan for the next 10 years, but feel that high earners ultimately should not enjoy this ‘benefit.’ Ah, politics!

A new set of required minimum distribution rules is proposed for those with incomes over $400,000 and pre-tax accounts over $10m. The proposed new RMD is 50% of the amount in all pre-tax accounts over $10m and less than $20m, and 100% of the amount over $20m, payable in any year these thresholds are met regardless of age.

This will not apply to very many people, but if it does, it is also a gift that keeps on giving. If you have a $14m in your 401(k) and IRA, your RMD this year will be $2m of taxable ordinary income. Next year it will be $1m + growth [($12m + growth – $10m) /2], and so on. Also new IRA contributions are not allowed for accounts over $10m, though 401(k) and SEP contributions are allowed.

Estate and Trust Changes
A loophole will be closed by the plan that permitted the grantor of an intentionally defective grantor trust to benefit from trust assets and pay lower than trust personal income taxes on trust gains while the trust holds those assets away from grantor’s estate and potential individual estate taxes. This change will also effect the structure of irrevocable life insurance trusts.

More relevant is the reduction if the lifetime exemption for estate and gift taxes. Currently the federal estate tax exemption is $11.7m, and with portability, $23.4m for a married couple. The 2017 TCAJ Act doubled the $5m exemption to $10m, with inflation adjustments, and also specified the increase would sunset back to $5m on Jan. 1, 2026. The new plan will accelerate that reduction to $5m for individuals, and $10m for married couples by four years to Jan. 1, 2022. The April plan was unsettled whether the exemption would be $5m/$10m or $3.5m/$7m. $10m provides more wiggle room. Note that individual states may have lower estate tax exemptions that require estate planning not needed for federal estate taxes.

What’s Next
The new plan seems tailored to satisfy moderate Democrats who are a necessary part of the reconciliation strategy to pass the new act with a simple majority in the Senate. Depending on how solidly that moderate support stands will determine how quickly and in what final form this bill is enacted.

Meanwhile, a showdown on the Treasury debt ceiling is rapidly approaching a new fiscal cliff.

McConnel has said that Republicans will not support an increase of the debt ceiling. According to Secretary Yellen’s Sept. 8 letter to Congress, the Treasury will exhaust its extraordinary measures to stretch out cash on hand during the month of October, and the United States of America will then be unable to meet its obligations. A shutdown of the government might be the least of it. A default by the Treasury would have significant impact on domestic and international markets.

At this point, and it should not be surprising given all that has transpired this year, it appears that some in Congress are willing to take significant existential risk to advance their political agenda. The markets will increasingly reflect this uncertainty and insecurity as a default nears.

Please let me know if you have any questions or concerns.

09/11/2021

The economy took a backseat in August to the ending of the 20- year War in Afghanistan and the evacuation by the U.S. military of 122,000 U.S. and Afghani citizens and U.S. soldiers. Another 43,000 were lifted out by Eurozone countries during two dangerous weeks in which su***de bombers killed 13 U.S. soldiers and 170 Afghanis.

At month’s end, Ida, a Cat 4 hurricane devastated Louisiana and Mississippi, leaving more than 1 million without power—likely for weeks while electric lines are rebuilt. Wildfires in OR, CA, and other western states have burned over 4 million acres, destroying hundreds of structures. Over 80 large fires are active, and evacuation orders were in effect for thousands of people near 11 large fires.

While we face numerous serious issues and risks from inflation to Afghanistan to Covid to a divided government, the U.S. stock market remains focused on the $4T of bond-buying stimulus the Fed has added to its balance sheet in the past 18 months.

The Fed buys bonds from primary banking institutions and pays for them by crediting the banks with additional reserves, currently about $120B a month. The banks lend out the new reserves above their reserve ratios at decreasing rates driven by the increased supply of new money. They have leant out about half those new reserves--$2T—since March 2020. One result is that the economy and the markets are awash in cheap cash.

Investors have used some of that cash to bid up the market—over 20% this year-to-date. Picking up the pace in August, the market has continued its steady march upward. With just one two-day hiccup in August, the U.S. stock market set new all-time highs 12 out of 22 trading days during the month, and over 50 YTD, ending the month up +2.9% compared to July.

The Fed did not meet in August but Chair Powell made clear at the annual Jackson Hole conference that though the Fed might start cutting back its monthly bond buying later this year, it is in no hurry to raise interest rates. Investors responded by pushing the market to a new high, while selling off bonds, lifting the 10-year yield to 1.36% before settling at month’s end at 1.30%

Investors don’t see the end of easy money stimulus derailing earnings growth and stock valuations any time soon. Tapering bond buying suggests some level of continuing if decreasing bond-buying stimulus. Once the bond buying ends, then the Fed would need to start selling bonds back to the banks, reducing reserves significantly before the money supply would appreciatively tighten and force up intermediate rates.

The stock market might jump the gun on this eventual tightening—a taper tantrum—or it might not. $4T is a lot to unwind and the change from easy to tight money could spread into 2023 and beyond.

Other News
The debate about temporary or long term inflation continues. Those who see it as transitory point to the July drop in items that have surged the most like used cars and airfare, while those who see a more long term impact point to food, the high over all rate, and rising wages.

While Covid is back at nearly peak rates, it has become a “pandemic of the unvaccinated” since nearly all of those caught in the current wave are unvaccinated by choice. Unfortunately, the fight over vaccinations and masks has become centered on elementary schools where students under the age of 12 are not yet cleared for vaccination by the CDC or FDA, and state officials, school boards and parents haven’t been able to agree on policies to safeguard the health of young children.

Dept. of It Ain’t Over Till It’s Over
Yes, you can still get Covid and get sick if you are vaccinated or have had it before:
https://awealthofcommonsense.com/2021/09/some-thoughts-on-my-experience-getting-covid/

Bottom line: Don’t let down your guard until the fat lady sings!

Some Thoughts on My Experience Getting Covid Posted September 2, 2021 by Ben Carlson I’ve read a number of stories in recent weeks about why Covid-19 is here to stay and why everyone should expect to get it at some point. Basically, we’re just going to have to learn to live with it. So I was men...

08/12/2021

July has given way to August and the dog days are upon us. The jolts to a smooth recovery which we saw in June and July, high inflation, a stutter in jobless claims, and hospitals filling up again as the Delta variant spreads among the half of the population that did not get vaccinated, are melting into a market stubbornly holding onto its highs if without much conviction.

We’ve come a long way in the year and half since the pandemonium of Covid shut down the economy—the US stock market has doubled in that time and is up 18% this year to date. But the recovery is not yet complete. Unemployment is still at 5.4%, the threat of high inflation remains, bonds are still priced to pay historically low yields way below inflation, and the high valuation of stocks challenges the norms of the past.

The 10-yr price earnings ratio (CAPE or P/E10) of the S&P 500 is at 37.3 times earnings, higher than any period except the 44.2 recorded in 2000 before the internet crash, against the historical average if 17.1. It has been rising steadily since 2013, and is now at the 98.3 percentile.

It's a great time to be invested, but a difficult time to be investing since stocks and bonds are both pricey compared to historical norms. Both are threatened by additional shocks to the economy from a new variant of Covid filling hospitals with critically ill patients just as many business sectors are getting back on their feet.

Just a few weeks ago, the main worry for investors was inflation from an overheated economy growing too fast fed by easy stimulus money. Now it’s becoming clear that the larger, more likely threat is a slowdown in growth from an uncontrolled resurgence of Covid-19.

The market up-trend is flattening out. With second quarter earnings in the rear-view mirror, investors are pausing to look around, or maybe they’re just on vacation. Even the Fed is taking a break, with their next market operations meeting not until late September. Meanwhile the Kansas City Fed will be hosting their annual Jackson Hole policy conference at the end of August.

Last year the meeting was held on Zoom. A year later, with a vaccine now readily available but not embraced by half the population, expect some discussion of the effect of vaccination rates on the economy and monetary policy.

Social Security COLA (Cost of Living Adjustment)
The SSA uses the CPI-W inflation index, which was 6% in June, higher than CPI-U which is the most widely used index, to calculate the annual Social Security inflation adjustment. The formula is based on the third quarter of the current year—July, August, September. At this point, even if we have 0% inflation in CPI-W in third quarter, which is highly unlikely, the SS COLA will be 5.1% from the June baseline. Barring deflation from a significant market crash, the likely range for next year’s SS COLA is 5.6%-6.2%. We’ll know in October.

A large SS COLA might bring the discussion of the oft forecast depletion of the SS trust fund in the early 2030s to the fore, along with consideration of gradually increasing the retirement age and increases to payroll taxes. On the other hand, this congress does not seem focused on resolving difficult issues when they can still be used as political cudgels.

07/27/2021

Weighing in on the Economy

The stock market (“investors”) does not move in a straight line. If in the long run it is a weighing machine that determines value and risk, as Benjamin Graham wrote, it is a grand procrastinator day to day. The long run never seems to arrive, and only appears if we turn around and look back 20 or 30 years.

A month ago investors (“the market”) were unnerved by the high May inflation report of 5% over the preceding 12 months. After a four day 2.5% dip and reassuring statements from the Fed, investors shrugged and money flowed back into the market to fill the dip. Bonds also rose, interest rates fell, and the market resumed following the Fed’s stimulus script that has carried us up literally 104% since the March 23, 2020 pandemic bottom. Yes, that means the value of the U.S. stock market has doubled in the last 16 months—DOUBLED!

Though we had been waiting a month for the May numbers since the unexpected high 4.2% rate in April—to see if the higher than expected inflation was just temporary—the market shrugged off the even higher 5% May report, with many saying it’s still too soon to tell, let’s see what June brings.

Two weeks ago the June inflation report came in even higher with a monthly increase of 0.9% making inflation 5.4% over the last twelve months. If the high monthly rate persists for the rest of the year, inflation for 2021will be the highest since 1981 at the end of a decade of high inflation that peaked at almost 15%.

Last week the market took a one-day 3% dive acknowledging the rising inflation report, disappointing unemployment numbers, and a new surge of Covid infections. Fed chair Powell appeared before Congress and indicated that the Fed still sees a recovering economy and high unemployment, and so likely will not begin tapering the $120B monthly bond buying or raising short term rates in an attempt to tamp down inflation any time soon. That was good enough for the market to end the week back at record highs.

Once again there is a divide between those that see continuing stimulus necessary and high inflation as temporary, and those who are concerned that more stimulus on top of rising inflation may lead to persistent high levels of inflation and potentially a recession in the near to medium term.

Meanwhile rising Covid infections, hospitalizations, and deaths among the 42% of Americans older than age 12 who have voluntarily chosen not to be vaccinated are pointing at a new surge of the virus this fall that may rival the worst days of the last 16 months. Such a needless recurrence would likely be a significant setback for the still recovering economy.

The Fed meets again tomorrow, with Powel’s press conference on Wednesday. This will be closely watched for any indication that the Fed may change course and tap the brakes on stimulus and raise rates sooner rather than later.

Acting in the short term as a voting machine, according to Benjamin Graham, the market registers popular opinion rather than fundamental value. Today we call that opinion “momentum,” and the current momentum trade believes stimulus will continue even if inflation remains high, though the most bullish do not believe that it will.

Thursday second quarter GDP will be released, which may confirm or contradict the Fed or may simply be inconclusive. Big tech reports earnings this week as well, likely to beat estimates. The real estate boom has slowed down. A new debt ceiling cliff is looming next month. This is the busiest time of the summer for investors, but even highly unexpected results may not overcome the summer somnolence that has settled over the markets.

The upward stimulus-fed momentum trade may continue until the Fed announces the beginning of the end of its bond buying stimulus and the raising of the Fed overnight rate. Whether the Fed can continue stimulus long enough for the economy to stand up on its own, without falling into an inflation driven recession in the meantime is the big question of the moment, the question the market is currently voting every day.

While it is great news that stocks have doubled in the last 16 months which has pushed our Growth & Legacy Upside stock allocations to all-time high levels, we recognize this valuation may pull back from the highs as the market sorts through the path of Covid economic recovery, which still has a rough patch left to go. That is why we hold the G&L Upside allocation for long-term growth and value, reflecting long-term economic growth that is otherwise choppy when observed close up, and do not focus on the short-term voting of the markets.

Instead we manage our Lifestyle Floor bond allocation to meet our lifestyle goals throughout retirement with risk-free annual income derived from inflation protected Treasury bonds sized to meet expected annual expenses. While we are currently holding more cash than we would like while we wait for bonds to fall in price and pay better yields, nevertheless it is a comfort to know that our goals are covered with Lifestyle Floor funds that are not impacted by the short-term ups and downs of the market.

/ml

06/24/2021

The Economy and Inflation Front and Center

The shutdown of the economy and the rapid collapse of the markets 15 months ago reflected the epic financial toll as the Covid pandemic spread around the globe. With massive support for the credit markets from the Fed, trillions of dollars in relief to individuals and businesses from Congress, and an aggressive vaccine development program, the economy began a rapid climb back.

Remarkably, fueled by stimulus, the stock market sprang back to new highs just six months after the March crash, and has gained another 25.5% on top of that in the ten months since. As if waiting for everything else to catch up, the market has slowed down its climb this month. Earlier this month the May inflation report of 5% over the last 12 months particularly gave the market pause.

So much so that investor focus has shifted from the economy and the markets to the economy with inflation front and center in the spotlight.

The 5% inflation rate reported for May created pressure on the Fed leading up to their meeting last week to start tapering their $120B of monthly bond buying and to start raising the overnight Fed rate sooner than their previous guidance, which stretched out to late 2023-2024 for rate increases.

Jamie Dimon at JP Morgan Chase said the bank has $500B in cash and plans to be very patient in the face of what it sees as rising inflation—better to lend money when you can get higher interest on the loans. Morgan Stanley and Deutsche Bank also chimed in that inflation is rising and that the Fed may need to respond sooner rather than later. Banks are almost as hungry for higher yield as retirees.

We have been holding extra cash in your portfolios allocated to bonds since the Fed cut its overnight rate at the start of the pandemic. None of us are fond of low yields and zero interest, but it is affirmative that even the largest bank in the country has a similar problem and recommends patience as the remedy as we await higher rates.

Fed chair Powell emerged from the FOMC meeting last week announcing that though the Fed still sees the inflation spike as temporary, it now expects full year 2021 inflation to be 3.4%, up from its March forecast of 2.4%. So yes, the Fed admits that inflation is running higher, but it is not running wild. The recovery continues, in “fits and starts.” The economy is warming up, so they have begun discussing tapering monthly bond buying, and they may begin raising the Fed overnight rate in late 2022 or early 2023— a year earlier than previously forecast.

This was hardly a clarion call for the end of the pandemic monetary stimulus programs, but it was an acknowledgement that as conditions improve, the Fed will respond and tighten up monetary policy. Even at that the market threw a perfunctory two-day hissy fit, dropping -2%, before floating back up to all-time highs. Clearly what the Fed says is as important as what it does. Fed ‘signals’ get baked into stock and bond prices long before the Fed acts, which is why investors parse the language in Fed announcements with large magnifying glasses.

TIPS bond ladders (Treasury Inflation Protected Securities) are the key retirement income component in our portfolios, since they provide risk-free cash that hedges away inflation risk.

What happens to TIPS bonds as inflation rises and the Fed starts tapering bond buying and raising its overnight rate? David Enna at TIPSWatch suggests that the period 2013-14 may be instructive. That is when the Fed first began talking (signaling) about tapering bond buying after the 2008 financial crisis. just before they started tapering and raising rates

While the stock market had a ‘taper tantrum’ losing -4.3% in three days in June 2013 after the first announcement of possible tapering, the 10-year TIPS bond rose +1.8% between December 2012 and September 2013, from negative -0.86% to +0.92% real yield (on top of inflation). The Fed did not actually begin tapering bond buying until December 2013 and raising rates until December 2015.

In today’s terms, if TIPS prices fall and real yields rise later this year anticipating tapering and Fed overnight rate increases, TIPS will again become attractive, strategic purchases in our portfolios.

If inflation goes to 3.4% late this year (down from 5% in May), with TIPS paying a real yield of +0.80%, their total yield including inflation will be 4.2% (3.4% inflation + 0.80% real yield). Those of you with TIPS already in your portfolios, which were bought when their real yield was +0.50% to +1.00%, are already seeing combined annualized yields above 4% with your current TIPS bonds.

Meanwhile, back in Congress, the infrastructure bill has been whittled down from $2T to a “bi-partisan” $600B. The total could grow to $1T-$1.2T if continued over the next five to eight years. Generally speaking on the Hill, deficit spending or revenue cuts are inflationary if proposed by the other party, and are stimulative is proposed by your own party. Bipartisan deficits are relatively rare and involve intricate finger-pointing and cautious claims for any success.

Today Microsoft became only the second company, after Apple, to go over $2T of market capitalization. The U.S. tech sector includes five of the largest and most successful companies on the planet. Which probably has something to do with the House Judiciary Committee vote today to refer the Ending Platform Monopolies Act to the full floor for consideration. The Act seems directed at Facebook, Google, and Amazon. The Committee still hasn’t figured out what Apple’s “platform” is or how it works. Apparently when you Google “Apple Platform” on your iPhone, you get a smiley face!

These five stocks make up about 21% of the S&P 500, and so are significant holdings in our core Growth & Legacy Upside stock portfolio sleeve. Hopefully Congress won’t screw this up!