Wednesday, June 9, 2021

“Far More Money Has Been Lost By Investors Preparing For Corrections, Or Trying To Anticipate Corrections, Than Has Been Lost In Corrections Themselves.” – Peter Lynch

Probably a great deal of the investing public has never heard of Peter Lynch.  During my formative years of investing, he was the most famous investor of all time.  Peter Lynch ran the Fidelity Magellan Fund for 13 years with an average gain of 29.2% and had unparalleled success.  Even in the stock market crash of 1987, Fidelity Magellan Fund had a positive return.  I think his advice above is very important today as we face a recovering economy and an earning explosion.  

I became curious as to why so many investors are unwilling to invest more money during this time, so I did an informal survey to find out exactly what is bothering people and preventing them from investing.  I got many responses, but most of them centered around the potential increase of inflation, the wild and crazy spending in Washington whether the economy is actually recovering, a potential increase in interest rates by the Federal Reserve, and a basic misunderstanding of corporate earnings.  

Ava posing with her 10th birthday 
celebration signs

I have decided to address these issues, so my readers understand exactly where I stand.  I also want to give you information regarding the recovery of the economy that is in controversy.  It is so absolutely crystal clear to me that the economy is exploding on the upside, that it is fascinating to me that so many people continue to question it.  Also, I want to discuss general investing policy and how that affects your potential retirement.  I always like to quote the famous investor Warren Buffett, when he said “Do not save what is left after spending, spend what is left after saving.”  I intend to cover all those subjects and hopefully convince investors that many of the fears expressed above are either temporary or completely misplaced.  

Before I do so, I need to reflect on the performance of the financial markets for the month of May.  As you know the year 2020 was an extraordinary year on the upside for the markets.  It has also continued into 2021 with the markets continuing to rise.  One of the oldest sayings on Wall Street is, “Sell in May and go away.”  I think if you follow that advice over the summer months, you may miss a good opportunity.  

The Standard & Poor’s Index of 500 stocks was up 0.7% in the month of May and is up 12.6% for the year 2021.  The one-year performance on this index is an extraordinarily high 40.3%.  The NASDAQ Composite was down for the month of May 1.5% and is up 7% for the year 2021.  The one-year performance on this index is a 45.9% increase.  The Dow Jones Industrial average was up 2.2% during the month of May and is up 13.8% for the year 2021.  The one-year performance for the Dow Industrial is also an outstanding 38.6%.  Just for the sake of comparison, the Bloomberg Barclays Aggregate Bond index was up 0.2% in May, but is down 2.5% in the year 2021 and is also down for the one-year performance at negative 0.7%.  

Kari and Adam’s engagement 
photoshoot before their June wedding

If you compare the three major market indexes, which were up 38% or higher over the last year, you can see that the bond index was a major disappointment, reflecting a negative return for the one-year period ended May 31, 2021.  One of the major reasons for concern for investors is that they believe that inflation will soon impact virtually every item we purchase and every commodity that is essential for the everyday budget.  There is no substantial evidence that inflation will impact the economy this quickly.  In fact, if you go back and review the history of inflation, you will realize that it takes many years to actually affect the economy in general.  

I was here in Atlanta during the 1973 oil crisis.  Most people do not even remember that the reason that crisis occurred was because OPEC, “Organization of the Petroleum Exporting Companies,” decided to withhold oil from all the countries that supported Israel during the Yom Kippur War.  Basically, the OPEC countries decided that they would not sell oil to the United States during this time period and correspondently, the U.S. suffered through a substantial decline in its oil imports and a substantial increase in price.  During that time, the use of oil affected so many different aspects of the American way of life it forced prices up almost immediately.  The price of oil went up almost 300% from $3/barrel in the U.S. to nearly $12/barrel.
  
I can vividly remember standing in line to purchase gasoline during that very difficult time.  I also recall the dramatic increase in the price of a gallon of regular gasoline which rose 43% from 28.5 cents a gallon in May 1973 to 55.1 cents in June 1974.  Just looking at the above numbers you would think that inflation would impact the United States almost overnight.  But history reflects something else.  

It wasn’t until the late 1970’s (6 years later) that inflation really became a serious financial issue for the American economy.  Yes, we had inflation prior to that time and went through ill-placed actions by the government to hold down prices, which was unsuccessful.  However, it really got out of control during President Jimmy Carter’s years, when double digit inflation was commonplace.  The point of this scenario is that it takes years to impact the economy with significant inflation.  I think we are seeing that reflected today.  Even though prices are moving up, inflation in the economy is almost assuredly an event that will be years from now before it will affect and hurt the U.S. economy.  It even looks like some of the prices have already started to moderate.  

You also see it in the words of the Federal Reserve members that are most influential in controlling interest rates.  The most important regional bank in the Federal Reserve is the New York Federal Reserve.  Its President, John Williams, recently said we are “Still quite a ways off from maintaining substantial further progress.”  Basically, what he quoted was a reflection of Federal Reserve’s Jerome Powell’s many statements saying that the economy has yet to overheat and, therefore, any changes by the Federal Reserve at the current time would be unwarranted.  

There is also a clear misunderstanding of how inflation impacts financial markets.  There is no question that if the Federal Reserve started to increase interest rates dramatically, it would start to hurt stocks.  But using the Federal Reserve’s own words, that may be years away.  It is, however, already dramatically hurting the performance of bonds.  As noted above, bonds for the one-year period had a negative rate of return.  Bonds are not a good investment right now.  However, the effect on stocks is much more positive.  

Morgan seeing the waterfall while 
hiking at Roswell Mill

If you envision a company that has inventory and inflation had increased the prices of that inventory, they have instant gain with an increase in the underlying products that they sell to the public.  This instant increase in prices generates future higher profits for the company.  In addition, the assets owned by the company are likewise increased in value due to inflation.  Therefore, the machinery, equipment and real estate also have a higher valuation prior to the increase in inflation.  While these increases in valuation do not necessarily increase the value of the stocks, they dramatically increase the cost for a competitor to come in and compete with the company itself.  This increase in fair market value of the underlying assets is very much a positive for corporate earnings.  Why some question that runaway inflation would have a dramatic negative effect on the economy, it appears at the current time that this economy is literally “on fire” with the Federal Reserve waiting for future increases for future information to make any change in interest rates.  

There was a short-term sell off of the stock market last week when the Federal Reserve announced that they would be selling some of their corporate bonds that they have accumulated during the crisis.  However, what they did not specifically mention was that they would not be selling any of their Treasury bonds.  In fact, the Federal Reserve currently continues to buy Treasury bonds on a regular and continuous basis.  Most people are confused why the 10-year treasury has not moved significantly above the 1.6% rate when reported inflation is well above 2%.  There is a specific reason why that rate is continuing to be steady.  With the Federal Reserve basically buying up all the excess Treasury bond issued it is unlikely that rate will move dramatically without the Federal Reserve backing off.  At the current time, the Federal Reserve announced that it is not their intention to back off on these purchases prior to 2023.  Therefore, if your major concern is that inflation would impact the value of your stocks on a current basis, that is misplaced.  

Danielle, Reid and Caroline smiling for this 
sweet shot

One of the items that always perplexed me was why people do not save more.  I get the answer as quoted above by Warren Buffett that they just don’t have any money left over after their monthly expenditures to save.  What I have seen over my 50 years in the business, young couples come out of college and both begin working simultaneously and make a good income.  Over time they just increase their expenses so that their monthly budgeting equals basically their income.  When asked why they do not save more they reflect upon all the expenses and indicate there is nothing left to save.  

I often question why people tell me they only put in their 401(k) plan exactly what the company matches.  Since a 401(k) is, under current tax law, the absolute largest tax deduction a young professional could get, you wonder why they do not participate more.  In fact, in most cases, virtually all workers should attempt to maximize their 401(k)’s on a regular basis.  If you look at a chart where you start to save early in life and continue to save over time, a financially secure retirement is almost guaranteed.  However, if you wait until later in life the difficulty to accumulate these amounts are enormous.  

As we all know the stock market on average goes up 9% a year,  yet too many people are trying to time the market and ignore that proven fact.  If you look back to March 2020 all the people that sold out of the market during that time period were the losers in a financial market that was legendarily high.  Take a look today at all of the cash sitting in checking accounts.  It is now estimated that over $3 trillion is sitting uninvested in money market accounts today.  We all know that money markets are paying virtually zero interest and CD’s are paying almost zero.  As noted above, over the last one-year period, the S&P 500 is up 40% and money market accounts are up 0.1 of 1%.  You do not have to be a Philadelphia lawyer to understand the value of being invested as compared to being in cash.  

The Schultz family in their
Sunday Best

Last week the Commerce Department reported that May hiring increased by 559,000 employees.  It also announced that the unemployment report dropped from 6.1% to 5.8%.  However, with those numbers came out the stark reality that there are still 9.3 million people in the United States that are unemployed and potentially available to work during the month of May.  One of the major components of inflation is job-related wage increase.  It should be evident to everyone that hiring is almost at a standstill in America because so many workers refuse to go back to work.  There is no shortage in employees, there is just a shortage of people wanting to work.  Virtually all industries that pay minimum salaries are searching for employees to fill those positions.  One of the major reasons quoted is that the extra $300 a week in Federal unemployment insurance is causing employees not to want to work, and to stay home and collect benefits.  It has already been announced that 25 states will eliminate this $300 increase, effective immediately.  The President also announced that these increases will stop immediately in September of 2021.  The economic effect of stopping these increases in Federal unemployment should be obvious.  If only half of the people currently unemployed now take jobs, since unemployment is unprofitable, the economy should pick up even further.  These are people paying taxes and consuming once again to help the economy grow.  

People ask me all the time how I knew and how I was correct regarding the absolute turn around in the economy during the early parts of 2021.  Basically, I look at the numbers every day to determine whether the economy is moving ahead or sideways.  But if you want to hear information that is more down to earth and easily understood, look at the case of Las Vegas, Nevada.  For the month of April their weekend occupancy in their hotels was 83.5%.  In January, that weekend occupancy was 48%.  During the month of April there were 2.9 million air passengers coming into Las Vegas.  In the month of January there was 1.5 million.  Most importantly, during the month of April the unemployment in Nevada was 8%.  During April of 2020, the unemployment in Nevada was 29.5%.  As you can see there is a real-world increase in the economy happening overnight.  

I happened to fly to Florida over the Memorial Day weekend and can report that the airports were completely crazy on Memorial Day.  There were lines to get into restaurants lined up down half the corridors with passengers.  There was a shortage of rental cars in both markets and the airport appeared to be exactly at the same level of capacity that it was prior to the pandemic.  I flew quite a bit during the pandemic and can report walking into Tampa International Airport at seven o’clock at night and there not being one single passenger other than me.  This most recent trip, the airport was virtually at capacity of people trying to catch flights out of Tampa.  

DeNay visiting the incredible
 Van Gogh exhibit

Another common reason I hear people will not invest in the market is that the market is too expensive.  One of the things I that I try to do with potential investors is ask them how they have determined that the market is too expensive.  Well basically they read what is quoted in major publications and believe those facts and figures to be accurate.  But one of the things misunderstood by the investing public is that if the price of stocks are at a certain level today, but earnings continue to go up, doesn’t that mean that prices will be cheaper in the future?  As I have often said in these postings, the most important component in pricing stocks is the level of earnings of these stocks.  At the current time, earnings are exploding to the upside and the public does not seem to get the point.  It is now being forecast that earnings from the period from May through December of 2021 will increase a dramatic 23% higher from where they were in May.  If earnings continue to increase, as I suspect they will, stocks will continue to get cheaper.  Why would you not participate in this increase when we absolutely know it is occurring all around us?  

One of the major concerns of the investing public has been the pandemic and the spread of COVID.  Maybe you haven’t noticed that COVID infections are down close to 90% of what they were six months ago.  In the entire Unites States yesterday there were only 11,000 new cases.  Deaths from COVID are falling dramatically and now average around 400 a day as compared to several thousand six months ago.  If we could encourage the rest of Americans to get vaccinations, heard immunity could be reached this summer.  Already 63% of Americans over the age of 16 have now been vaccinated at least one time and the number of vaccinations is going up roughly at one to two million a day.  It is very clear that the vaccinations are stymieing the spread of this terrible virus.  Correspondingly, as cases go down the public is out again spending all their accumulated resources.  Given the fact that they have not been able to spend over the last 14 months, you are seeing an explosion in hotels, rental cars and virtually any type of lodging on the beach.  

This upward explosion of the economy has occurred without the new Federal money that is being discussed to spend in Washington.  At the current time, Congress is considering an additional $4 trillion of Federal stimulus in the way of infrastructure type changes.  This would provide funds for additional roads, highways, bridges, dams, etc.  While all those things are clearly needed, dumping all that money into an already overheated economy will only make the shortage of commodities worse over the short term.  It is my opinion that Congress will go slow with these increases, and we will not see them implemented until much later in the year 2021.  

Jodi Dufresne, 36-year client, enjoying
 her horse on a spring day

So where do we really stand on the economy and exactly what does the future hold? While no one can truly predict the future, we do have some evidence of exactly where we stand.  The Federal Reserve of Atlanta makes a projection of future GDP growth based on their internal models.  Currently they are forecasting an increase of GDP for the second quarter at 10.3%.  The entire Federal Reserve is forecasting the economy in the U.S. for the entire year of 2021 to increase above 7%.  If we were to end the year with a 7% increase in the economy that would be the best yearly increase since the Ronald Reagan years.  There is no question that the economy is coming back in a big way.  We all see it every day around us and just like I predicted, the increase will be substantial and long-term.  

In circling back to the original reason for writing this blog, I am questioning why people will not invest all the cash they are sitting on.  After a dramatically higher year in 2020 and a great start to 2021, everyone should consider investing their cash that is earning nothing for long-term results.  We now know that the three components of higher stock prices are firmly in place.  The three components of higher stock prices are interest rates, the economy and corporate earnings.  The chairman of the Federal Reserve, Jerome Powell, has confirmed that he has no intention of restricting the economy or increasing interest rates prior to 2023, which is a cool 18 months from today.  We know based upon the information presented above that the economy is totally on fire.  Businesses today are dealing with the exact opposite that they dealt with over a year ago.  Corporate America is trying to hire employees, but they cannot do so.  Everywhere you look, employers are seeking employees but cannot fill those positions.  

Josef Martinez, Morgan and Kari 
catching a Braves game

These trends are a clear indication of the strength of American corporations since they are now hiring rather than laying off employees.  Also, we know that corporate earnings are dramatically increasing and even the pros are forecasting an increase in earnings in 2021 of greater than 20%.  There are many forecasters that think in the last half of 2021, corporate earnings will be even higher.  It is a fairly conservative forecast that the earnings will be higher given all of the new employees that have gone on the payroll in the early 2021.  In addition to the prior Federal stimulus, if the government continues to give out free money to Americans and businesses, we expect the economy to grow even faster and bigger.

So, my forecast for the future looks like an economy that will continue to grow, earnings that will continue to increase and interest rates that will be stable.  That is the trifecta of positive economic data that will lead to higher stock prices.  There is absolutely no question that the concern of the Federal deficits will increase inflation.  However, my assumption is based on history that the increase in inflation is years away rather than months away.  We also know that eventually the Federal Reserve will have to increase interest rates to slow down an overstimulated economy.  Once again maybe years from now, but not months from now.  As we go forward to the summer and more and more Americans become vaccinated and corporate travel and recreational travel doubles, you will see corporate profits unprecedented in modern times.  All these positive economic effects will have a negative effect on bonds, but a positive effect on stocks.  

There has been a dramatic change in the investing of growth stocks in the last part of 2020 and the first five months of 2021 as there has been a transfer to value stocks due to the turnaround in the economy from recession to expansion.  However, do not give up on the growth segments of investing.  The growth companies such as the large tech companies are recording profits unprecedented in American commerce.  All of the positive economic events represented above will only increase those profits, not decrease them.  While values stocks are certainly rallying in the first part of 2021, I see a shift back to growth this summer and an expansion of growth for the rest of the year.

As always, the above comments are based on my personal research and my personal opinion and certainly no one can forecast the future accurately.  However, the realization that the economy has already turned should be self-evident and those who are sitting on cash should be moved to make appropriate investments. 

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins 

Wednesday, May 12, 2021

“Who You Gonna Believe, Me or Your Own Eyes?” – Groucho Marx

I know I have used this famous Groucho Marx quote in many of my postings, however, I find it particularly compelling at this particular time.  It is hard for me to imagine that a great many Americans cannot see the explosion of the economy that is occurring around us.  I guess it is influenced by the overwhelming negative attitude of Washington and the continuing flood of cash into the economy from our lawmakers.  Of course, that will lead to short-term positive trends, however clearly long-term negatives. 

Ava and Byrdie catching a 
 Braves game – Braves won in 12

In this posting I want to give you the facts and not the fiction.  I recently had a client tell me that he did not like reading my newsletter since all I did was express positive thoughts.  I guess I am guilty of the obvious.  However, as I pointed out to him, the S&P Index of 500 stocks has had positive returns in 16 of the last 18 years.  I also pointed out that when it was down 37% in 2008, it was followed by an increase of 26% in 2009 and 15% in 2010, making back most of the losses.  In 2018 the market was down 4%, but up 31% in 2019 and 18% in 2020.  If you had odds of 16 chances in 18 to double your money in Las Vegas, I rather suspect you would take those odds any day. 
 
I want to cover so many things that indicate the strength of the economy.  The evidence is all around us and if you do not grasp the facts, you may miss one of the greatest buying opportunities of all time.  Before I can get into all those interesting items, I must report on the month of April which was quite an excellent month.  For the month of April 2021, the Standard and Poor’s Index of 500 stocks was up 5.3% and up 11.8% for the year in 2021.  The one-year performance on that index is a cool 46%.  The Dow Jones Industrial Average was up 2.8% for the month of April and up 11.3% for the year 2021.  The one-year return on that index is 42%.  The NASDAQ Composite was up 5.5% during the month of April and is up 8.6% for the year 2021.  The one-year return on that index is 58%.  Just to give you a basis of comparison, the Bloomberg Barclays Aggregate Bond Index was up 0.8% for the month of April, yet it was down 2.7% for the year 2021.  For the one-year period ended that index had a negative return of 0.5%. 

As you can see from the above analysis, the lowest return for any of the major indexes for the one-year period was the Dow Jones Industrial Average which was up 42%.  Compare that with the bond index, which was a negative for the one-year period then ended, and you will see the divergence that is occurring between stocks and bonds.  Anyone not recognizing the underperformance of bonds will probably continue to lose money for the remainder of 2021, which is sad given the upward potential other asset classes hold. 

Lucy and Eddie Wilcox after
 the Girls on the Run 5k

As I predicted in the last several postings, the economic explosion in the United States is just beginning.  What we are now seeing are the early stages of an economy unlike any we have seen since World War II.  The GDP growth for the 1st quarter was a very high 6.4% and based upon the projections of the Federal Reserve, this year should generate a total GDP growth of 7.2%.  Take into context that growth percentage would be the highest since 1984 when Ronald Reagan was President.  Also remember that in 1984 we had basically come out of recession from the previous three years and that jump in GDP was somewhat prevailed by lower tax rates and reduced oil prices in the economy.  The GDP growth in 2021 is not a reflection of a jump back from a recession, but clearly an explosion of printing money by the Federal Reserve and turning that money over to the average consumer. 

The evidence as to this explosion is occurring everywhere around us.  If you are unaware of the shortages in the economy, you really have not read current financial news.  The automobile companies are reporting that they have cut back production because they do not have enough semiconductors to build a car.  Take into context that virtually everything we buy nowadays has semiconductors and the production around the world is not adequate to keep up.  That tells you the public is on an unprecedented buying spree. Currently, Home Depot has no dishwashers, refrigerators or washers and dryers available for delivery.  Their latest indication is that it may be October before they are resupplied.  Just when exactly have you ever known Home Depot to not have refrigerators available? 

Even more distressing is that contractors are reporting that they have no 2x4’s of lumber.  How can the housing boom continue without 2x4’s?  Those contractors lucky enough to find 2x4’s are noting that the price is double what it was 6 months ago.  I am also sure that you have read that home sales are beyond ridiculous at the current time.  It is reported that homes selling in Atlanta oftentimes will get double digit offers to purchase above the asking price.  The days of taking the asking price and discounting it 10% are long gone.  In fact, for a decent house inside the perimeter of Atlanta, to stay on the market more than one day, there must be a serious problem with the house.  Now how could any potential consumer not understand these shortages and not understand how good the economy will be if all these shortages occur? 

The numbers for April were nothing short of spectacular.  Consumer income during the month of April was up over 20%.  Yes, I understand a great deal of this was due to the stimulus payments paid to most anybody who asked for them, but it also had a lot to do with more people going back to work.  What was more interesting to me was that retail sales for the month of April were up 21.3% over a year ago at the same time period and the savings rate of consumers set an all-time high of 21%, as compared to a  normalized savings rate of 7.5%.  So, in summary, people were making more money, but were also saving more money and clearly this saving of money bodes well for future spending by consumers. All this explosion in the economy has to be taken in perspective of the actions of Congress where they have already distributed almost $4 trillion in stimulus money and are desiring to distribute another $4 trillion in the upcoming months. 

Mitch Musciano-Howard accepting
 his Varsity Letter for soccer

While certainly things on that list of Federal expenditures are needed, the vast majority of this amount will do nothing but create hyperinflation in the United States.  If you take an economy that is already scalding hot and you flow an additional $4 trillion of liquidity into that economy, almost assuredly the economy will overheat leading to adverse economic effects of inflation in the coming months.  Just exactly what they are looking at in Washington defies the ability of someone trained in economics to actually understand. 

Make no secret about it, the way the Federal Reserve has created all this money to be distributed is by using their very efficient printing presses to produce more cash.  While the flooding of the economy certainly has positive economic effects over the short-term, if you overheat the economy and if interest rates start to go up because of the overheated economy, the long-term trends on $8 trillion of manufactured money would be significantly bad.  I do not want to imply that negative aspects will occur in the next day, week or month, but certainly 10 years from now we will all feel the burden of repaying debt that was created today. 

I told you in prior postings that you should be extraordinarily positive with the progress that has been made on vaccinations in the U.S.  I indicated that you were likely to see by the middle of the summer the ability to reopen the economy virtually everywhere.  I was certainly wrong in that projection.  That day is here today, and it is happening.  I went to the Atlanta Braves game last night and the stadium was at full capacity.  There was no social distancing occurring, but the numbers support that confidence by consumers.  For all the people in the United States over the age of 18, 43% are now fully vaccinated and another 57% have already had their first vaccination.  Everybody wonders why this percentage is not higher.  Remember that there are no vaccinations given to anyone under the age of 18.  However, beginning next week children between the ages of 12-17 will begin vaccinations, which should run the percentage up dramatically over the next few months. 

Ava and her bunny sharing 
a delicious snack 

But even more encouraging are the U.S. citizens above the age of 65.  A remarkable 83.5% of those U.S. citizens over age 65 have already had one vaccination.  Also remarkable, is that 71%  of U.S. citizens over the age of 65 are fully vaccinated at the current time.  We are going to see an explosion of the economy as the U.S. citizens feel confident that the vaccinations will allow them to travel and spend money once again. 

People think it is remarkable that the amount of increased savings during April was 21%, however, do not forget that people have not been allowed to travel and eat out for the last 14 months. If all those restrictions are lifted you will see an absolute explosion of spending throughout all levels of the economy and, in fact, we may be seeing it right now with all of the shortages that are occurring.  

Almost every day I hear from an investor asking how the stock market can keep going up because stocks are clearly “overvalued.”  I wonder exactly where those investors are getting their information.  If we all agree that stock prices are based on earnings and earnings are going up, there is a high likelihood that stock prices will continue to follow earnings.  But have you or has that investor looked at the current increase in income?  For the first quarter of 2021, the high-tech companies such as Apple, Facebook, Google, and Microsoft reported income that was nothing short of breathtaking.  The numbers were absolutely staggering in their magnitude and shattered all expectations as to future income. 

DeNay visiting scenic Roswell, New Mexico

It is now anticipated that net income as we go forward for all S&P 500 companies will be 25% higher by the end of the year than they are today.  That almost seems to me to be a conservative estimate given the avalanche of cash that is going to be spent by the consumers in the next nine months.  Once these consumers feel comfortable that their job is protected and they do not fear from the COVID pandemic, they will once again travel, eat out in restaurants and spend money on consumer goods.  We as investors do not really care what happened last year, that is in the past.  What we want to know is what is going to happen in the next couple of years.  It is fairly clear to everyone that is reviewing the information that the next couple of years should bring a substantial increase in profits due to this pent-up demand that is now going to be released on the American economy.

It almost seems comical to me that in the 1970s, ExxonMobil reported a quarterly profit of $10 billion and the congress of the United States was outraged.  In fact, there were calls at that time by Congress to break up Exxon and to impose a windfall of profits tax on them due to their higher profits.  This last quarter, the company Google reported net earnings that were double Exxon’s quarterly earnings and there was not a whimper out of Washington.  In fact, when you think about it, Exxon spends substantial sums of money to extract oil from the ground, refine it and sell it to the public.  Google sells no products to speak of and collects money at an invisible way by key stroke.  Today the super large technology companies dwarf the oil companies and are likely to report substantial profits that will stagger the investing public and embarrass the older companies like Exxon and GE. 

It must be spring – the roses are
 blooming at my house

What is interesting about this time and the reaction of the Federal Reserve is the distinction between what happened in 2008 and what happened in 2020.  You remember in 2008, we reached the point where all the banks were virtually going to fail, and the financial backbone of America was in danger.  The reaction to that by the Federal Reserve was to bail out the banks and the brokerage houses and other significant financial businesses to protect the general public.  But the Federal Reserve did nothing whatsoever to try to help the individual consumer.  Their assumption was if they help the banks, the banks would help the public.  They could not have been more wrong.

It has been reported by many that even though the banks received over $300 billion in Federal TARP subsidies they did not go out and lend to the consumer.  In fact, they used that money to shore up their own balance sheets and to compensate their people.  It is little known, but true, that virtually all the banks paid 100% of their money back to the Federal Reserve.  In fact, now the reports indicate that TARP was a roaring success for the government.  The Federal Reserve actually made more money on this plan than it cost them.  However, it cost the American public quite a lot more.  There was huge unemployment, many people lost their jobs, and it would take years to recover from that recession.

In comparison, what occurred in 2020 was the exact opposite.  During March and April of 2020, the Federal Reserve did not bother with helping the banks, but went directly to compensate the individual citizens in the U.S.  By virtue of throwing $4 trillion into the economy, they instantly turned it around.  As I pointed out in those postings in 2020, if you do not realize what $4 trillion will do to the economy, you have not been around economics very long.  By flooding the economy with money, the Federal Reserve created an economy supported by Federal money that only lapsed into a recession for a few months in 2020.  Now, less than a year later, we are looking at an economy that is virtually exploding.  The Federal Reserve Bank of Atlanta is now forecasting GDP growth in the second quarter at 11%.  Short of wartime, this country has never had such high GDP growth. 

What is bewildering about the reaction of Congress today is that they just cannot be satisfied with the good work that the Federal Reserve has already done.  They are insisting that they need to throw another $4 trillion into the economy, which as pointed out above is likely detrimental.  Almost daily we hear speeches of how many people are unemployed and the terrible economic circumstances of the unemployed.  As we all now know, we could quickly solve the unemployment issue if we just reduced the subsidy by the U.S. government.  We have paid unemployment greater than what was necessary during the crisis, which has continued almost beyond any time of realistic need for the money.  Virtually every employer that I know cannot hire employees to work at their business.  The golf course that I am a member of had to close two of its three restaurants because it does not have enough employees to work.  Everywhere you go you see help wanted signs and employers with the inability to hire workers.  That is not an economy that is represented by high unemployment.

DeNay hoping to spot some 
UFOs in Roswell

Not only did the Federal government pay too much in the way of unemployment, most recently it has been determined that the first $10,000 of unemployment is tax-free for many recipients.  It is estimated by the Bank of America economist that the unemployment today would be equivalent to a salary of $33,000 in the private sector.  Most of the hospitality workers do not make that much money anyway and therefore it is better for them to not work than for them to give up the governmental subsidy.  While it is true that there are still eight million U.S. workers not working today, you must wonder if they cut unemployment, a great number of those would return to work immediately.  As of today, there are already two states that have totally rejected Federal unemployment subsidy not because they do not like receiving Federal money, but because there is such a shortage of labor in their state.  They are hysterically trying to get people back to work by cutting the unemployment benefits.  There are 8 million open jobs in the U.S.

A lot of ink has been wasted on the proposed tax increases proposed by the current administration.  Quite frankly, I think there is a high likelihood that I have a better chance of playing shortstop for the Atlanta Braves today than all these tax proposals getting through Congress. I have no doubt that some will, but the majority will not, or they will certainly be modified.  To give you an example of one that is an extreme, the President is proposing that for anyone making a $1 million, the capital gains rate would be equivalent to the ordinary income rate which is roughly 43%.  If you add to that number state income tax, that means on a capital gain that size, you would be paying over 50% tax of that gain.  In my opinion that will never happen.

People have lost sight of the real reason why taxation occurs.  The reason you tax things is because you want people to buy less of them.  Remember we have always overtaxed tobacco, alcohol, and gasoline, the theory being if we tax these items high enough, people will not spend money on them and therefore reduce consumption which will help the economy.  For us to even consider taxing capital is a dangerous precedent.  I thought I would never get to the point where the government is taking actions that are detrimental to the entrepreneurs of the U.S.

There is no question that capital is the secret to why America is the most inventive country in the world.  Have you ever considered that virtually all the software and medical achievements occur in the United States and not in other countries?  Japan and China have proven that they are very skilled workers that can copy U.S. products and produce them well.  Neither Japan nor China have proven that they can develop these products as the U.S. has. The reason that companies can participate and create new products is because of capital.  Sometimes it is private capital and sometimes it is government capital.  In the most recent example, there is no way that these pharmaceutical companies could have developed a COVID-19 vaccine in less than12 months without the government’s involvement. By virtue of throwing billions of dollars into these pharmaceutical companies, vaccines were created within one year that are inexpensive and actually work.  The last thing we would want to do is reduce the ability of entrepreneurship in America by taxing capital to such an extreme level.  While capital gains taxes may go up to something like 28% which is the rate that it was during the Clinton Administration, certainly, to tax at that ordinary income level is not in the cards. 

Marti Musciano-Howard celebrating 
her Varsity Letter and MVP
 award for soccer 

As we gear back up to full production in the U.S., it always concerns me when I hear Washington misstating the facts to prove a political theory.  The most recent example of that is the State of the Nation Address by President Joe Biden.  During the course of his speech he said, “Wall Street didn’t build this country.  The middle class built this county, and unions built the middle class.”  While not surprising, a similar opinion was represented by former President Barack Obama.  Why is the government misstating facts that are clearly easily checked to be incorrect?  I understand political payback and certainly the unions almost universally supported the President in the last election, and he would want to give them due respect - I understand that part of the program.  However, the facts are indisputable. 

Today less than 11% of the U.S. population is covered by union contracts.  And the number of U.S. workers covered by unions previously is even less.  The number of union workers during the 1920s was roughly 5 million.  That number declined to three million in 1930 and almost none of these union jobs were in large U.S. industry such as steel or automobiles.  In fact, most of the union jobs were all held in mostly craft skills that required specialized training to be a part of a union.  Therefore, to assume that labor unions were instrumental in building America, is disingenuous and incorrect. 

As we go into the summer, we have time to sit down with you and review your financial plan.  I anticipate that this year is going to be bumpy with many ups and downs, but the trend is clearly up, and you need to participate.  I believe bonds will not make any money in 2021 and that investment could potentially drag down your portfolio.  However, the biggest obstacle to building wealth today is this over-mounting gush of money that is being held by the public in cash.  I can almost assure you the vast majority of people reading this posting has more than one year of cash at their disposal, uninvested.  If you are talking about a lost opportunity, there it is, just as crystal clear as it can be.  


On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins