A rising spirit of the times. You fed up yet?

J Pow wraps Jackson Hole Fed meeting with some thoughts

An update on the US $ and it’s hegemonic role as the world’s preferred reserve currency

The U.S. is 26% of the global economy, as measured by annual GDP.

US$ is still 58% of global reserves. It was already declining pre-Covid & pre-UKR War. Despite the massive $$ creation, mismanagement of Fed debt, and abuses of the dollar, it’s still in place for years ahead. 

I don’t see how it’s unseated without at least these conditions being present:

1. The emergence of a strong, proven, gold-backed alternative reserve currency, which will also require significant trust, deeper and more liquid capital markets than the U.S., and an open capital account (those last two are critical).

2. An emerging dominant world economy that has sufficient working population AND population growth, that can produce most of its own food, energy resources, and is protected by natural borders.

3. The ability for the lead country of that alt system to project power globally at a moments notice which would require:

A. both superior naval & air power

B. superior satellite & recon capabilities 

C. a fleet of nuclear powered air carriers

D. a fleet of nuclear powered deep sea subs

E. deep experience operating elite units in counterinsurgency scenarios

4. Given all of the above conditions, there would need to be a major war resulting in an uncontested unseating of the current reserve status position country

In addition to all of the above, it would require the development of global financial centers of trade to rival the West. For instance it might require Shanghai, Singapore, Hong Kong, and Dubai to collectively displace New York, London, and Tokyo. And all would have to be "off" of the US$ as primary mode of exchange/trade settlement, and reserves.

Remember that trade is settled and reserves are held primarily in US Treasuries, as they represent a nearly risk-free option. We have by far the deepest, most liquid capital markets and transparency.

What happens from here though with the amount of Fed debt we're racking up through PRINT+CTRL & Spend is up for debate. One could argue that a certain amount of "inflating our way out" will occur, as has been the pattern throughout history (American Revolution, Civil War, World War II).

I have also noted the following order of events proposed recently by an anonymous (but learned) financial pundit:

1) Credit downgrade so nations dump US treasuries

2) Rapidly raise rates

3) Restrict swap lines causing US dollar shortage

4) Stage "incident"

5) Dollar skyrockets

6) Panic spreads to financial system

7) Nations collapse

8) Print trillions & buy your cheap debt

Let's call that last sequence "just for fun". 

It's one that I'll save and reflect on later.

Welcoming all ideas, opinions, challenges, arguments, etc.

A note on mortgage rates & inflation

This is where mortgage banking and residential real estate overlap w/macroeconomics & money mgt. 

First, a disclaimer. I am not a real estate agent or broker. 

However, understanding some basics around calculating risk, probability, and applying to personal money management/financial decisions:

1. I wouldn't be buying a house right now until prices adjust from the shock of the RATE OF CHANGE of the moves in rates. Understand the magnitude.

2. I would not be taking out 3/1 or 5/1 ARM's (Adjustable-Rate Mortgages) for a 25-50bp (basis points) discount (0.25%-0.50% discount) banking on the idea that mortgage rates have to be lower in 3-5 years (b/c Fed is going to pivot & lower rates ad infinitum).

Inflation: We don't know what the 3-10 yr effect on inflation will be, given this massive shift in globalization, supply disruptions (see the latest in rice & grains) + moves in oil production + geopolitical unknowns in the face of current cold & hot wars on multiple fronts w/multiple "adversaries".

It's simple thesis to believe that "well, we tamed inflation! rates will go down now. time for deflation!". And it's a thesis that serves one's own book (aka the need to be right, aka intertwined with ego).

We're likely to see a higher inflation print for July given higher prices in things like copper, oil, grains (data will come in Aug, so let's revisit). And while probability has inflation cooling again + the possibility that we could get Fed rate cuts into '24 if economic conditions continue to weaken (stock markets are not "the economy"), we cannot rule out continued inflationary pressures later. No, this is not the 1970's. However, inflationary periods tend to move in waves. Think of head-fakes and rebounds.

I would not stake a 3/1 or 5/1 on paying this higher fixed rate thinking that you're saving money for now and surely getting a lower adjustable in a few years.

This also leads to the sort of money behavior that says "well if we just stretch this budget to afford...". Lenders will factor your lower payment into your DTI (Debt-To-Income). But thus can get you into trouble by spending above your means.

3/1's and 5/1's can work if you're not planning to live in the home longer than those time frames. And you can refinance, although you should factor in the fees/costs associated.

Wait it out if you can. Prices haven't fully realized the shock of more expensive lending. Many people are sitting in their homes with low mortgage rates and have no options as replacement. More inventory is coming in the form of new builds. And then we have the issue of investment homes that were purchased for short-term/AirBnB rentals, but are sitting empty most of the time not generating revenue. People took out HELOC's to purchase them.

If you can't wait, find a payment that works at fixed. You can refinance later if rates come down considerably.

Others will disagree & take issue. There's no right or wrong way. It depends of course on your situation.

You have 28 months before the 2018 TCJA (Tax Cuts & Jobs Act) sunsets.

▶ If it expires, we roll back to prior tax brackets 📈

or

▶ It could be extended and remain as-is

or

▶ It could be replaced w/a new act and higher tax rates 📈

2/3 of outcomes lead to higher taxes ❗ 

Roth conversion? 

Maybe. 

▶ Depends on your tax situation, your current income bracket, your ability to pay the taxes on the conversion, your understanding of all conditions that apply including the NIIT(Net Investment Income Tax) if it raises your MAGI (Modified Adjusted Gross Income).

▶ Depends on your future vision of taxes. Will they be higher or lower 10, 15, 20 years from now?

▶ Depends on whether you anticipate being in a higher or lower tax bracket based on income. Are you advancing in your career and expecting to have a higher standard of living, thereby taking more in income from assets in retirement? Is your income projected to stay relatively flat, with adjustments for inflation? Are you looking to take less in income when you get older? Take from non-taxable sources first, then taxable?

Remember that partial conversions can be done. For instance, if you have a $200,000 Traditional/Rollover IRA and you want to convert part of it. The amount you convert will add to taxable income. So you'd work with the #'s and determine what you're comfortable moving this year and next that doesn't cause a serious impact to you by moving you into higher tax brackets. If you have say $1mm in Trad IRA $$, it's going to be a more careful calculation, as a $200-250k conversion could put you into the highest tax brackets at 35-37%.

Consider that the biggest jump in the current tax bracket happens for single filers right at the $182k mark. That's for MAGI. It's a 6% jump. A tax torpedo if you're not careful. Does not apply to married couples filing jointly, as you can see.

In short, work the math. Keep yourself from jumping too much in terms of tax bracket, with the addt'l amount from a Roth conversion, because the amount you pay at a higher tax rate on that conversion could work toward negating the incentive.

Nevertheless it may work out for you to do partial conversions this year and next, in advance of the tax situation changing in 2025.

How Much Is Enough? "The Psychology Of Money" Series Chapter 3: Never Enough. When Rich People Do Crazy Things.

There are different ways to measure wealth. In this case, we’re talking about money and assets.

You can look at income.

You can look at overall wealth, or holdings, or assets.

You can also zero in on cash deposits. 

After all, cash is king when you need it. When the prices of goods and services go up. When you have to feed your kids and get them school supplies. When opportunities arise and you hope to level up your own state of financial security.

A massive move happened from 2019 to 2022, according to official data from the Federal Reserve Bank of St Louis, via their FRED data system.

When we look at all of the cash deposits held by individuals in the US., we see something extraordinary. Knowing that it happened is one thing. Explaining it is another.

I’m also going to zoom way out and give some #’s over the years. I isolated these for 10 year periods, starting in 1989, then 1999, then 2009, then 2019, then the end of 2022 since that’s the last batch of data. And of course it gives us a pre-and-post forced shutdown/lockdown view.

Looking into this was inspired by the work of James Eagle, who creates excellent visuals of econ and market topics, usually in graphics and video form. I encourage you to follow him on Twitter, LinkedIn, or Instagram.

So first, the #’s. And if you’d like references to the charts I’ll put those in the description section. They are screen shots from James Eagle’s work.

1989

Top 1% held 7.6%

Next 9% held 44.5%

Middle 40% held 34.5%

Bottom 50% held 13.3%

1999

Top 1% held 20%

Next 9% held 28.5%

Middle 40% held 38.8%

Bottom 50% held 12.2%

1999 was when the major world protests around the WTO, or World Trade Organization, like the Occupy movement, about the 99% and 1% began. These protests were mainly situated around Seattle. It was also the beginning of more pronounced divisive, identity politics that would carry through to today. Said differently, there are many economic issues, commonalities, shared by a large # of people in this country. It is the divergence of social views, and the focus on them, the exacerbation of these differences that keeps stoking division.

2009

Top 1% held 18.5%

Next 9% held 30%

Middle 40% held 40%

Bottom 50% held 11%

2019

Top 1% held close to 19%

Next 9% held 36%

The middle 40% held 35%

And the bottom 50% held 10%

2022

Top 1% hold 30.5%

Next 9% hold 35.5%

Middle 40% holds 27.5%

Bottom 50% holds 6.5%

(more in episode) (link to article w/graphs included)

Some highlights

-> 8 stocks have driven 90% of the S&P 500’s return (but that may be changing)

-> Cost at the fuel pump is up

-> Inflation up just a bit. CPI came in today at +3.2% YoY, so a little bit higher than the June YoY #. We’ll go over those #’s in minute.

-> GDP is up. That’s on $1.5 trillion of government spending. Think of 3 big factors that affect GDP: consumption, investment, and gov’t spending. It’s that last item that has really juiced GDP of late. With the debt ceiling raised, another $1.5 trillion in govt green moved into the system. We mentioned this in our mid-year review and outlook, whereby gov’t spending could be the wild card that boosts the GDP print.

-> Property loans are so unappealing now that banks want to dump them.

-> Consumer sentiment was up in July

-> Credit card use is up substantially

-> US Consumer Credit has reached $1 trillion

-> This at a time when APR’s on credit cards are up

-> Retail sales are way down

-> Home sales way, way down

-> Fitch downgraded the whole US Government