The Rollins Financial Blog

November Was Just Great, and This Has Been a Great Financial Year. Let Me Give You the Highs and The Lows of the Month

2024-12-13T15:00:00.001-05:00

From the Desk of Joe Rollins

Ava and Josh are all “spruced up” for the holidays!

It is hard to explain how good the month of November 2024 has been. Not only did the financial markets hit all-time highs, but there was also a new and better perception by the public that we are entering a growth cycle in the coming years as compared to the previous years. I have so many topics I would like to cover but will try to keep it limited to the most important ones.

I also want to do something particularly unusual for this posting. I want to give you the history of a 40-year client who recently passed away. I also want to discuss in detail DOGE (Department of Government Efficiency) and the importance that this agency will have for our future. I also want to get back to the explanation of wealth and the transfer of wealth to the next generation. And just to wrap up all those issues, I will have to discuss taxes, tariffs, and the difficult situation the current administration has left us.

Yes, I understand that this is a long laundry list of items, but there are things that I feel need to be said. Before I can get to those terribly interesting topics, I want to report on the excellent month of November. The Standard and Poor’s Index of 500 stocks had a great month during November, up 5.9%. This Index for the year is up 28.1% through November 30th, and its one-year return is an unbelievable 33.9%. The NASDAQ Composite was up 6.3% in November and is up 28.9% for the year 2024. Its one-year total return is 36.1%. The Dow Jones Industrial Average was up 7.7% in November and is up 21.2% for the year 2024 so far. The one-year return on this Index is 27.2%.

No Musciano-Howard tree decorating is complete
without the help of Muzzy and Jennie!

I always like to give you the Bond Index since it so vividly contrasts the return on equities. The Bloomberg Barclay’s Aggregate Index was up 1.1% for November and is up 3% for the year 2024. The one-year performance on this Index is 6.9%. Also, I want to point out that over the last 10 years, the Bond Index has had an average return of 1.5%. As you can see from above, the Equity Index is at or near 30% are greater for the one-year return, and the Bond Index is barely positive. Those who advised you that you should have a heavy concentration in bonds over the last decade have not provided you with a very positive service. Equity investing has been so much more profitable than bond indexing over the last decade, and we expect that trend to continue.

It was reported on Friday that the number of new jobs created by the U.S. economy was up 227,000 forthe month of November. This is a sharp rebound for the depressed numbers in the month of October, which was affected by the hurricanes and various strikes around the country. The only negative news in this otherwise positive report was that unemployment had slipped and had gone up from 4.1% previously to 4.2% now. The good news far exceeded the bad news in this report. Average hourly earnings were actually up 4% year over year from the previous year. For the first time, it is clear that earnings now are gaining faster than inflation. For many of the months in the previous year, inflation was running at 5% to 6% while the average earnings growth was only growing at 3%. Finally, that trend is starting to reverse, which allows the average family to enjoy greater discretionary cash flow.

JD, Josh, Carter and Ava ready to cheer on Atlanta.
Fly Falcons, Fly!

It does not look like the economy is slipping into a decline. The Federal Reserve of Atlanta is now forecasting the GDP growth in the fourth quarter of 2024 at 3.3%. Since we are already in the third month of the quarter, much of the information necessary to develop this forecast is now available. If, in fact, the economy does have this strong performance of 3.3%, it will indicate that the economy over the last few quarters has been growing, not declining.

With a new administration that is focused on growth, that is a good omen going into the year 2025. Also, we are seeing the broadening of investing away from the magnificent seven tech stocks into a broader return of a more balanced portfolio. As you can tell from the numbers above, the S&P 500 Index and the Dow Jones Industrial Index are now catching up with the tech-heavy NASDAQ Composite for the year. You cannot help but be excited about the potential for growth in 2025 and reflect on the excellent year we enjoyed in 2024.

If you think I am the only one who is positive about next year’s financial market performance, you would be incorrect. I looked up the projections of the major brokerage houses to see what they think 2025 would bring to the financial markets. JP Morgan Chase, Morgan Stanley, and Goldman Sachs project the S&P 500 will reach 6,500 by the end of next year. Today, that index is at 6,034, which would imply a gain of 7.7% over the next one-year period. However, it also does not include the dividend yield of almost 2%, making that total return in excess of 9%.

Reid and Caroline roasting on an open fire

Other banks have even higher expectations. Barclays recently increased their price target to 6,600, while Bank of America and Deutsch Bank expect the benchmark index to hit 6,666 and 7,000, respectively. If these major brokerage houses are even close to correct, then 2025 looks like an excellent year. I am on board with these projections, and I think the indexes will close 2025 at roughly 6,600, plus the dividend yield for a total gain of roughly 12%. I guess I am not that great of a forecaster since I have forecasted the 2024 year to be up 10%, and it looks like it will close the year closer to 30%. I am very thankful for my very poor call on the ’24 performance.

In many of the postings, I have indicated that something is going on with the invested public that has never occurred before. You are seeing a buildup of wealth and a transfer of wealth, unlike any time in the financial past of the U.S. The substantial buildup of wealth and the subsequent passing down of that wealth to the next generation will forever change how investing is done in the future. How could you really compare what took place a decade ago with the results of today? With such a large concentration of money invested, it would take a substantial economic event to actually affect the markets. Every day, more and more money flows into retirement accounts, building up a larger base that would be very difficult to move in a negative reversal.

Joe enjoying dinner with his favorite people - Dakota, Ava, Carter and Josh

You may think I made up this information, but it is based on hard facts. Fidelity Investments just recently announced that the average 401(k) that they manage was up 9.5% in the third quarter of 2024. Further, they indicated that they have 544,000 401(k) accounts that exceed $1 million out of the 24 million account balances they manage. It is assumed by most that there are roughly 100 million 401(k) balances currently active in the United States. If the Fidelity numbers are representative of the total, that means that there are currently over two million 401(k) accounts with balances over $1 million.

These numbers do not even come close to calculating the number of IRA balances exceeding $1 million. It is reported by Fidelity Investment that they have over 400,000 IRAs in excess of $1 million, and once again, assuming that they only have ¼ of all the assets, that is another 1.6 million IRAs with $1 million or greater in investments.

Evan and Alexis getting into the holiday spirit(s) at East Lake Golf Club!

I give you all these boring numbers to point out the fact that never in American finance have so many investors invested this much money in the future of the American economy. Most of this money will never be consumed by the current contributor but is likely to be passed down to the next generation or maybe even the third generation. Never before in American finance has there been such an extraordinary transfer of wealth like the one that will occur over the next decade. This transfer of wealth to the younger generation will change everything about consumer spending and retirement savings. I do not know how anyone could see this as a negative, as it creates a stable economic environment for generations to come.

As I pointed out in the last posting, all of us should be concerned about the huge deficits run up by the current administration. When you look at the numbers, it is hard to believe that since 2020, the amount of National debt in the United States has increased by $13 trillion. In 2020, the U.S. debt was $23 trillion, and now it is $36 trillion. It is hard to fathom that the government would spend $13 trillion in only a four-year period and increase the national debt by 56% over such a short period of time.

As I pointed out in that posting, all is not lost in making this deficit whole. It is true we cannot cut spending enough to reduce this deficit, but we certainly could grow out of it. If the economy continues to grow, by its very nature, taxes will increase and maybe this growth will allow the deficit to be reduced. Hopefully, we now have an administration that is willing to take on the debt, try to balance the budget and reverse the negative trend that has gone on for the last decade.

Carter and Josh looking Merry + Bright!

Frankly, I do not know how anyone could be anything other than excited about the new Department of Government Efficiency (DOGE). First off, you have two basic billionaires running this agency. It is their job to cut out expenses, and they have already identified over $500 billion of expenses that could be eliminated almost immediately. In addition, they will finally attack the ever-growing governmental employment and evaluate which employees need to stay and which need to go. It is even hard to believe that for the month of November, the government has hired over 30,000 new employees. It is time now for Federal employees to be ordered back to their offices, and those who are not contributing need to be eliminated. In my opinion, every American should encourage and desire the success of this brand-new governmental agency.

I read so much negative criticism about Elon Musk and I often wonder why people are so negative. I think we will one day look back on Elon and put him in the same category as Thomas Edison. Here is a man who invented essentially new industries that no one even considered. None of the major car manufacturers can make a profit on electric vehicles, but Tesla can. His companies have essentially put NASA completely out of business and have bankrupted the space division of Boeing. He is the wealthiest man in the world by a long shot, and how anyone questions his intellect is inconceivable to me. If he and Vivek Ramaswamy can make it anywhere close to the cost-cutting they are now projecting, they will have done a great service for Americans.

DeNay in Wonderland (Atlanta Botanical Gardens)

There are so many negative things that the current administration has left us with. One of the weirdest items is that the mandates on electric vehicles have forced the major car manufacturers to produce electric vehicles at staggering losses. It has also forced these companies to lay-off employees due to the lack of profitability in selling electric cars. Only Tesla has succeeded in being profitable in its production. However, the mandates coming out of Washington have affected the private sector by imposing limitations on the cars they built and, therefore, the number of employees they have.

As pointed out above, during the last five years the Federal deficit has soared by $13 trillion. This trend cannot continue, and it must be satisfied. The combination of a growth policy and constrained spending could get the current budget under control but would do little to satisfy the accumulated debt. For reasons unbeknownst to economists, much of this debt has been financed as short-term debts. As everyone knows, the inverted bond yield has produced much higher rates for short-term debt than long-term debt. However, most of this debt has been financed with short-term debt, which has the highest interest rates. Once again, it is a bad omen for the future in that the cost of carrying this debt will be at higher, not lower, rates.

Mia and family making fun memories at Lake Arrowhead in Waleska, GA

In addition, the current administration has drawn down the strategic petroleum reserve by roughly one-half. Part of this was designed to flood the U.S. market with oil and reduce the price of gasoline, affecting the cost of inflation. When the current administration took office in 2021, there were 638 million barrels of oil in the strategic petroleum reserve. Today, that number is 392 barrels. While the US now is the largest producer of oil in the world, this lack of a petroleum reserve could be important if a worldwide crisis were to occur, and we did not have the reserve to back up the war effort.

To the credit of the current administration, it has reduced undocumented immigration on the southern border substantially since the summer. For the month of October, there were 106,344 crossings. Contrast that with the previous October when there were 240,927 crossings. Why did they not do this three years ago? The number of crossings has gone down by one-half over that one-year period due to better supervision of the border crossings. I cannot imagine any American being satisfied with 106,000 crossings in only one month. If annualized, that means over 1.2 million undocumented crossings a year, and that must end in order to maintain any type of law and order in the United States.

I read so much about tariffs, and I wonder whether people view them just as vanilla increases in price. There is no question that tariffs increase prices since if you increase the cost of the product, the selling price to the public must go up. But there are many reasons why tariffs are imposed. The most important issue is the government's illegal subsidies for its products so that they are cheaper in the world market. There would be no question that China subsidizes their industries, making for an unfair advantage and a disadvantage for American workers and manufacturers. It would seem that no one should argue with tariffs on Chinese goods since they have been basically in place for the last seven years. Already the threat of tariffs to Mexico and Canada has resulted in a positive movement by these countries to improve immigration and the shipment of drugs. The question would be whether these tariffs ever go into existence or whether they are just a negotiating point. I think the latter.

Mal is making a list and chewing it twice…

One of the things that never seems to be in these articles regarding tariffs is whether, in fact, the offending countries might come to the United States and establish manufacturing in the United States to overcome the tariffs. That would be very much a positive factor for U.S. employment since it would increase jobs and taxes and bring international operations to the employment of the U.S. This would be very much a positive thing for the U.S. economy.

I guess all of us got a little bit tired of hearing about taxes in the election and paying our fair share. It seemed like every other word out of politicians' mouths was to make the rich pay their fair share, and everything in America would be good. Basically, what they were saying is to give the Federal government more money, and we will distribute that money to whomever we so elect without any oversight by the public while spending this money. In fact, do the rich not pay their fair share today? The IRS documentation proves they do.

For 2022, the top one percent of the population, defined as anyone who makes greater than $663,000, pays 40.4% of every tax dollar in America. Even the smaller taxpayers between the top 1% and 5% pay a substantial portion in income taxes. There were about 6.2 million returns above $262,000 but below $663,000 in adjusted gross income. These people had 15.9% of the total earnings on all tax returns filed, but they contributed 20.6% of all income tax revenue. Their average tax rate was 18.5% on the first dollar and not on the first incremental dollar.

Some special ornaments we’ve received over the years

All this sums up to the fact that the top 25% of all earners in the United States reported 69.9% of all income in 2022 but paid 87.2% of all income taxes. I am not sure what you define as being the fair share, but clearly the top 25% is paying virtually all the income taxes. It has been pointed out that if you confiscated every dollar earned by the top 25% of the highest-paid people in the U.S., it still would be an inadequate amount to fully fund the Federal deficit. Therefore, the solution to the deficit is not increasing tax rates but rather increasing the economy so tax revenues go up and reducing the substantial amount of wasted money that the Federal government now spends.

I want to give a short history about my client, Bill Battle. When I was playing basketball in Tennessee, the most important person in the state of Tennessee was the head football coach of the Tennessee Volunteers. Many say that he was much more influential than the Governor, which I would say was not even close. At the time when I went to college, the head football coach at Tennessee was Doug Dickey, but he resigned in 1970 to take the job at the University of Florida, and they promoted a little unknown assistant coach by the name of Bill Battle, who was 28 years old at the time. Bill has told me many times that his first salary as head coach at Tennessee was $37,000 annually which compares to current head coaches of major institutions making $10 million or more.

Two Greats - Paul “Bear” Bryant alongside Bill Battle

Obviously, I knew Bill's name and had run across him several times in the athletic dorm, but he neither knew me nor did I really know him. As you know, Bill had a successful career in coaching the Volunteers, but his career ended when Bobby Majors was hired to replace him in 1976. You may have heard the famous story of the moving vans being sent to Bill's house unbeknownst to him and his wife, to encourage him to leave town. In fact, he did shortly leave Knoxville and moved to Selma, Alabama, to work for a window manufacturer there.

The story goes that Coach Bear Bryant (who Bill played for in the 1960s) wanted Bill to help him with his licensing and to organize the licensing prospects at the University of Alabama. Bill quickly learned that no one in Alabama knew anything about licensing, and currently, no one had any legal documents to prevent people from infringing on the trademarks. Bill saw this as an opportunity and quickly moved into licensing for all major universities over the next decade. Basically, the major universities were receiving no royalty income prior to Bill Battle’s involvement, and today, that is a substantial portion of their athletic budget. Bill moved his operation for licensing to Atlanta in 1982, and I first met him in 1985. At that time, only he and the family were running the business, and it had little financial impact. Bill went on to grow that company and sell it for over $100 million (public information). If you thought he would retire and disappear into the sunset, you were wrong.

Bear and Bill sharing a laugh

When the athletic director of the University of Alabama suddenly died, they called on Bill to replace him – to which he obliged. He moved on to a remarkably successful career, winning multiple National Championships while he was there.

Bill recently passed away, and I look back on the 40-year relationship we had as a client and a friend. He was one of the most honest and respected businessmen you could ever run across. He recently finished his book before his death titled “The Master’s Plan.” Much of the book contains information regarding Tennessee football, but much of it is personal and important. I highly recommend it to those who have an interest in reading it. I guess we could all say that we are coming to the end of an era when clients have been around for 40 years. You could not have asked for a more enjoyable and impactful client than Bill Battle over the last four decades.

I keep reading in the paper all the negative implications of the appointee for the Department of Defense. Pete Hegseth. I had never heard of Mr. Hegseth until all this controversy came up. I read his resume, which indicated he had a lengthy military background and was a commentator on Fox News. I had never seen any of his Fox reports since they ran on Saturdays, and I really knew nothing about his military experience. So, when all the controversy came up, I decided to educate myself on the subject.

Client Steve Thompson came by to visit and hit the Buckhead Club with Joe

In the last several weeks, I have read three of his books. I am extraordinarily impressed with his insight and his intellectual ability. I also cannot believe how candid he is in these books, and with the information that is so readily pointed out, there is a need to cut this spending in defense. One of the items that got my attention was the extraordinarily high level of the military. As he pointed out today, there are 44 four-star generals in the United States with absolutely no wars going on. With only a standing army of roughly 1.7 million people, the number of four-star generals has never been this high. If you compared it to World War II, when almost 5 million Americans were in the war effort, there were only six four-star generals for the entire conflict. You have to ask yourself why we would have so many four-star generals in the military today when there is not even a current conflict ongoing. Time for them to move on.

As pointed out in his books, there are so many cost savings that could occur in the military. All of us have heard about the exorbitant cost of things in the military process. It is now time to attack the budget of the military, cut back the top-heavy personnel no longer needed and make the military once again efficient for the future. There had been a major drawdown of military armaments sent to Ukraine for the war effort. It is now viewed by many that the military is underequipped, undertrained, and with too many leaders and not enough followers.

The love of family is the true magic of Christmas!

I do not know how you feel about tackling the military and trying to bring efficiency to it, but the time is right. I am not sure he is the man for the job, but he is the only one that I have heard of who has expressed the interest, the desire, or shown the intellectual capacity to make this reduction. Now that we have an administration that is focused on growth, cutting expenses, and making the government more reflective of its people, Mr. Hegseth might just succeed, and I am going to give him a chance.

I recognize that this posting kind of rambles around on many subjects, and frankly, there are more topics I would like to cover, but due to its length, I will postpone those to a future posting. In summary, it has been a fabulous financial year, and I feel sorry for those investors who still have their money in cash. Also, I am aware that in January, virtually everyone could make an IRA or Roth contribution for that current year and should do so. 401(k) limits have gone up for 2025, and I fully expect to see Americans contributing more to their 401(k) and the wealth effect passing down from generation to generation. If you are not feeling good about how well your investments have performed over the last several years, then you just have not reviewed them recently. We highly encourage you to visit us and go over your investments and discuss your goals so that we can help you achieve those goals in the coming years.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future. These statements are not guarantees, and undue reliance should not be placed on them. Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.

“We have two kinds of forecasters: those who don’t know and those who don’t know they don’t know” – John Kenneth Galbraith

2024-11-14T16:00:00.001-05:00

From the Desk of Joe Rollins

"The magic of pasta lies in its ability to bring people
together around the table."

I guess you could classify me as one of those forecasters above. I am not sure whether it is the former or the latter, but in either case, the end result is the same. There is an old saying that the reason economists have jobs is because they tend to make weather forecasters look good. In fact, neither one of them are fully accurate in their projections. Certainly, no one knows what the next four years will bring under the new presidency, but I have some thoughts I would like to pass along.

One of the major concerns regarding the U.S. nowadays is its Federal deficit. Currently, the national debt exceeds $31 trillion and has grown exponentially over the last few years. I get the sense from many people that they do not believe this number is controllable and that we could ever work our way out of this mess. There is a way it can be done, and certainly I do not think the debt is unmanageable. I hope to explain this further in this posting.

Rachel Keller’s adorable “Millie” Mouse.
“Remember, you’re the one who can fill the world with sunshine.”

I recently traveled to New York City, namely, to see new Broadway plays. My daughter and I have a long-term affection for Broadway musicals. We try to go to New York each year and catch whatever is new. My love of Broadway goes back to my childhood, which I would also like to discuss.

There has been a lot written about fracking in the current election. I would like to try and explain why fracking is so important and so valuable to the U.S. Those who want to eliminate fracking clearly do not understand the interaction between our ability to frack in this country and our 100% self-reliance on produced energy in the United States. Hopefully, I can illustrate how the elimination of fracking would be an economic disaster in the United States.

Game face on ✓ Let’s go, Ava!

With all the major market indexes hitting all-time highs in November, I received many calls regarding stock prices. I would be the first to tell you that stock prices are priced to perfection, but that does not mean they will not go higher. There is a great deal that you need to understand about future stock pricing and exactly why new highs are not necessarily bad.

The most important thing I want to emphasize in this posting is what we have learned over the last few years. If you study economics long enough, you realize that every year is a learning process. They may teach you long-term trends that have happened in the past, but none of that will mean anything if economic circumstances change. I have learned a lot over the last four years that has led to us having great financial results for our clients. But I have also learned that mainstream economists are more often wrong than they are correct. I find that if you follow these so-called experts on Wall Street, you almost assuredly have to evaluate their advice with a “grain of salt.” I think I can illustrate that in this posting.

Evan and Alexis looking stunning at a friend’s wedding in Huntsville

Before covering all those terribly interesting ideas, I need to report the performance for the month of October. I think it can clearly be said that October was a nothingburger. Virtually nothing was going on, and that is fully reasonable given the circumstances. Given that the election was on November 5th, right after the end of the month, you would expect the markets to be cautious. In addition, the Federal Reserve was due to meet on November 6th, so you had a double whammy that would affect the news that could affect the market dramatically. It appears that for the month of October, virtually everyone was sitting on their hands, waiting for the news to occur. However, we cannot ignore those results and need to report on them.

For the month of October, the Standard and Poor’s Index of 500 Stocks lost 0.9% and is up 21% for the year through October. As I would like to point out, the 10-year return for this Index is 13% per year. The NASDAQ Composite was down 0.5% for the month of October and is up 21.3% for the year-to-date through the end of October. The 10-year return for this Index is 15.7% annually. The Dow Jones Industrial Average was down 1.3% during the month of October and is up 12.5% for the year through October. The 10-year return on this Index is 11.7%.

Marti and Mitch celebrating Homecoming at LaGrange College.
These twins are “two”rrific!

For the month of October, the Bond Index was very volatile with the anticipation that the Federal Reserve might increase interest rates rather than cut them. As we now know, that did not happen, but that did not keep the bond index from reacting to those rumors. For the month of October, the Bloomberg Barclays Aggregate Bond Index was down 2.5%. For the year-to-date, that Index is up 1.9%, and the 10-year average of this Index was 1.5% annually. As I have pointed out endlessly in these postings, the major market indexes have had double-digit returns for the last 10 years. However, the Bond Index has had a dismal 1.5% annual rate over the last decade.

When I was very young, my father was required to attend a conference in Boston for one of the civic organizations for which he was President. You can imagine the excitement of packing up the family and driving from Tennessee all the way to Boston. Since it was winter and close to the Christmas season, we took the opportunity to stop in New York City to see the sights. My father had friends there who had bought Broadway tickets for us to see Mary Martin in the play South Pacific. I am not sure what the date was, sometime in the early 1950’s, but I was sold. I became a fan of Broadway musicals from that day forward and have seen or attended Broadway musicals around the world.

The cutest orange M&M and Harry Potter to hit the streets on Halloween!

We recently went to New York City to catch some new plays and see what was interesting. We could see five Broadway plays in three days by attending the matinees. Not only do I have a great interest in Broadway musicals, but my daughter enjoys the music and collects all the posters and cast recordings of those plays. However, one of the things that I have noticed by going to New York City on a regular basis is the deterioration of the city itself. Due to so many employees not going to their offices for work, the lunch business has almost evaporated in Manhattan.

The city seems dirtier than ever, and what has happened to Times Square is embarrassing. It is true that every night, Times Square receives thousands upon thousands of tourists, but the influx of people begging and seeking money for pictures is embarrassing. You cannot help but think the city would do more to clean itself up, but unfortunately, they are not interested in improvement. New York City is currently the center of great Broadway musicals. No other city rivals it, and we will continue to visit it as long as possible. It is just unfortunate that the city seems to be trending in a downward direction when it has so much greatness to offer.

This will be the last time Kasten asks Josh
to pick up spare ribs on the way home

I am often approached about what the U.S. could do about the huge deficit that the Federal government runs up every year. This year, it looks like the deficit will be somewhere around $1.8 trillion. The current debt now exceeds the GDP by roughly 15%. That certainly is a negative trend after 100 years of the national debt being less than the GDP. However, I am not as pessimistic as many when it comes to solving the deficit issue. One of the things that we have learned over the last four years is that the expansion of Federal and state government employees is no substitute for workers in the private sector. The government does not create innovation or expand the technology dominance in the United States. What it does is burden the U.S. citizens with extra taxes, and the inefficiencies of the government are legendary.

But I wonder if you realize how fast the government has grown during the last administration. From December 2020 to March 2024, which were all dominated by the current administration, the Environmental Protection Agency has grown by 9.4%. The agriculture department has grown by 9.6%, and the Department of Housing and Urban Development has grown up by 10.7%. I am not sure what exactly these agencies do, but I can assure you they probably just write rules and regulations that make our lives more complex. But these are not the only agencies that grew, as the Energy Department grew 14.8%, the State Department grew 18.4%, and the Health and Human Services grew 18.4%. It is hard for me to even venture a guess as to exactly what these agencies do and why the need to grow these agencies at such an alarming rate was required. Meanwhile, employment was down by 1.2% for the Department of Defense. As you can tell, employment throughout most of the government was up double digits but our security was down.

Reid and Caroline hanging out with the Hulk at the Baha Mar Casino in Nassau

There was great outrage when Elon Musk indicated that he would cut $2 trillion out of the Federal budget. Obviously, that would be virtually impossible, given that it would require cuts in Medicare and Social Security. However, as you can see from the growth of the government, there is room for the U.S. government to severely cut back employment. If you did nothing more than require Federal employees to come to the office five days a week, you would probably eliminate a good many. This issue could be resolved simply by freezing employment in the government. If you let natural retirements take place and do not replace those jobs, you would materially reduce the number of people on the Federal payroll over a four-year period. I think realistically if the new administration could cut Federal employees back to the level during 2020, that would make a major improvement on the cost of government. I understand that cutting 10% of the Federal workforce would save close to $4 billion a year, which should be meaningful to all who really care.

The one way that the Federal budget can be solved and balanced in the future is not only by cutting expenses but by increasing economic growth. Everyone I have talked to discusses the fact that all the major market indexes are at all-time highs and that, assuredly, we are due a pullback. With the market trading at roughly 22 times forward earnings, that would certainly seem to be above the long-term trend at 19 times. However, if you consider that earnings are expected to grow 15% in 2025 and 13% in 2026, the current evaluation does not seem to be as onerous. But I have higher expectations.

Whole Lotta Love! Michael and Aunt Mia in their matching tees.
Happy Birthday, Michael!

If you are not excited about the policies of the new administration, you just do not realize the benefits that the U.S. economy could have from a less administrative burden, lower taxes and a growth-oriented Federal government. I cannot speak to the social aspect or the faults of the current President, but I can tell you that with a smaller government and less administrative burden, the economy could expand even further than where it sits today. This is not just a promise, it is exactly what happened during his first term. Non-economists just do not understand the benefits of a lower corporate tax rate. Even though corporations are demonized during the election, corporations are the employers that keep the U.S. growing.

If you increase the corporate tax rate, foreign companies are not likely to want to move to the United States to employ our people. If you lower the tax rate below the rate of other countries, companies from around the world will seek opportunities in the U.S. to employ people. If you combine that with the less administrative burden and reduce the meddling that the Federal government has in private businesses, almost assuredly the GDP is going to pick up. I am optimistic that we are going to see an expanding U.S. economy which will produce higher profits, which in the end will create more tax dollars to fund the deficit.

It is a combination of lower spending and higher growth that will bring the deficit under control. For those that fear the national debt, that is misplaced. We are a country that can print money and as long as we can do so, debt is not a problem. However, currently the interest to carry the debt is now greater than the entire budget for the Defense Department. This continuing growth of debt and higher interest rates will be devastating to the economy in a decade or two. Now is the time to attack spending by the Federal government, reduce taxes which will increase earnings and employ more people in the private sector, which hopefully will raise more tax dollars to pay down the deficit. There is no question in my mind that this is the right move at the current time.

Throwback from the 80s when Joe used to take the staff to Mexico. Alas…

Many people were surprised at the election and its current winners. I luckily projected the winner because I read extensively on the consumer and the effect that wages have on consumer purchases or nonpurchases. There is one fact that defines the entire election. For the period from January 2017 through December 2020, the level of prices and wages grew nearly 7% during that time frame. That was the time frame of the first Trump presidency. During the Biden administration, average level of prices and wages went down 0.5% and during the height of the inflation, was downed as much as 3.8%. What you saw during the last four years was a decline in the ability of the average person to purchase groceries and, after inflation, saw their wages actually fall.

There were many foolish proposals during the election that were not attainable. Trump wanted to exclude tips from being taxable income. All I could think about was that we would quit charging clients for our services and request tips instead. A democratic candidate proposed reducing grocery costs by eliminating price gouging. Another absurd proposal that was not attainable. Anyway, many promises were made, but I doubt very seriously whether many of them will be sustainable.

What we have learned over the last four years is extremely important. You may recall that at the beginning of 2021 the new administration passed a $1.9 trillion special Bill to pass out money to the American public and a lot of political cronies. Much of this money was used to bail out inept pension funds that could not make money investing. A great deal of the money went back to cities that were inept at running their operations and suffered during Covid. The remainder of the money was given to the public, which we now know in many cases went in the hands of foreigners, scam organizers and people that just cheated the system. What we know implicitly about this incredible mistake by the Federal government, it created its extraordinarily high inflation that took years to tank.

Bill Bewley immersing himself in Italy’s culinary
traditions with a pasta making class

Realizing that this entire $1.9 trillion was manufactured money and an increased deficit, when you pour that much money into the economy over a short period of time, you are going to create shortfalls. All of us knew and heard about the supply chain shortages during late 2021 and 2022. What we did not realize was that it was not a supply shortage, but a demand acceleration created by these excess funds. What we learned emphatically is that governmental money funneled in the economy likely does more damage than it does good. The net effect of this change was extraordinarily high inflation that reached a 9% level in 2022. The Federal Reserve at the beginning indicated that the inflation was transitory and would not last. They were clearly wrong. What we learned is you cannot dump this amount of money into an economy, which at the time did not really need it, and not expect it to have adverse effects when it comes to increased inflation.

At the beginning of 2022, all the so-called experts on Wall Street indicated that due to the increase in interest rates by the Federal Reserve we clearly would have recession in 2022 and 2023. They indicated that with the inverse yield curve they had the strongest argument ever of upcoming recession. I argued in these postings that they were incorrect. The economy was weak, yet it was positive and there was certainly no indication it was going to flip over and be negative. However, the so-called experts convinced the public and the market went down dramatically in 2022, even though no recession ever appeared. I was right and they were wrong, but the markets did not believe me. Yes, 2022 was a difficult year for us all given the incorrect advice we received from Wall Street at the price action of stocks, which was nothing but negative.

In 2023 and now in 2024 the markets have been up substantially. It is likely that there will be a 40% gain after those two years if we end the year where we are today. When you consider that the market was down 20% in 2022 but maybe up 40% in the two intervening years, it tells you that the economy never actually contracted. I do not anticipate the economy contracting for the next several years, but you just never know.

“A lioness does not need to roar to keep the crowd in awe.” - South Africa 2023

Elon Musk made news recently when he indicated that there would be hard times coming. If in fact he follows through with his proposal to significantly reduce the size of government that means millions of Federal employees will be looking for jobs. Fortunately, these people are educated and are likely to quickly fill positions in the private sector. I do not think that will create economic disaster. I recently read an article that indicated that if the government removed undocumented migrants from the U.S., it would create a falling of $70-$80 billion in tax payments and as low as $30 billion payable to Social Security. Right now, tax revenues to the Treasury are close to $5 trillion. While these amounts are large and absolute numbers, as a percentage to the tax revenues of the Federal government, it hardly rates as a rounding error. The removal of undocumented immigrants, while maybe personally revolting, is lawfully required. Those that are in this country illegally need to be excluded and let them apply for legal entry, as with all non-U.S. citizens seeking residency in the United States.

The liberal media is now falling all over themselves, trying to explain the loss in the election and what everyone did wrong. The polls projecting a 50-50 election were not even close. The election swung to the former President winning all seven of the battleground states without much opposition. There is a mandate from the American population for a new President and a new financial model. Hopefully, it means less government, less administration and the ability of American entrepreneurship to grow corporate America, legally employ people from around the world, and to innovate and create future wealth for all U.S. citizens. I will look back a few years from now on this posting and give you an update as to where we are going with those political realities.

Food tastes better when you eat it with family (or even just in Italy, period). Ava, Savvy, Dakota, Josh and Carter

What we also learned is that inflation impacts so much of our life that we do not even realize. Even though we had the $1.9 trillion windfall from the government, the inflation that it created was devastating to the economy. To slow down the rate of inflation, the Federal Reserve had to dramatically increase interest rates. This increase in interest rates reduced the number of homes built and also placed havoc on the real estate market. Now we have a shortage of new homes because so many potential buyers can no longer afford the payments of the higher interest rates. It all goes back to the major mistake of assuming by the government that you could create economic expansion and wealth by giving governmental money to the average person. The fallacy in that argument was that it was not money created from the growth of the economy, but rather borrowed.

At some point that borrowed money must be repaid, and the cost of repaying it would be a reduction of the economy since you would be taking money out of the economy with higher taxes in order to pay off prior debt. My anticipation is that if you could grow the economy you could catch up with the deficits.

If you think that is a pipe dream, go back and review what happened under Bill Clinton's Presidency. Even though the country was in a deficit situation at the end of the Iraq conquest at the beginning of the 1990’s, over the short life of Bill Clinton's presidency, the Federal budget turned positive. It was not so much what the government did, but during that time frame the economy grew, and when the economy grew it created more taxes for the government. At one point in the Clinton administration, there was real concern in where the money would be spent if it created surpluses in the budget forever.

Cherish your yesterdays, dream your tomorrows and live your todays!
Randy and Kathy Wittman

The U.S. now is energy independent and that is positive. Things are about to get better under an administration that is anti-fossil fuels. For reasons nobody totally understands, the current President stopped exporting liquefied natural gas out of the Gulf coast. The sad part about that is parts of Asia and Europe depend on exports of this gas to keep them going during the wintertime. I fully expect a lifting of that Presidential order in the first week of the new presidency.

Also, there was much conversation during the election about not eliminating fracking. It is hard to conceive that educated people are even discussing this matter. It is now estimated by S&P Global that more than 70% of its oil and more than 80% of its natural gas in the United States is produced through fracking. If you eliminated fracking from this process, that would mean that we would have to import virtually all the oil and natural gases that we use in this country. What has been proven over the last couple of decades is that alternative energy sources are neither adequate nor dependable. We have found that wind cannot meet the demands of utilities for alternative fuels, and the only reliable one is solar, and it is just in infancy. It would not surprise me to see that all wind would be eliminated over the next decade, given its unreliability and cost to maintain being in excess of the revenue generated.

Our cute, no longer so little Ava catching a
Falcons game with big brother, Josh.

But the one thing that a lot of people were missing in this argument was the political effect importing oil to the United States would have in the world arena. Russia was completely wrong about what the effect of cutting off the oil supply to Europe would be. Russia thought that Europe would fall into line when all its natural resources would cut off, and they would have to come hand in hat back to Russia to buy the energy to keep them going. Fortunately, Norway and the United States jumped in to supply liquefied natural gas to Europe and subsequently to Asia to beat that demand. If we were unable to provide for our own natural resources, would we again have to depend upon Saudi Arabia and the terrorist countries of Russia and Iran. The fact is that we are energy independent due to fracking, and to have a discussion of eliminating that ability is irresponsible for anyone who knows the facts.

Even though all the major markets are at an all-time high, I expect that the market will continue to rise, but it will be volatile. The fundamentals are in place for a continuing increase, but a pullback is always possible. The one fact that you can depend on is we watch it closely and will anticipate movement if economic circumstances should change. If you have concerns or would like to discuss it in greater detail, please schedule a meeting or give us a call.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

The end of a great quarter and the best Estate planning plan ever…

2024-10-11T15:00:00.001-04:00

From the Desk of Joe Rollins

Rollins & Associates “working 9-5” back in the Fall of 1988

No two ways about it - the third quarter of 2024 was an excellent quarter. As was the year ended September 30th, when all major indexes enjoyed double digit returns. Given all the strife currently in the world, it is hard to believe that the U.S. economy continues to remain resilient.

I have many items to discuss in this posting, including the progress in the U.S. economy and where we stand today. Also, I have written often about generational wealth, but it seems to be misunderstood by some people, so I want to further explain what I mean by it. I want to also explain why the markets are more stable than before due to increased participation and the amount of money flowing into it both daily and weekly. It would not be a normal posting if I did not discuss the inefficiencies of the government, and I will give you two examples of such. When discussing the government, I often mention President Ronald Reagan and his famous quote, “The most terrifying words in the English language are I’m from the government, and I’m here to help.”

Say Cheese! Long-time friends and clients
Fred and Janet Bland came by the office to visit!

Before commenting on those interesting items, I must discuss the excellent quarter we just ended. The Standard and Poor’s Index of 500 stocks was up 2.1% in September and was up 5.9% in the third quarter of 2024. Year-to-date, that Index is up 22.1%. The NASDAQ Composite was up 2.7% during September and up 2.7% for the quarter ended September 30th. For the year 2024, that Index is up 21.8% at the end of the quarter. The Dow Jones Industrial Average was up 2% in September and up 8.7% for the third quarter of 2024. That Index is up 13.9% for the year 2024 so far. It is clear from reading these Indexes that the market rally is broadening away from tech into more of the traditional blue chip type stocks. The fact that the Dow Jones Industrial Average outperformed all other major Indices except the small-cap index in the third quarter is telling. I do not believe for a minute that the rally in tech is over, but it is certainly welcoming to see other stocks participate.

Due to falling interest rates, the Bloomberg Barclays Aggregate Bond Index was up 1.4% in September, and up 5.2% for the quarter that ended on September 30th. Year-to-date, in 2024, that Index is up 4.6%, a significant turnaround for performance in bonds. It is remarkable that for the one-year period, the Bond Index is up 11.5%, which is an excellent return, but pales in comparison to the S&P 500 Index, which for the one-year period is up 36.4%. Just so you are not disillusioned and misled by the Bond Index's strong performance, the 15-year return on the Bond Index is 1.4% over the last 15 years compared to the S&P 500 Index, which has returned 14.1%. Therefore, it could easily be said that the S&P 500 Index has performed ten times better than the S&P 500 Bond Index over the last 15 years.

Barb + Mia celebrating their 25th on a Royal Caribbean Cruise

There is new evidence that the “Goldilocks” economy continues to flourish in the United States. Last Friday, the Labor Department announced that there were 254,000 new jobs created during September. That far exceeded any estimate by so-called economists for the month. Even more importantly, they reported 72,000 more jobs than previously reported in July and August, making those months very similar in employment to the strong month of September. Also, they announced that the unemployment rate had dropped to 4.1% at the end of September. All of this is very important since the economy is very dependent on people working, and the fact that employment picked up in September is a very positive sign.

We continue to be in a strange time when it comes to unemployment. As of last Friday, it was announced that there were 8 million jobs available and, in the U.S., there are 6.8 million unemployed. You may recall in my postings that I have previously pointed out that there are two jobs for every other unemployed person in the U.S. That is falling to just over one job but is still extraordinarily strong. Employment in the U.S. could be next to zero if people really wanted a job and were willing to relocate.

Guess who Reid and Caroline are rooting for?

As the news on the economy continues to be lackluster, which is a good thing, it was finally announced that the second quarter of 2024 had a GDP growth of 3%, which is excellent. Not too strong, not too cool. The Atlanta Federal Reserve has forecasted that the GDP growth in the fourth quarter of 2024 will be 2.5%. I need to emphasize again that these are the types of numbers we want. We do not want GDP growth to be too low or too high. It needs to be somewhere in the 2.5% range to not create economic imbalances. We want growth, but we want controlled growth. We do not want to make the same mistakes we made previously when trying to create growth by printing money and creating inflation.

There has been a lot of conversation in the financial media about why the U.S. went through such high inflation growth in 2022. You may recall that during COVID, the administration put through numerous spending plans to stimulate the economy. One of those plans was to dump $1.9 trillion into the economy through payments to individuals and favorite political supporters. The only way the government could have created this $1.9 trillion in aid was to print that money. When you print money, basically, you are creating dollars from nothing.

Barb, Marti and Mia ready to cheer on “the A!”
Better luck next year, Braves!

That means more dollars are in circulation seeking the same goods and services. There is no question that this one act contributed mainly to the advent of inflation in 2022 and 2023. No actions by the government are immune to creating problems in the overall economy. If you think inflation has not set in for the long term, just look at this fact. The average price of a new vehicle in the U.S. in September was down 3% from 2023, which is certainly good news. However, the average price of a new vehicle in the United States is up a mind-blowing 29% from 2019. This is a good example for those who think inflation has not impacted on almost anything we purchase.

While the U.S. is enjoying a nice economy at the current time, the rest of the world has not been so lucky. It is particularly true that Europe is slow and has many problems keeping their economy above negative. Also, as we all know, China has suffered serious economic declines and recently provided huge stimulus to jump-start its economy again. View this fact if you want to know exactly how far China has gone to stimulate its economy and use public works to support it. It is estimated that there are 90 million unused but finished empty housing units in China at the current time. As you know, China has built entire cities to keep people busy and not unemployed. However, they have no one who can occupy these units or afford them. It is estimated that these 90 million unused housing units in China could house 270 million people. If you do not believe that China’s problems are severe, you truly do not understand the economics of the government creating jobs for people to create certain products and services that are not needed.

For DeNay, no road trip is complete without a stop at Buc-ee’s

Almost daily, I get the question of what happens when China invades Taiwan against the U.S.’s desire. Roughly 70% of China’s exports make their way to the U.S. one way or another. If China were to invade Taiwan, which is a staunch supporter of the United States, the U.S. would create sanctions on Chinese exports that would essentially destroy their economy. I do not believe for a second that China would be so stupid as to create this self-inflicted wound over the small island of Taiwan.

For the last several postings, I have talked about the flowing down of wealth to future generations. I explained how this is currently occurring in a way unlike anything we’ve ever experienced before. We are seeing daily the transfer of wealth passed down from our generation to the younger generation, which will significantly change how the new generation consumes and retires. As I have pointed out, this is a very good thing if it is controlled, and the younger generation gets good advice. However, I did have some clients raise objections and want to know if I was asking them to do without so that the younger generation could inherit more. Basically, must I suffer so that my children benefit? That is not what I am proposing.

Megan feeling at one with the gaming community at
DreamHack Atlanta (Georgia World Congress Center)

I suggest that if properly invested, almost everyone can create wealth beyond their spending ability. I had one client say to me the other day, “I have been frugal for 50 years of my life; I cannot just change overnight.” And I agree with that philosophy, but you should also spend your money. I am suggesting that there is plenty for you to enjoy retirement and yet pass money along to the next generation. You cannot imagine the benefits of starting a young couple off with a nest egg that they never would have had if not given to them by you.

There are many changes regarding retirement. I see it in our business now, where young people come in and sign up for the 401(k) plan immediately. If there is any resistance to the 401(k) plan, it is by the older generation, not the younger one. They understand that if you begin saving early, you can accumulate wealth for retirement, and even a small contribution today saved for 40 years would be substantial in the future.

One happy grandchild – Jim + Patty Radney’s
pride + joy made it on Braves Vision!

You would be surprised how often I hear middle-aged clients complain about how much they contribute to their 401(k). The standard answer I get is they either contribute 4% or 5% based on whatever level their employer matches. It is hard for me to imagine that people could be so naïve. The beauty of a 401(k) is that you can contribute money on a tax-deferred basis, yet you still get to keep the money. Of course, that money is taxable in the future, but it is taxable at the tax rates in the future, which may or may not be as high as the ones today. If you do a time value analysis of those future taxes, you will see that they are minor compared to not contributing to the 401(k) plan and paying the taxes now.

Parents also miss the golden opportunity to create Roth accounts for their children. Creating a Roth account for them is the way to go if you have a child who earns a few thousand dollars in a summer position. Think about the growth that would happen if you contributed $3,000 for an 18-year-old, and they do not touch that money until retirement at age 65. The growth would be exponential, as compared to the initial investment. Parents can teach them the value of investing by starting them early and helping them learn the benefits of future growth.

Mia and Sophia the Sloth in Roatán, Honduras – never letting go!

I see the issue related to 529 educational accounts almost daily. President Obama wanted to curb 529 accounts and focus on the American Opportunity Credit because 529 accounts primarily benefitted those higher on the income scale. I counter to indicate that 529s should be used by everyone, not just the rich. The benefit of accumulating money for future education on a tax-exempt basis is just too good to pass up. Both parents and grandparents should begin contributing to a 529 educational plan at the baby's birth. If you allow money to build up for 18 years tax-exempt, maybe you can alleviate the extraordinarily outrageous cost of college.

The point I am trying to make here is that there are billions of dollars flowing into investments on a daily and weekly basis from all these sources. People are contributing to their 401(k) plans, IRAs, and 529 accounts on a weekly or monthly basis. These billions of dollars flowing into the marketplace increase the opportunity for those stocks. Never in the history of American finance has such a flow of money been available for future appreciation of stocks and bonds.

I thought I would give you a history of investing to illustrate my point. I was around when the first IRA was put into effect in 1974. Virtually everyone viewed it as a skeptical device because many people believed that it was just a scheme by the government to confiscate money from you. It took many years before a significant number of people actually used the IRA.

Watch out East Atlanta, Harper got her learner’s permit!!
Happy belated 15th!

If you do not believe that IRAs have become successful, all you have to do is look at the amount of money invested in our IRAs today. At the end of the second quarter of 2024, it is estimated that $14.5 trillion was currently invested in IRA accounts. It is also estimated that total retirement assets today are roughly $40 trillion. When you think about the future generation, generational wealth passed down to them is $40 trillion, which will flow down for generations to come. It is not a one-year or two-year flow down. This $40 trillion will be felt for the next decade and passed down to multiple generations in the future. This has never happened in U.S. finance, and it will change everything we know about generational wealth going forward. Do you realize that $6 trillion of cash is now in money market accounts waiting to be invested?

The biggest change in investing and retirement came in 1981 when the IRS proposed the formal rule for a 401(k) plan. I was practicing then, and the skepticism and the adoption of the 401(k) plan was slow. Once again, people did not view it as a viable retirement plan. Prior to that time, the standard retirement vehicle was a Defined Benefit Plan. In a Defined Benefit Plan, money is paid to you in retirement for your lifetime and maybe for the lifetime of your spouse. But when your spouse dies, all that money evaporates. There was no money to pass along to your heirs.

The 401(k) changed that concept. The 401(k) would allow you to contribute to the plan during your lifetime and draw on it in your retirement. But if you died prematurely, this entire amount would flow to the second generation, being your children or grandchildren. So, as the 401(k) plans became popular in 1983, 7.1 million employees participated in a 401(k) plan. But that number grew to 38.9 million in 1993. Suppose you want to know the buying power of 401(k) plans today, in 2019. In that case, it is estimated that 80 million people, or basically one out of every two employed people in the United States, benefit from a 401(k). Currently, $5.7 trillion in assets are contained in those 401(k) plans. As you can see, the growth of these plans has substantially made available new money daily, buying stocks and bonds and supporting the market.

Mia and Barb enjoying a beautiful beach in Cozumel – rough life, ladies!

I get many questions about the new election's effect on the U.S. stock market. My answer generally is that it will have little or no long-term impact on the market. You may get a whiplash sell-off or a buy-in opportunity at the election, but it will be short-lived. As illustrated above, the flow of money into the market will stabilize, and over time, this election will have absolutely no effect on long-term results. It is true that the two competing partners for the presidency represent entirely different ideologies and different economic goals. They could not be any further from each other. However, the effect of the market will be minimal and will last only a short period of time before it stabilizes. The thought of trying to cash out before the election and buy back afterward would be deemed to be “market timing,” and we all know that market timing is impossible.

As mentioned, regardless of the outcome I do not anticipate any major long-lasting effect on the market, although both candidates have floated tax trade and spending ideas that I find populist and sometimes bordering on the ridiculous. Both candidates propose cutting taxes, which is alarming, given the huge deficits that the government is running today. There was substantial support for running up deficits during the pandemic a few years ago, but there is no economic justification for deficits today.

Interestingly, neither candidate has even broached the subject of less spending by the government. I would be a true advocate for any candidate who would reduce the size of government and reduce spending. We do not need higher taxes. The deficit this year is $1.8 Trillion. What I think we need is a smaller government. Suppose you can even imagine that the number of people on the government payroll has reached over 23 million Americans now. Roughly 15% of every employee in the United States is employed by the U.S. government. I am sure those numbers go up exponentially for people not employed by the government but supported by the government. I cannot even imagine what 23 million people do that is beneficial for the country.

Freddie Falcon found some adorable sports fans at
Lymphoma + Leukemia Society’s Light the Night

The federal government just finished its fiscal year, which ended September 30, 2024, and financially it was a total disaster. The deficit for this fiscal year ended at $1.83 trillion. Believe it or not, that is 13% larger deficit than the previous Biden year. What is baffling to virtually everyone is that a considerable amount of this deficit was created when there was no pandemic, financial crisis, or major war involving large U.S. forces. This is an excellent example of the government running amok.

You would be wrong if you think this deficit was due to a lack of tax revenue. Tax revenue actually increased by 11% this fiscal year to $479 billion in virtually every tax category. Individual income taxes were up 11%, and corporate income taxes were up a stunning 26%. But even though tax revenue was up close to half a trillion dollars, the government figured out a way to spend that money and substantially more. The total tally of expenditures by the U.S. government went up 11% from the previous year. Therefore, they spent $699 billion more than the last year for total spending this fiscal year of $6.75 trillion. The sad part of the previous two paragraphs is that neither candidate running for the current office of president has offered any solution to government spending, which is quite unfortunate for us all.

I would love a President who would go in and say it is time to balance the budget; therefore, we must reduce the size of employment in the government. Some of you were not even around when government budgets were in a surplus condition. As recently as President Bill Clinton's administration, there was actually a surplus in the budget. Unlike the multiple trillion-dollar deficits we have today, the government budget was actually in balance. Do I believe that governmental deficits are a long-term harm to the economy? Of course I do. Do I think it is devastating? No, that would not be the case.

Any time you have a government that can print its own money, deficits will never be of concern. However, when printing your own money, you will, by nature, create inflation, and inflation is a hidden tax on us all. While I find the upcoming election interesting, I think the effect on the stock market, whoever wins, will be minimal and I think the government will continue to govern even against our wishes in the future.

Some cute Marti + Mom time at the
Melissa Etheridge + Jewel concert (Sweetland Amphitheatre)

However, at some point, some governments are going to have to figure out a way to spend only the money they earn and create less government rather than more. At a deficit of $1.8 trillion this year, I feel as though they are not even trying.

I thought I would give you a couple examples of the inefficiencies of government and how destructive their inefficiencies can be. You may remember that in 2021, the Biden administration passed an infrastructure law for $42.5 billion to expand broadband to underserved, mostly rural communities. Who could have disagreed with this policy? The idea of providing broadband internet to underserved communities can be a tremendous benefit for young kids and for businesses. It could create new jobs, educate children, and accelerate the abilities of these communities to expand and grow. What a wonderful concept that virtually everyone could have supported.

Here we are three years later, in 2024, and you know how many contracts have been made regarding this wonderful service. As of this time, not a single project is underway. It seems that once the government got involved, they put into the contracts a lot of administrative garbage that kept the project from being built. It had to follow Federal labor and employment laws, and many other types of restrictions. This kept people from wanting to work on these projects. Further, they insisted upon this rollout being in fiber broadband cable. As you know from looking at your own community, running fiber cable is expensive and inefficient. Running it to rural areas is almost impossible and very expensive. For less than one-third of the allocated budget, they could have installed Starlink and other wireless carriers that could expand the coverage at a lower cost. Basically, for less than $15 billion, the entire United States could be covered by satellites providing internet access, but three years later, the government plan did not provide any access.

You’re never too old to learn something new! Cameron joined the football team post mid-season of his senior year – good luck, kid!

But, if you want a further example, think about the famous 2021 program to build an electric vehicle charging network throughout the United States. In 2021, the government passed a law that would allow EV charging networks to be built throughout the United States at a cost of $7.5 billion. Certainly, if you were going to mandate further EV promotional ideas, you would need more charging stations. Basically, the inability to charge has slowed the growth of EV cars. Only Tesla has a nationwide charging network. Even major car companies now rely on Tesla charging stations to create charging opportunities.

However, everyone rejoiced when the government decided to provide funding to build charging stations throughout the United States in 2021. Here we are three years later, and exactly eight stations have been constructed in six states. The reason more stations have not been built is due to the government's interference in building these stations and the restrictions they put upon them. If, instead of directly overseeing the construction of these charging stations, they turned the money over to private industry to build them, most of the network would be finished by now. These are just two examples of the inefficiencies and everything the government does. The private sector could do all these projects cheaper, faster, and without governmental interference in their completion. In my opinion, the only thing this government does well is the military, and that is only because there is no private sector.

In conclusion, I want to give you the best estate planning advice of all time. Estate planning is going to become particularly important over the next few years. Currently, the estate exclusion is roughly $13.6 million per person. Therefore, a married couple could exclude estate problems worth $27.2 million. After 2025 this exclusion is scheduled to expire and be reduced to $7 million. Therefore, a couple could exclude only $14 million compared to $27 million, a major reduction if Congress doesn’t act.

Nadine + Steve Hooks enjoying retirement! Fun fact, Nadine is a former Rollins’ employee and is pictured along with Joe at the top of the blog

Everyone should consider estate issues regarding the growth of their assets. Over the last few years, the value of real estate has increased significantly, and of course, the value of your financial assets continues to grow. Many people are now having estate issues that were never there before. If you are not doing gifts of 529 accounts and funding the Roth IRAs of your children, you should be. If you wait to deal with your estate issues in the last years of your life, you may find out there are not enough years left to satisfy and get you below the exemption.

I talk to clients every day about gifting money now to their children. Please reference my comments on generational wealth and helping your heirs today rather than waiting until you die. Make their life a little easier and not affect your own. It seems so simple to me, yet getting clients to give up assets to children is so hard. While it may be hard, I am going to keep trying.

Often, I am asked for the best estate planning. The simple answer is a quite simple plan of action by you. On the day you die, you write a check for the exact amount of all the assets you have left… and it bounces!

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

The Best Months of The Stock Market Are Coming – Get Ready For Gains!

2024-09-12T13:30:00.001-04:00

From the Desk of Joe Rollins

A big CONGRATULATIONS to Lily Holmes –
recent graduate of American University Washington College of Law!

In the first part of August, I received many phone calls from clients who believed the world was surely coming to an end. I reassured them that the sell-off in early August was based on incomplete information and the work of professional traders. As I wrote in the last posting, I did not anticipate that there would be a major sell-off during August, and fortunately, I was correct. The month of August actually ended higher, despite all the concerns of investors.

I have found many topics I would like to discuss in this month’s posting. I think I will finally make reference to gold and Bitcoin and my thoughts on why we do not invest in them. Also, after two long years, the yield curve is no longer inverted. This is a major economic event, and I need to explain why this has suddenly become such a controversial topic.

Eddie scoring major points with daughter Lucy at
Olivia Rodrigo’s GUTS World Tour!

It would not be a political season if I did not give you some insight into the politics of the tax proposals by the new candidates. Some of them are ridiculous, and some are beyond ridiculous, but I will explain. Interestingly, it seems that the U.S. is running out of energy. Nuclear energy may be the only solution for us in the future. It is amazing that the environmental lobby is so against nuclear, even though it may be our only alternative clean energy in the future.

I have always been interested in Cuba and became even more interested in their local economy and politics after I visited there a few years ago. It appears that anyone who can get a job elsewhere is now leaving the island and mainly heading to the U.S. It is especially important that we discuss the economy and why Cuba has failed and will likely not recover without additional help.

Yeehaw! Cameron ready for Western night
at the high school football game!

Over the last several years, job openings have doubled the number of unemployed people in the U.S. Finally, now, the number of job postings is almost equal to the number of people unemployed, and therefore, the economy sits poised to turn either higher or lower. I will explain.

Before I get into those exciting topics, I do need to report on August, which was an excellent month for the financial markets. Even though the anticipation was something extremely dreadful, the exact opposite actually occurred. Once again, the quick turnaround in the financial markets during the month of August emphasizes how important it is to be invested at all times. At the point where things look bleakest, that is the time when you need to be invested.

Evan and Alexis cruising along’ in Nassau, Bahamas

For the month of August, The Standard and Poor’s Index of 500 stocks was up a very satisfying 2.4%. For the year 2024, that Index is up 19.5%, and the one-year total return for that Index is 27.1%. The Dow Jones Industrial Average was up 2% for the month of August and is up 11.7% for the year 2024. The one-year return on that index is 22.1%. The NASDAQ Composite was up 0.7% for August, and for 2024, it was up 18.6%. The one-year return on that Index is 27.2%. As you can see, the three major indexes are all up in excess of 20% for the one-year period. Given the dour prospects for the economy from the so-called experts, the markets have returned excellent results for the last one year.

Just to give you some basis for comparison, the Bloomberg Barkley Aggregate Bond Index was up 1.4% for the month of August and is up 3.1% year-to-date. For the one-year period, that Index is up 7.2%. With interest rates most likely to fall in the next few months, it is possible that the bond index should show better results; however, as you compare it to the three major Indexes of stocks, it is a very dismal performance. Many people believe that you should have at least 40% of your assets in bonds. If you base that on returns, you can see that a 40% allocation to bonds would have been a serious mistake over the last 12 months.

Caroline and Reid (is that really you?)
proudly displaying their new faces on Amelia Island!

At the beginning of 2022, all the so-called experts on Wall Street predicted that the U.S. would almost surely go into recession during that year. Even though they did not have a lot of evidence to support that theory, the one that they did roll out to explain a recession theory was that the bond market had an inverted bond yield. For those who are not familiar with bonds, what that meant was that the two-year treasury bond yielded a higher rate of return than a 10-year treasury bond.

The theory behind this logic was when interest rates are high for two years, that indicates a Federal Reserve that is restrictive and trying to control the economy by slowing it down, which would in turn throw it into recession. Also, the fact that the 10-year bond was yielding a lower percentage than the two-year bond would indicate that, more likely than not, the economy would be in recession due to the restrictive nature of the two-year since it clearly was not in sync with the yield 10-year bond. The so-called forecasters on Wall Street predicted that this inverted bond yield created recession 100% of the time; therefore, you should abandon stocks immediately. As would be the case, 2022 ended up being a bad year on the stock market, with the S&P 500 Index stock going down roughly 20% in 2022.

Ava extending her love of all animals to the Charging Bull on Broadway!

I predicted during that same period that the economy would not go into recession because the momentum was just too strong to allow it to go into any type of pullback. I was right, but the stock market proved me wrong. Notwithstanding my explanation of why the economy would not fail, the market went down anyway. But I have excellent news to report. After two years of the inverted bond yield, it has finally right sided itself. The current yield on the two-year treasury is 3.654%, while the current yield on the 10-year treasury is 3.716%. I recognize that the difference is small, but the fact that the two-year treasury is now below the 10-year treasury is quite a positive for the U.S. economy.

It is interesting to me that these so-called experts who predicted a recession in 2022 have not changed their opinion and still believe a recession is likely to occur. Those who quoted the inverted bond yield as evidence of the recession have not come out and changed their opinion because the inverted bond yield is no longer inverted. I recognize that these are extremely technical issues in investing, but you need to understand why the market goes down even without any rational reason. The markets went down in 2022 without any good reason, but the pain was felt in that year. However, it is encouraging that for 2023 and the current 2024 year, the same Index that lost 20% in 2022 is up 20% in each of those subsequent years.

Proud Papa Michael Holmes with daughter, Lily. Kudos to you both!

Since it is a political year, I thought I would reflect on the proposed tax conversation with the current political candidates running for the Presidency. One candidate has proposed that they would be anti-price-gouging from big corporations and pharmaceutical houses. Literal price controls have never worked anywhere in the world, including the United States. Price controls did not work in Cuba (to be explained later), Argentina, Russia, Venezuela, and other third-world countries. If you think that the U.S. economy is more sophisticated than the others, remember Republican Richard Nixon imposed price controls in early 1971, and they were a dismal failure.

What true price controls do is lead to scarcity. This is not a difficult concept for anyone to understand, but if a producer cannot increase prices and therefore would produce at a loss, then they would not produce at all. Suddenly, while you have an oversupply of products, now you have scarcity. The question always centers around the fact of which is the worst situation. Controlling prices is a good thing for the consumer, but having no product to purchase, in my opinion, is a much worse situation. Look at the situation that they have in South American countries where they cannot produce the food necessary to feed their population because the farmers cannot make money on the sale of goods.

Mia giving extra love to dad – Happy 97th, Muzzy!
Cheers to you, and the fabulous journey that is your life!

The obvious answer is, of course, to eliminate those price controls to increase the supply of products. Of course, when you do that, you get immediate inflation and a worse-case situation, such as currently being felt in the Argentina economy, where inflation is up 1000% over the last five years. The most uneducated economist would tell you that price controls are disastrous for the economy and cannot be enforced, and they would clearly be negative to consumers, not a positive, but it sounds good in commercials.

Another candidate running for office proposes that all the problems in the U.S. economy would be saved by putting tariffs on all products brought into the United States. The argument being that it would ensure that more manufacturing takes place in the U.S. since there would be tariffs to keep the prices high for goods produced outside the United States. Once again, the concept is a “populist” concept but is absolutely ridiculous from an economic standpoint. You cannot have tariffs without inflation. If, by definition, you would increase prices on all goods produced outside the United States, that would allow the U.S. manufacturers to exploit the market and increase prices, which would clearly create inflation and destroy consumer’s pocketbooks in the United States.

Alexis and Evan celebrating her 25th at a pasta making class
with friends (not pictured)! Welcome to adulthood, Alexis!

Goods produced outside of the United States have an incredibly positive benefit to the economy as has been clearly shown in the past. During the 1960’s and before, there were only three major car companies producing cars in the United States. The cars were expensive, and the quality was awful. I remember buying a brand-new car in the early 1970’s and taking that car back to the dealer the next day with a long list of things that were wrong. The quality was just not particularly good and since the car companies basically had a monopoly, they just did not care.

However, that philosophy changed when foreign car companies began manufacturing cars and shipping them to the United States. The cars coming out of Germany and Japan were of higher quality and of similar price than the cars produced in the United States. This increase in quality cars made the big car companies in the United States better. They had to improve their quality in order to compete. And they did. There are many examples where foreign manufactured goods have improved the quality of U.S. goods and competed on a level playing field with goods produced in the United States. There is no question that we all desire more goods to be manufactured in the United States to create more jobs and taxes, but the way to do that is not through higher tariffs but through a better working environment.

Another example that both candidates are against is the acquisition of U.S. Steel by Japanese steel companies. Both the current administration and candidates have come out against this acquisition. While you certainly think it would be a desirable interest to keep steel manufacturing in the United States, the way to do that is not as proposed by these candidates. If you were to turn over virtually all the steel manufactured in the United States to one manufacturer, that would obviously lead to issues where they could increase prices any time they wanted to.

Joe using props to explain bullish vs. bearish markets to Ava

The major difference would be that the Japanese manufacturers have agreed to spend $2.5 billion upgrading U.S. steel manufacturing and making it more efficient and cost-effective. This would be an enormous positive for the U.S. economy. First, the spending of this $2.5 billion would create vast amounts of jobs that would be high-paying and long-lasting. The innovation and production of cheaper steel would benefit many industries and construction in the U.S. In my opinion, the acquisition of U.S. Steel by foreign manufacturers would be incredibly positive for the U.S. consumer, yet from a “populist” standpoint, all the candidates are against it.

They argue that in the case of war, steel would be controlled by a foreign government, and therefore the U.S. would be deprived of the steel needed to produce military armaments. The ridiculous part of that statement is that in the case of war, any foreign manufacturers could easily be nationalized, and we would get back the industry for free that they have innovated and spent money to improve. The acquisition of U.S. Steel for many reasons should be approved, yet for political reasons, all candidates for the highest office in the country cannot see the benefits.

The most outrageous proposal is that one of the candidates would like to tax unrealized gains on stocks. You almost have to be amused by this proposal given the extreme complexity of doing so. Having completed tax returns for over 50 years, computing realized gains is hard enough, but to tax unrealized gains is virtually impossible.

I know it only affects taxpayers with over $100 million dollars in assets, and those are very few, but those people control a large portion of the population and employees in this country. But first, think of how you calculate the fair market value of your assets and how that has been done in this calculation. No one knows exactly what a business is worth if it is a private industry. As an example, we all know that the price of your house is subject to many fluctuations and changes year to year. How one with that amount of assets would calculate the fair market value of all their assets would be an exceedingly difficult situation.

Take as an example an entrepreneur who has only one privately held business and virtually no other assets and is stuck in this unrealized appreciation quagmire. Due to the success of that business, the value of that company goes from $100 million to $150 million in one year. Therefore, the $50 million increase would be taxed at 25%, and he would owe $12.5 million dollars in taxes under this proposal. Where does that money come from? It is clear that he would have to sell the stock of the company, which would endanger the company and employees and almost ensure the loss of jobs.

The interesting part of the proposal is that, let us say that the following year, the value of the company falls back to its $100 million level. Does he now receive a $12.5 million refund from the government? I doubt it, but who knows what is under this proposal? But the most important part of this proposal is that, almost assuredly, it is unconstitutional. While it is a “populist” idea to tax the rich, it is not realistic to tax gains that have not been realized. This proposal will not pass Congress, but it is interesting how it has been characterized by the media as being a positive thing when it would be an economic disaster.

DeNay and family enjoying some fresh air and
beautiful views at Rocky Mountain Park

I believe the one proposal that would create a better U.S. economy is the proposal to cut taxes on big corporations. One candidate wants to increase taxes on big corporations, and another wants to decrease them. It is hard to believe that the media just does not understand the difference. If you decrease the taxes of the corporation, you will get more companies that want to operate in this country. They would create new plants and equipment, hire employees, and pay local taxes. The higher the taxes are the more they will stay away and produce in other countries with lower tax rates.

I find it such a simple concept that it is hard to believe it is misunderstood. If you increase taxes on corporations, that is money that they could not use to hire people, expand plant equipment, and produce better goods. Obviously, there is a major difference between higher and lower taxes, but it solely depends on your view of what is better for the country. It is good to have wide-ranging opinions, but I only wish people understood the economic effect rather than the populist idea. It seems the better solution is to cut government expenses, not raise higher taxes.

I have always been interested in Cuba, and more so since I have visited the island. It is an example of why socialism just does not work and will never work in any economy. From an idealistic point of view, you would think that everyone would be better off with socialism than they are under capitalism. But that has never proven to be the case, yet people continue to believe that we are becoming more socialistic in our government in recent years.

Point to Cuba and you see exactly what the issues are. It recently came out that from the year beginning of 2022 to 2023, the island lost 1,011,269 residents (10% of their population). Over a million people left the island since there were no work opportunities, and they had a better chance of finding those work opportunities in other countries. What was the most distressing was that of this amount, over 800,000 of the people that left the island were between the ages of 15 and 59. This is also the age group that produces future generations. That means the most productive part of the population is abandoning the island in droves. Basically, what that means is that they are leaving the incredibly old and the noticeably young on the island, which is creating a financial disaster for the Cuban government. The care of the elderly is of serious concern, and the island has no way to raise revenue, since the majority of the tax paying populace has left to go to a different country.

Mitch, Marty, Barb and Mia trying out their sea legs in Tampa!

The other interesting aspect is that the food production in Cuba has collapsed. Since people are not willing to work on the farms because the pay is equal to those sweeping the street, the production of food in the country has completely collapsed. To give you an example, the production of pork in Cuba fell to 3,800 tons in the first six months of this year, compared to 149,000 tons in all of 2018. The country is headed to a severe crisis since it cannot feed its population and will not accept help from other countries. Most of the people leaving Cuba are coming to the United States. It has now been reported that 645,122 Cubans have come to the United States over the last two years seeking asylum with hopes of residency.

I am asked every day about the potential for recession in the United States, and maybe I look at it differently than most people. And looking back over my financial career of over 50 years, it seems like that every recession in the United States was created with a spike of prices of oil and the effect it had on the consumer. I vividly remember the Jimmy Carter years, where the price of oil virtually doubled overnight. But worse than that, we had scarcity of oil, and therefore scarcity of gasoline. And every year since then, other than the COVID-19 year, a recession has created a spike in energy prices.

All that has changed. While the current administration has fought the production of oil and gas at every turn, the U.S. is now energy independent. We produce more oil and gas than we consume in the United States, and if the current administration would allow us, we would export to more countries. The exporting of natural gas to Europe creates many well-paying jobs and helps the U.S. economy. Therefore, I do not think recession is likely at the current time, because the price of oil has actually fallen over the last year or so or has remained basically stable.

Shelley and Cameron spent Labor Day rescuing
382.9 pounds of food for Second Helpings Atlanta!

People ask me all the time about why we do not invest in gold and Bitcoin. My answer to that is relatively simple. I do not have any way of evaluating what the value of gold or Bitcoin is or should be. It is impossible to evaluate whether those assets have the ability to go up or down, because they have no income stream and basically the only way they have any value is scarcity.

So therefore, they are like collectibles, which would be paintings or fine bottles of wine or autographs of professional athletes. The value has nothing to do with the ability for it to produce income, but more on the ability of scarcity. Since I find neither of these assets to be particularly scarce, I question whether over the long term, they can continue to go higher. I often cite the rednecks that promote gold on television on Friday night as a good example of why gold is not likely to continue to be scarce. If this hard-working group can produce gold, then more likely than not, more gold will be produced in the future. I understand the price of gold has gone up in recent years, but that is mainly due to inflation and not due to scarcity. If you compare those assets with U.S. stocks, you get a dividend flow and an increase in value in those assets that can be quantified. Currently, I see nothing in gold or Bitcoin that allows it to be evaluated on a total return basis, yet I do with stocks, which is why I went into stocks.

For the first time over the last several years, the number of unemployed is 7,115,000. It has approximated the number of job openings, which is 7,673,000. For the most part of the last several years, the number of jobs has doubled for the number of unemployed. As I have written and many times in this posting, we wanted the economy to slow so that the Federal Reserve would cut interest rates. We have now accomplished that goal without destroying the economy, and now we are almost assuredly looking at rate decreases.

I project over the next 90 days that we will see rate decreases of 0.75 which will dramatically improve the economy with lower interest rates and, importantly, lower mortgage rates. We could not have accomplished these rate decreases until the economy slowed, which we have now accomplished. You hear so much about the soft landing and the hard landing and the desire for one over the other. We have now clearly accomplished this soft landing, and that is almost a sure indication of higher stock prices in the future.

Following in her father’s footsteps?
Ava in front of the New York Stock Exchange

The U.S. is running seriously short on power. With the increase in electric vehicles and the use of electricity by technology, the U.S. is clearly running out and private industry is not responding. The answer to the energy problem is nuclear energy. I have never really understood why the environmentalists are so against nuclear energy. It is the only clean way to produce more energy and yet, for some reason, every time we begin a new facility, the environmentalists fight it.

The rest of the world has caught on and is building nuclear power at a rapid rate. In France virtually all their electricity is produced by nuclear energy. In China they are producing nuclear plants at an efficiency unseen in this country. They can build a nuclear reactor in seven years or less, at a fraction of the cost in the U.S. Over the last several years, it has taken over 20 years to build a nuclear reactor in this country, and everyone has been overdue and overbudget.

There are simple solutions to these issues, yet, due to the environmentalists fighting every nuclear plant, we cannot move forward. First off, the production of nuclear plants in the United States should be standardized, and rather than each being unique, they must all be built the same. This is not a novel concept. Also, the government must move in and provide protection to the producers of environmentalists’ legal challenges. Basically, the government would have to guarantee the uninter rupted production of a nuclear facility in the United States. It is amazing to me that politicians are so short sighted that they cannot see the obvious. The obvious is that we are running out of electricity and if we do not begin shortly, almost assuredly, there will be shortages in the future.

Almost everything I read; I see that America is becoming increasingly rich as we move forward. Over my last several postings, I indicated that the passing down of wealth by the current generation to the second generation is going to be historic in its high value. This passing down of wealth will materially alter the U.S. economy for decades to come. It will provide for a consumer; unlike anything this country has ever seen in the past. All these huge attributes can mainly be attributed to investing in the stock market. I have been saying this over the last decade, but the population just does not seem to understand or believe it. There are still too many people sitting on cash, earning virtually nothing as compared to the positive aspects of investing in stocks. I received a notification the other day that supported my assumption.

“Brother and sister, together as friends,
ready to face whatever life sends!” Caroline + Reid

Fidelity Investments announced that there were 497,000 401(k) accounts in the U.S. with assets in excess of $1 million. That is 31% greater than from the previous year. This means that these 401(k) accounts have grown since they were invested principally in equities. This does not include the 401(k) accounts of all the other major brokerage houses such as Schwab, Merrill Lynch, etc. It also does not include the likely millions of investors that have $1 million or more in their IRA accounts, and not their 401(k) accounts. The evidence is clear that America is getting richer by the day, and they are getting richer by investing in stocks.

One of the reasons that short-term dips in the market do not concern me is because of the potential buying power of the money coming into the market daily. I always laugh when you see Apple stock go down after their earnings report. The principal buyer of Apple stock is Apple itself. They use their corporate profits to buy back their stocks, and every time it goes down, they benefit by buying more. The same is happening throughout the investing world. There are literally billions of dollars every day flowing into the stock market from 401(k) accounts. These 401(k) accounts tend to be more aggressive than ever, and therefore grow at a faster pace. Wealth is being created throughout the economy, and yet so many investors elect not to participate. We are moving into the best months of the year for the stock market, and there could not be a better time to invest for future profits.

We all know that the best months for investing are November through May. This time we have an even more powerful stimulus, which is the cutting of interest rates by the Federal Reserve. Once again, we have the trifecta of strong investing stimulus. We have a very sound if slowing economy, we have almost assuredly lower interest rates coming up and corporate earnings continue to expand and get better. We have the three most powerful positive attributes working in our favor at the current time. We do have many potential issues as well, such as the federal deficit, and a major U.S. discord with one-half of the population disliking the other half of the population.

However, I think the positive attributes of the economy clearly outweigh the negatives at the current time. If there has ever been a major opportunity to prove your potential to be wealthy, it is currently investing. I have never really understood why people like to invest in cash when they have the potential to earn many times that by investing in equities. All I can give you advice on at the current time is going into the best months of the year, it is now time to get fully invested.

Dream big! Train hard! Play volleyball! ✔✔✔

We have had a fabulous year so far through August which followed another fabulous year in 2023. Over the last 20 months, the markets have been up substantially, and you have benefited from it enormously. It is a good time to reevaluate your investment philosophy and sit down and discuss with us issues that bother you regarding investing. There is no question that the markets will be higher 10 years from now than they are today. What happens over the next 90 days? No one has any idea, nor should you care.

When I first got into investing, the Dow was at 1,700. As of Friday, the Dow ended up 41,563. Stocks will be higher in the future because corporate profits continue to expand. That is not likely to change, and therefore the likelihood of recession is low. I think it would be a great time to sit down and review your investment philosophy and discuss with us how we can help you going forward.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

Slow your roll, don’t overthink - the cavalry is on the way!

2024-08-14T15:00:00.001-04:00

From the Desk of Joe Rollins

Bill Bewley listening politely as one of the locals
proclaims that one day he’s going to be a real boy.

Since announcing my semi-retirement, I have been reminiscing on my 35-years of investing for clients and my 53-year CPA career. In the beginning, we did this job without the “essential” technology needed today. The entire financial world didn’t depend on technology the way the industry does now. In this post, I would like to cover some events in the industry that have changed investing policies since the beginning of 1990.

This week, the financial markets weathered a significant sell-off; a familiar sight that often triggers panic. However, by the end of the week the indexes had rebounded, showcasing the remarkable resilience of the market. I want to delve into a significant sell-off in 1987 and 1929 and the lessons we learned, shaping our approach to such issues since then. I also want to discuss why the sell-off happened last Monday and why it is unlikely to be repeated.

Interestingly, “al fresco” in Italian slang refers to prison
- not dining outdoors.

At the beginning of 2022, Wall Street's so-called experts were abuzz with talk of an impending recession due to the inverted bond yield. I want to bring you up to speed with that thinking and, after two years, illustrate that there is still no sign of a recession. This long-term perspective, a crucial pillar of our industry, guides us through market fluctuations, and I am excited to delve into it further. But first, let us review what transpired in July.

The Standard & Poor's Index of 500 Stocks ended up being 1.2% for the month. Its year-to-date returns are 16.7%, and its one-year return is 22.2%. The Nasdaq composite was down marginally 0.7%, but it is up 17.7% year-to-date, and its one-year return was 23.7%. The Dow Jones Industrial Average is up 4.5%, bringing the year-to-date up to 9.5%, and the one-year return is 17.2%. The Bloomberg Barclay’s Aggregate bond index is up 2.2% in July, its year-to-date return is 1.7%, and its one-year return is 5%. As you can see, all the major market indexes are up double digits, and the bond index drags very far behind.

Caroline Schultz bringing home the gold in the
backstroke + butterfly for the Ansley Golf Club.

The financial markets sold off dramatically this past Monday, with the Dow Industrial Average down over 1,000 points. As expected, there was major panic and many phone calls from concerned clients who expressed outrage. The single question that kept coming up was – Why don’t we just get out now and get back in when it is lower? This is what we call “market timing”, and it is a strategy that no one has been able to successfully master in the history of financial investing. It is important to remember that getting out is simple, but getting back in is hard. The critical question is - when do you know the market has bottomed out, and when do you know it is safe to return? Based on my history of investing, I would argue that it does not matter, and market timing is a fool's game that no one is qualified to master. Let me illustrate:

When I began to think about opening my own investment company, I studied long and hard to prepare for that opening. Unfortunately, in 1987, we had the infamous Black Monday. On that terrible Monday, the Dow Jones industrial average dropped from 2,300 to roughly 1,700, a 508-point decline in one day. That market sell-off of 22.6% was achieved in a single day. The market sell-off that recently occurred was 3% and was hardly a bump in the long road compared to the Black Monday incident. What happened after the sell-off in 1987 is very important so I will explain.

Nothing like celebrating your 21st in Tuscany– Happy Birthday, Savvy!

The sell-off of 1929 is another example of a severe sell-off in the history of investing. That sell-off was extremely catastrophic due to the misplaced actions of the government in 1929. Rather than loosening financial controls, they tightened them. In 1929, you could leverage 90% of your portfolio. Therefore, you could buy $10,000 of stock with only a $1,000 investment. This highly leveraged atmosphere in buying stock became one of the major causes of the fall. When the market fell over 20% in 1929, you were essentially bankrupt if you had $9,000 in debt on your $10,000 stock, now worth only $8,000.

There were many rumors of people jumping off buildings and committing suicide due to the financial plight this caused. More importantly, this sell-off and ultimate financial downturn in 1929 led to the lengthy decade-plus Depression in the United States. The 1929 crash on the stock market was a severe contraction of the economy, which caused irreparable damage. We all know the history of the 1930s when the unemployment rate was 25% of the working population. It was not until the U.S. entered the fight of World War II in 1941 that the economy turned around as the government was spending money to build military armaments—that action in the economy put an end to the Depression in 1941.

Artie Macon and Liz Mercure enjoying a moment of bliss in Tuscany.

Compare that to the 1987 crash, which was as bad as the previous example. The notable difference is that, even though the crash significantly damaged the net worth of Americans, the government immediately freed up capital and flooded the financial system with cash. I recall even the infamous unqualified Dr. Greenspan assuring the public that there was no need to sell their stocks since he assured them that there was plenty of liquidity in the system. Given the fast actions of the Federal government at that time, 100% of the losses in 1987 were fully recovered within two years due to a rising stock market.

More importantly, this increase in liquidity in the financial system added to a significant boom in the U.S. economy during the 1990s; business was good, inflation was low, and the government was controlling its spending. You may even remember President Bill Clinton was concerned that the U.S. budget would have a surplus during his presidency and how they would save that money for the future assurance of Social Security. Compare that to today, where the deficit will exceed $1 trillion for as far as anyone can see.

Love and laughter in Venice - Kathy and Randy Wittman

As you can see, the difference between the 1929 incident and the selloffs of 1987 were substantially different. This is the lesson I received when I began my investment firm in 1990; it did not make any difference whether you tried to time the market. Recall that the 1987 market fell off to a level of roughly 1,700. Today, that same index is approximately 39,497. So, the question that you would have to ask yourself as an investor is, would it make any sense at any time to get out of the market and later get back in, or were you better off riding out the fluctuation in the market? The answer is crystal clear: trying to time the stock market is a foolish game that even the so-called experts cannot master.

When I launched the investment company in 1990, the world was different from an investment standpoint. I have looked back at some of my writings from that time, and you had to evaluate the most influential companies at the time. People forget companies such as Bethlehem Steel, Eastman Kodak, Goodyear, Sears and Roebuck, IBM, and the most powerful of all, General Electric. These were the “blue chips” of investing at that time. How quickly have these mighty giants fallen?

Lloyd and Laura King savoring a romantic evening in Tuscany.

When I say there is no way to time the market, I do not mean that you should not go out and seek other ways to invest your capital. If you had invested in these companies mentioned above over the last 35 years, likely, your retirement funds would be close to wholly depleted. You must continually evaluate new investments and how those fluctuations affect your long-term goals. Unfortunately, too many people invest in a specific stock or mutual fund and forget it.

I wish I could tell you how often clients come into my office and have no idea what the balance of their 401(k) plan is. In many cases, I ask them to guess their balance, and they cannot even do that. If you are not aware enough to even know your balance, I think that is saying you are not keeping up with your investments.

“Three coins in the fountain!”
Cousin adventures in Rome at Trevi Fountain - Ava and Savvy

During my investment career, I have seen unbelievable companies conceptualized and introduced into the market. People forget that Amazon was founded only in 1994 and is now the most powerful retailer in the world. Tesla Motors, the first producer of an all-electric vehicle, was not even on the radar until the turn of the century. Once again, Facebook, now Meta Platforms, was not even a concept in Harvard graduate Mark Zuckerberg’s mind. This idea was not executed until 2004 and is now a multi-national tech conglomerate. The most interesting is NVIDIA, an artificial intelligence leader founded in 1993.

So, where do we stand with the so-called “Magnificent Seven?” If you go back and compare the two things that move stocks, the most important is earnings. During the first quarter, Microsoft earned a $22.2 billion net profit, Google earned a $23 billion net profit, and Apple earned a profit of $21 billion. During this same time, General Electric earned a profit of $1.2 billion, IBM had a profit of $1.8 billion, and the one-time most profitable company of all in our lifetime, Exxon, earned a profit of $9.2 billion. As you can see, the rate of returns brought by the Magnificent Seven is many times higher than the old blue chips, and, of course, deserves a higher rating. Companies are valued based on three essential components: the economy, earnings, and interest rates. If you looked at earnings alone, the Magnificent Seven’s stocks would continue to be valued higher than the old blue chips, which today are literally an afterthought.

A tavola non si invecchia – Italian Proverb

Compared to the 1987 and 1929 major market crashes, the sell-off last Monday of 1000 points was virtually immaterial. How do you compare a sell-off of over 20% with a one-day sell-off of only 3%? The most important consideration was that by the end of the week, that 1000-point deficit was eliminated, and the week ended virtually unchanged.

Many of the questions I received this Monday related to what caused the sell-off. One of the principal reasons quoted was that the soft employment report of the previous Friday had scared people into believing we were falling once again into recession. Even though the evidence was overwhelmingly against a recession, you cannot keep the people on Wall Street from discussing this issue. It seems like all the famous Wall Street forecasters always have recession on the tip of their tongue.

One of the reasons why they continue to harp to the public about recession is because the stock market forecasters who correctly predict the direction of the market become instantly famous. Those advisors who were correct in predicting that the market would crash in 1987 became investment superstars. No one mentioned that they may have been wrong multiple times, but they were right this time, and the public praised them. Every time a stock market sell-off occurs, the financial news parades out the same predictors of “gloom and doom” that we always hear.

Teri, Bill, Savvy, Joe, Randy and Kathy at St. Mark’s Square in Venice

Often, clients will send me those articles and ask me to comment. In many cases, these people have been predicting recession almost continuously for the last 40 years. Even a broken clock is right twice a day, and eventually, they may get it correct. But where do we stand today regarding recession and the future direction of interest rates? Let me give you the good news later.

One of the principal reasons for the sell-off last Monday related to the “carry trade” with the Japanese yen. Often, investors do not understand the terms Wall Street throws around, but the concept is quite simple. Up until last week, you could borrow money in Japan at virtually zero interest. If you could borrow substantial sums of money at zero interest and invest that money in U.S. equities or treasury bonds, you could make the difference between whatever these investments earned and the basic cost of the interest, which is zero. That is why it is called a “carry trade.”

Just you, me and Venice! - Teri Hipp and Bill Bewley

However, all that changed the previous week when the Bank of Japan decided to increase interest rates. Suddenly, that trade was no longer profitable because you now had to pay interest on the loans in Japan based on your investments in the United States. Therefore, your typical hedge funds began immediately unwinding those transactions by selling stocks and paying off the loans to Japan. By doing so, yes, you are accomplishing the reduction of your debt, but you are also converting U.S. dollars into yen which in turn strengthens the yen and lowers the dollar's value. In any case, it is a bad situation if you borrow yen and pay it back in dollars, so the best action plan is to unwind the trade and get out of the entire transaction. By the end of the week, this trade had been almost reversed, and therefore, the carry trade likely did all the damage it would do.

One of the major reasons I have little concern about the market's future direction is the most crucial component of interest rates, the economy, and earnings. As we finish the earnings reports for the second quarter of 2024, we note that they are higher than they were this time in 2023. There are also projections that earnings may go up as much as 20% over the subsequent 12-month earnings. If interest rates go down, earnings will clearly go higher.

Even though the so-called experts on Wall Street are calling for a recession, the evidence is quite substantial in the other direction. The GDP for the second quarter of 2024 was reported at 2.8%. The Atlanta Federal Reserve Bank is now projecting the GDP for the third quarter of 2024 at 2.9%, and the Federal Reserve projects the GDP in the fourth quarter to be greater than 2.5%. None of the major forecasters are projecting a recession anytime soon.

“Partners in Wine”
Liz, Randy and Joe conducting a happiness check in Italy

As I have written numerous times in these postings, we wanted the economy to slow down. As a byproduct of that slowdown, you would almost assuredly see unemployment rise. Interestingly, the unemployment rate went up to 4.3% during July, but the labor force continued to expand, and many believe that this expansion was due to immigration. I guess if you have basic open borders and anyone who wants to can come into the United States and work, you would be surprised if labor participation ever went down. However, we wanted a slower economy and the negative aspects of higher employment because it would force the Federal Reserve to cut interest rates, which are desirable for most businesses.

We now almost have a guarantee from the Federal Reserve that they will cut interest rates at their September meeting, and more likely than not, they will also cut interest rates again before the end of the year. People do not realize the effect that lower interest rates would have. Everyone knows that lower interest rates would positively impact real estate, but many do not realize how vital lower interest rates are to new car sales, credit card payments, and any revolving finance arrangements. The lower the interest rates, the more money is freed for consumers to buy goods, increasing the gross domestic product.

Road Trip Warriors
Ava, Savvy, Kathy, Dakota and Teri, the women of Tuscany

So, we have the absolute trifecta of good news for future stock prices. We have earnings that are growing, interest rates that are falling, and a solid economy. You cannot ask for anything better than higher stock prices. That, of course, does not mean you will not see volatility. As long as the traders continue to pursue their theory of recession, you will have one day of significant selloffs and one day of major gains. It means absolutely nothing when it comes to long-term investing, and it is best to ignore the market's wild fluctuations. I have learned, and this firm has learned over the last 35 years, that you are much better off fully invested times than trying to time the market.

The major sell-off in the markets that occurred in 2022 was related to the Federal Reserve increasing interest rates. At that time, the Federal Reserve announced that it would raise interest rates to slow down inflation, which had reached an extraordinarily high level of 9%. Make no mistake, that inflation was directly attributable to the administration flooding the economy with cash long after it needed no support. However, due to the high inflation and the Federal Reserve’s slow reaction, they needed to increase interest rates, which they did almost monthly.

Reid and Caroline cruisin’ around NYC –
a city built on dreams and determination!

One of the great axioms of all stock market investing is that if the 10-year treasury bond was inverted from the two-year treasury, that almost always indicated recession. I know it is a complex concept for the average layman to understand, but all that means is that if the two-year treasury is higher than a 10-year treasury, it likely connotes a future recession. The concept is supported by the fact that if interest rates are high in two years but lower ten years out, that likely means that you will have a recession in the short term since rates would normalize ten years out.

The so-called experts screamed from the highest mountain that this inverted bond yield would almost assuredly create a recession in 2022 and 2023, and you would have no choice but to get out of stocks. Unfortunately, 2022 was a terrible year for the stock market due to these projections of the upcoming recessions. But interestingly, after almost two years of the bond yield being inverted, there is no sign of recession even today. Also, this inverted bond yield has come very close to breaking even once again. Today, the two-year treasury is 4.057%, and the 10-year treasury is 3.94%. They are close to once again becoming un-inverted. That indicates that inflation is subsiding since there is no reason to take a 10-year treasury at 3.94% if inflation is truly at 3% or higher.

One of the things I hear on a regular basis is why we should not just invest in money market accounts that pay greater than 5%. You should consider that today, a one-month treasury is paying 5.373%, but a two-year treasury is paying 4.057%. What that means is that interest earned by money market accounts will almost assuredly fall in the future, and that 5% rate is clearly not guaranteed.

Checking out the beautiful St. Patrick's Cathedral in New York!

I have never really understood why investors do not invest in high-level securities if they are that uncomfortable with investing. Why would you not buy a utility stock that pays as much as a money market account and has the potential for appreciating when your money market assets cannot appreciate and will likely fall?

In Dr. Jeremy Siegel’s most recent edition of “Stocks for the Long Run”, he has reported that over the last 30 years, stocks have had an economic return after inflation of 6.5% - 7%. Remember, this is an after-the-inflation calculation. While you may be able to get a treasury bond on a 10-year basis at 4%, after inflation, that return does not look as attractive.

His explanation is an interesting one. He says, “Although stocks are the most volatile asset class in the short run, they are the most stable asset class in the long run.” He points out in his book that all other asset classes, including bonds, gold, and real estate, cannot even match the actual return of diversified publicly traded equities. Once again, that supports our theory that trying to time the market is a fool’s game, and you are best to stay invested at all times.

This is an excellent time to meet with us between now and the end of the year. It is also a great time to put idle cash to work. We would love to discuss your financial future and your investments going forward.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

“Save Like a Pessimist, Invest Like an Optimist” - Bill Gates

2024-07-17T17:21:00.001-04:00

From the Desk of Joe Rollins

Artie, Liz, Randy, Kathy, Carter, Josh, Laura, Lloyd, Savvy, Ava, Dakota, Joe, Teri, and Bill enjoying the views of Civita di Bagnoregio in Italy

The month of June was an extraordinarily good month for our investments since they grew unexpectedly to mid-year heights. It is hard to imagine that for the first six months of 2024, the S&P 500 Index was up an almost unbelievable 15.3%. With all the pessimists discussing the negative things that could happen in the economy, it was certainly a pleasure to see the indexes grow so much for the first half of 2024.

While indexes did extraordinarily well in the first half of 2024, actively managed mutual funds outperformed them. In some cases, the mutual funds even outperformed by a large percentage over the return of the 500 index. I would like to discuss some of this in this post.

The whole famiglia in Tuscany -
Joe, Dakota, niece Savvy, Ava, Josh and Carter

Since there is not a lot of fiscal news going on now, I thought I would go back and cover basic economics and some issues I found interesting. Also, I would like to discuss topics I normally do not discuss, like oil, life events, and the wealth effect. Before I get into these interesting topics, I need to address the actual returns of the indexes for the month of June. The Standard and Poor’s 500 was up 3.6% for the month of June and is up 15.3% for the year 2024. For the one-year period ended June 30, 2024, that index is up 24.5%. The NASDAQ Composite rose even more, gaining 6% in June, bringing its year-to-date increase for 2024 to 18.6%, and making a 29.6% rise over the past year. The Dow Jones Industrial Average was up 1.2% in June and was up 4.8% for the year 2024 so far. For the one-year period, the Dow is up 16%.

I always like to give you the corresponding returns of bonds since, generally, they are marginal and certainly insignificant as the relates to equities. The Bloomberg Barkley Aggregate Bond Index was up by 1.1% in June. For the year 2024, that Index is down 0.6%. That index was up 2.7% for the one-year period as of June 30, 2024. As you can see, all the major market indexes were up double digits for the one-year period ended June 30, 2024, while the Bond Index was returning roughly 25% of the returns of the equity indexes.

When in Rome…Joe and Ava at the Colosseum
(almost 2,000 years old, wow)

With such an outstanding first six months of 2024, I feel sorry for my clients and others who are uninvested. So many potential investors are sitting in cash thinking they are avoiding the next great market crash. They do nothing to assess the economy, earnings, or any other major stimulus of the stock market. I had a client this quarter who informed me that they were taking out all their money from their IRA and investing it in a CD. The logic of a move like that defies any type of explanation. You can earn in one month in the equity markets what it would take an entire year to earn in a CD. Additionally, you are locking up your money for a period of time, and you have no opportunity to react to current financial events. The worst part about that move and why I feel sorry for clients sitting in cash, they are giving up the opportunity for large gains that can help them build for retirement.

Much has been said recently regarding the Federal Reserve’s attempt to cut interest rates. With the softening labor market, it looks like the Federal Reserve will cut interest rates very soon. Going back all the way to 2021, it was assumed that inflation was “transitory” and would not have much effect on the economy. Clearly, the Federal Reserve was incorrect in that assessment. What we found out was that the Federal Reserve was late to the party and did nothing to counter the inflation that we went through in 2021, which was 9%.

Muzzy and Jennie Musciano, with daughters Lisa and Mia,
celebrating 71 years of marriage! Amazing!

If the Federal Reserve had started increasing interest rates during that time of high inflation, the dramatic market swings probably would not have occurred. However, the Federal Reserve has recently dramatically lowered the inflation rate from 9% to roughly 3% this month. They are well along on their goal to get inflation down to 2% annualized, which they say is their target.

Do not assume for a second that I am blaming the increase in inflation on the Federal Reserve. In my opinion, inflation can be directly attributable to spending by the Federal government. When the new administration came into office in 2021, they immediately approved another massive refund to Americans. As has been demonstrated, that was a severe mistake, by not only running up the deficit but also by creating the inflation we suffered through! You may remember the so-called phase of supply disruptions. There was no supply disruption; there was just a huge increase in demand over supply.

Clients Robbie and Susi Hensley enjoying a Braves game with friends

Basic economics indicates that when demand exceeds supply, prices go up. During COVID-19, we had a period where people were not spending money, and therefore, supply exceeded demand. However, just as soon as the Federal government funded their massive refunds, demand suddenly increased exponentially. This increase in demand created supply issues which obviously increased prices and increased inflation. The Federal Reserve was not responsible for inflation, but certainly, it could have helped relieve the issue by increasing interest rates earlier.

As we go forward, the Federal government continues to be the major culprit in creating inflation. It is projected this year that the Federal deficit will exceed $1.2 trillion. The Federal government is spending money like “drunk sailors,” and I think that a great deal of this was designed to buy votes. We are just now starting with the spending on infrastructure projects. It is anticipated that roughly 40,000 projects will be started with Federal money during the year 2024. Wow!

Client Michael King and his beautiful new bride Clare!
Here’s to a long and happy marriage!!

The main reason that the Federal deficit is out of control is that politicians can secure votes by sending Federal money in their own districts. They just cannot control themselves and so they continue to run huge deficits.

A client told me the other day that he thought deficits would go on forever and have been a constant part of government spending. I reminded him that we had a surplus budget period as recently as the Clinton administration in the 90’s. Even though that was not that long ago, it has quickly left people’s memory.

I like it when famous people quote and criticize the deficit. The most famous is Warren Buffett, a known finance expert. The deficit issue is extraordinary, but he has a simple solution. As he told CNBC, “I could end the deficit in five minutes; you just pass a law that says that any time there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.” It is a simple concept that could easily be solved by politicians.

Ava and friends catching a ballgame before the new school year begins!

Back at the end of 2023, all these so-called Wall Street experts forecasted that during the year 2024, we would have four or five interest rate decreases. They projected that the economy would slow to a recession, unemployment would skyrocket, and the Federal Reserve would have no option but to decrease interest rates. I do not know whether you have finally gotten the hint that you cannot rely on the Wall Street experts for advice, but I will continue to point out how wrong they really are.

So, what we found out in 2024 was that there was no recession, employment has remained strong so far in 2024, and the Federal Reserve has not cut interest rates even once. In fact, the odds of four or five rate cuts in 2024 is virtually zero. I would not be surprised to find the Federal Reserve cut interest rates twice in 2024, but more likely than not, they will only cut interest rates once after the Presidential election.

Even though people think the stock market is high, it depends upon analyzing the numbers to determine whether that is the case. As I have written many times in these postings, the stock market's value is based on earnings and interest rates more than any other single factor. It is true that year after year, earnings growth in 2023 was a meager 1%, and yet the Standard and Poor’s Index 500 stocks were up an unbelievable 26% in 2023. A good deal of that rise was related to the expected decrease in inflation, not so much an increase in earnings.

The Frank family knows that no baseball game is
complete without Cracker Jacks!

We have clearly turned that corner as we finish up 2024. It is now estimated by FactSet analysts that earnings will grow in 2024 at a rate of 11.3%. Even better than that, they project earnings will increase in 2025 at 14.4%. If it is true that earnings are going to grow 25% over the next 18 months, would you truly assume that stock prices are too high, or maybe, due to the increase in earnings, they are more moderately priced?

Clearly, the economic situation today is positive. Regardless of when they start, it is almost 100% sure that the Federal Reserve will have to cut interest rates in the last part of 2024 and into 2025. Couple that with the higher earnings projected above, this should lead to higher stock prices going forward. Obviously, no one knows exactly what the future will bring, but the economic tea leaves indicate a further rise in stock prices.

The month of June also had an interesting wrinkle that almost no one realized. Even though I have discussed above how great the month of June was for equity investing, interestingly, virtually all the value funds were negative in the month of June. Basically, those clients who thought they were being conservatively invested in value funds saw their accounts actually go down for the month of June. For the year-to-date in 2024, these value funds have returns significantly smaller than the growth funds, making up most of the indexes. For the first time in some time, it looks like the international stock funds are starting to gain some traction and hopefully will support the U.S. market going forward. We have begun allocating some resources to international stocks to offer a balance to the U.S. equity markets.

I read an article recently that indicated one of the major reasons investors are disenfranchised with the financial service industry is that they believe advisors are not investing to their personal goals. I recently had a client notify me that he had been married for over a year and we had no knowledge of that marriage. It is very difficult to keep up with people’s desires for investing if we do not know what is going on in their lives.

View from the villa. Leonardo da Vinci said it best,
“Tuscany is the ultimate canvas, painted with the hues of history and culture.”

We need to meet more often so we have a better understanding of your goals. Oftentimes, it could be as simple as an email or notification so that we at least know what is going on and if there have been any changes or events in your life. It is very important that we know major changes so we can invest accordingly. Frequently, we do not know until after the fact that people have gotten married, purchased new homes or are making plans for retirement.

You can also tell that the stock market is perceived high by its investors at the current time because we are going through what I classify as the “wealth effect.” The “wealth effect” is where people, realizing the market is perceived high, decide to take some of their investments and buy something they have desired. This could be a new car, a new boat, a new house or an expensive vacation. It is sort of a psychological way to hedge the stock market. If I take the money from the stock market and buy a new car, if the market goes down, I have already purchased a new car.

As the famous investor Peter Lynch commented, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” That is exactly what is happening here. Even though clients enjoy whatever they purchased, those funds are no longer working for their retirement.

One of the biggest mistakes clients make is that they only invest on a periodic basis. I guess the mentality is that you wait until you accumulate a certain amount of money and then invest. The problem with that investment philosophy is that you may hit the market at exactly the wrong ¬¬¬time. If instead, you invest on a regular basis, either by financial draft or otherwise, you are much more likely to enjoy market success. We can electronically draw money out of your checking account every month and have it go directly towards your investment.

The Wittman’s, Rollins’ and Dufresne’s in front of Michelangelo’s Statue of David

One of the biggest mistakes investors make is that they are sitting on a large sum of cash completely uninvested. When you realize that the market was up 15.3% in the first six months of this year, the returns on a 5% money market account appear to be minuscule. Over the last many years, I have encouraged people to invest in their IRAs in advance. That would mean that you should have already made your IRA investment for 2024. Unfortunately, my comments encouraging early investment have fallen on deaf ears. I wish I could go back and demonstrate to investors how much more money they would be worth today if they had invested their IRAs in advance.

I can tell it is a political season because the Federal government is spending money that it does not have and doing things that make no sense. We have basically suffered from an open border system between the U.S. and Mexico, allowing people to come into this country without any investigation on our part, and in fact, we have not only brought them to the country but have supported them with housing, food, and other benefits. How anyone does not see this as negative for the U.S. defies imagination. So, after three years of basically open borders right before the election, we vowed to close borders again. How could that be anything other than political motivation?

Even though the vast majority of Americans are against canceling school debts for the obvious reason, it benefits the people in debt and not the people who have already paid theirs. In fact, the U.S. Supreme Court has recently ruled that this cancellation of student debts is illegal. Notwithstanding the Supreme Court ruling, this administration continues to promote the cancellation of school debts and the cancellation of liabilities related to school. I am not sure I completely understand the whole concept, but it certainly appears to be vote-buying to me.

“Amici e vini sono meglio vecchi.” Randy Wittman, Joe and Bill Bewley

All of a sudden, the administration, by executive order, has paused all permits for new LNG plants. No one can explain why this move was made other than it was designed to appease the environmentalists and prove that the current administration was against fossil fuels. A court has recently overturned that ban as not approved by Congress, but clearly that was a case of attempting to buy votes from the conservation lobby.

I do not write much about oil since I find the subject confusing and the investments not very enticing. But the United States has done an extraordinary job producing new oil over the last few years. In fact, the U.S. is the number one producer of oil in the world, even today. During the month of June, Russia’s crude production was 9.2 million barrels a day. Saudi Arabia produced 8.9 million barrels daily, but the U.S. produced 13.2 million barrels, far exceeding both.

The U.S. is ahead of the rest of the world, and all this excess oil should be available for export to supplement the country's need to buy Russian oil. There is no more effective way to limit Russia's ability to execute war than to put financial risk on them from people not buying their oil. To this point, most of Europe buys no oil from Russia, but Russia continues to sell oil to China and India to make up their principal revenue source. If the U.S. can continue to produce oil, and the current administration will allow them to export that oil, it would bring great financial distress to Russia, which so depends upon oil production.

Proud client Paula Herraiz at her son’s Master’s graduation at Clemson. Way to go, Mason!

During the month of June, my family and friends and I spent two weeks in the beautiful expanse of Tuscany, Italy. While I have been to Italy many times, I have not spent much time in the heartland of the country where most of the vineyards are located for the famous Chianti wine. We prearranged multiple excursions into Rome, Venice, Florence and other historical sights. We rented this beautiful villa which overlooked the beautiful Tuscany countryside and had an amazing time visiting the sights and enjoying the wine.

Also, I need to report that you need not worry about the recession in Italy. The country is overrun with tourists and from all visible signs, they are doing very well economically. You very rarely see poor people in Italy. It seems to be a country of the middle class. But to give you an example of the tourist, the day we were at the Vatican, according to the guide, there were over 80,000 people there that day. I tried to text the Pope to tell him we were there, but I guess he was busy and did not respond. You will see many pictures in this posting from our trip overseas. It was a great, once-in-a-lifetime vacation where we were able to get together with friends and family and enjoy the beautiful countryside in Italy.

I expect that for the remainder of 2024, there will be a high level of volatility in investing, particularly as it relates to the Presidential election. Remember the most important components that make the stock market grow are interest rates and earnings. The lower the interest rates are, the better it is for stock prices. We now know that interest rates will start to fall and that the so-called experts are correct, earnings are about to go up. You can hardly think of a situation that is more favorably contributing to higher stock prices in 2025.

The aptly named Grand Canal in Venice

*** P E R S O N A L N O T E ***

After 54 years in the business of public accounting, I have decided it is time to slowly phase back my participation in the industry. I began this firm 44 years ago and have run it every day since then. It is time for me to start taking more time off and turn the responsibility of running the firm over to the other very capable long-standing partners who most of you are familiar with since we have worked side by side for over 20 years (Robby Schultz, Danielle Van Lear and Eddie Wilcox).

Most people do not know the history of the practice, but I thought I would give you a brief overview. I began working out of my house in Fairburn, Georgia in 1980 and had exactly one client. I did not have my first employee until 1981, when I moved the practice to midtown Atlanta. We have fortunately grown the business substantially since that time, and I have enjoyed having many long-term employees working for the firm.

In 1990, I began this investment company with basically two clients. I never anticipated that the investment company would grow at the rate it has, but I certainly appreciate the confidence the clients have in our firm. Today, we manage clients basically all around the country and even the world. We have many international clients, and we manage roughly $1.3 billion for all our clients. We have enjoyed a great expansion of our business, and we appreciate the many referrals that clients have given us throughout the years.

My goal is that I will work fewer hours beginning immediately and slowly transition my financial clients over to Eddie and Robby. I will not be in the office every day but can be reached at any time if there is an emergency. I have no intention of leaving Atlanta permanently and there is nothing physically wrong with me that would prevent me from working, I just think it is time that maybe I take more time off for myself and my family and enjoy the things that I once wanted to do.

Therefore, when one of the partners contacts you, hopefully you will treat them with the same respect you have given me all these years and know that you are in good hands. When tax season rolls around, I will not be having personal meetings with clients related to tax returns, but Danielle, Robby or Eddie will sit in for those conferences. As will always be the case, I am available to discuss emergencies or specific needs you may have, but hopefully, the routine and normal conversation we have can be held by others. If anyone would like to discuss this decision, please give me a call.

If you would like to visit with us in the coming months, we look forward to seeing you. We always enjoy learning about our clients and exactly what their financial needs are and how we can better serve them.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

“Generational Wealth Transfers”

2024-05-08T15:00:00.001-04:00

From the Desk of Joe Rollins

No subject that I have written about in these postings has garnered more attention than my last, regarding generational wealth. Everyone has that subject on their mind, but they really do not know how to address it. We are entering into a period where the transfer of wealth from the Baby Boomer’s generation to their children is unprecedented and will change the value of investments in the future for all. It is possible that the United States will become the second wealthiest country in the world over the next 25 years.

Pretty sneaky! Mia and the entire Musciano clan surprised
her wonderful parents (40-year clients of RF) with
a vacation to their old condo at the beach!

The stock market pulled back modestly in April, but that certainly was no surprise. I guess you would have to say that it was a humble pullback, given that the market was ahead 26% for all of 2023 and was up a full 10.6% for the first quarter of 2024. Given that extraordinarily hot increase in the markets, a modest pullback should not have been unexpected by anyone. In this post, I will discuss what is likely to happen during the rest of 2024, given the incredibly positive presidential cycle trends from the past. People seem to forget that this is a presidential year and what you see in presidential years is positive stock market performance.

For this posting, I will discuss a great deal about generational wealth, the economy in general and, of course, what I expect for the rest of the year. I will also comment on the extraordinarily negative sentiment regarding stock market performance and the remarkable performance contrary to the negative editorial comments out of Wall Street. Before I discuss all those interesting subjects, I must reflect on the performance of the stock market during the month of April.

The Standard & Poor’s Index 500 stocks were down 4.1% for the month of April but continues to be up 6% for the year 2024. For the one-year period, that Index is up a very satisfying 22.7%. The NASDAQ Composite was down 4.4% during April and is up 4.5% in the year 2024. The one-year performance of that Index is 29.1%. I do not think anyone could argue with that positive performance. The Dow Jones Industrial Average was down 4.9% in April and is only up 0.9% year-to-date in 2024. That Index is up 13.3% for the one-year period ending April 30, 2024.

Cameron thinking maybe he was meant for the tux life, after all…

I always like to add in the Bond Index so that you can have a comparison between equity investing and bond investing. For the month of April, the Bloomberg Barclays Aggregate Bond Index was down 2.5%. For the year-to-date during 2024, that index is down 3.2 % and the one-year performance of that index is down 1.4%. As you can clearly see, all three major equity indexes are up double digits for the one-year period ending April 30th, but the Aggregate Bond Index is negative for that one-year period. If you are investing all your retirement money in bonds expecting to fund your lifestyle in retirement, you are clearly making a mistake given these performance results.

Something very interesting happened during the month of April. The Indexes were performing very well through most of April, but towards the end of the month there was a major sell-off. In fact, on the last day of April, the NASDAQ Composite was down a full 2% in one day. It was clear that during this time, the market traders were trying to embarrass the Federal Reserve Chairman, Jerome Powell. Many believed on Wall Street, a combination of a negative stock market and a major increase in interest rates in bonds could force the Chairman to immediately reduce interest rates on the Federal Funds Rate.

Good friends Lloyd King and Scott Zakheim enjoying
great seats at the Predators game.

I have seen this many times in the past where traders team up and do everything within their power to embarrass the Chairman, hoping they can force his hand. As you know, even though he is appointed by the sitting President, the Chairman of the Federal Reserve is not political. Fortunately, this Chairman has not yielded to the whims of Wall Street and continues to do his job based upon current events.

It has received very little publicity, but I thought the Chairman’s comments after his last news conference were very telling. He basically promised that they would not increase interest rates. If you look at his actual statement, what he said was, “I think it's unlikely that the next policy rate move will be a hike.” You can get no more emphatic than that statement. Basically, what he is saying is that he is guaranteeing that the next move by the Federal Reserve almost assuredly will be a downward movement.

Sweet little Penny with what might be the only Easter Bunny
we’ve ever seen that doesn’t look terrifying!

The job numbers for the month of April were not spectacular, but they were very encouraging. The month of April reported an increase in employment of 167,000 jobs. That is certainly below the hot number we have had for the last several months. However, a moderate increase in jobs is very welcome. As we well know, the labor market has been extremely tight for the last several years, and any easing of that pressure in the job market will almost assuredly result in a reduction of interest rates going forward.

Wall Street has proclaimed that due to inflation, which has partly failed to respond to the Federal Reserve tightening, there will be no rate increases during 2024. I am in the opposite camp. It is fairly clear that the pressure that higher interest rates are putting on the economy is slowing the expansion of the economy and, therefore, is hurting future growth. In my opinion, I think that the Federal Reserve will cut interest rates prior to the end of the year, most likely after the Presidential election.

No Federal Reserve Chairman would ever want to be deemed political, and to impact a Presidential election would be a disaster. People forget that Jerome Powell was appointed by then President Donald Trump, but he has made it very clear that any monetary policy decisions would be made based on what’s right for the economy, without regard to politics or any outside considerations.

Amazing! Josh and Carter in front of the beautiful red rock walls of Sedona.

There is another reason rate decreases are going to occur. Suddenly, we are seeing a strengthening dollar around the world. This is not unusual when interest rates are as high as they are here in the United States. But we have recently seen in Japan that the yen has exceeded 150 to the U.S. dollar. That is the weakest it has been in generations. Also, we are seeing that the dollar's strength is impacting the ability of China to control and keep their currency level with the U.S. dollar. There is so much negative that would go on with a strong dollar that it is most likely that the Federal Reserve will have to cut interest rates regardless of inflation to slow down the gains in the U.S. dollar against the rest of the currencies in the world.

As I mentioned in my last post, I discussed the transfer of wealth in the United States to the next generation, creating generational wealth. Probably no subject I have ever written about has received more comments from the people reading my newsletter so I thought maybe I would go back and discuss it in greater detail. Whatever you believe in the way of transferring wealth that may occur in the U.S., you will not believe the actual numbers.

Economists now estimate that something like $84 trillion will be expected to pass from the older generations between now and the year 2045. Even more interesting is that roughly $16 trillion will take place over the next 10 years. Many things lead to this transfer of wealth. Obviously, the rapid increase in real estate values and the historically long bull market have led to substantial assets that will be passed down to the younger generation. However, one of the largest and most significant contributors to this wealth has been the transfer from defined benefit pension plans to the so-called 401(k) and IRA retirement accounts.

Joe (age 5) doing his best James Dean impression

When I was growing up, the Cadillac of investing was the pension you would receive from large companies like General Motors and the government retirement pensions that would go on for the rest of your life. The unfortunate part of these pensions is that when you died, the amount stopped and there was no money to transfer to your children. Basically, it provided a guaranteed income during your lifetime, but nothing was leftover to pass on to the younger generation.

I vividly remember, as a child, when the insurance agent would come by our house once a month to pick up a check for my father’s life insurance. He would often show up during a family meal, and either my father or mother would write a check to cover the insurance premiums. Being an impressionable child and not having any idea of the reality, I just assumed that my father had millions of dollars of life insurance in the case of his death.

In fact, when my father died, we found that he had three $1,000 whole-life policies. It was the standard during his lifetime that you would pay into life insurance your entire lifetime and then when the time came to retire, you would annuitize the cash value of those life insurance policies to create a retirement income stream for you. That is where the term to annuitize came from, and now it relates to all retirement income streams. It was certainly sad to all of us to see that he had paid for his entire lifetime just for a cash value of $3,000 to support my mother.

Huldah Bewley with her sweet granddaughter, Baby Georgia.
Congrats to Katherine – she’s adorable!

I was already practicing accounting when they first introduced the IRA law in the 1970’s. Everyone was skeptical at that time that these would work, and that the government would not get involved or try to intervene on the IRA’s. Over time, it has proven that they are highly successful, and it is now viewed today to be enormously utilized by the younger generation.

The success of advantage savings accounts and IRA’s can be demonstrated by the growth in these values. In 1995, it was estimated that the entire retirement market was $7 trillion. In 2023, it is estimated that the value of the retirement market is $38.4 trillion. As you can see, the growth in this market has provided a substantial number of assets that will be transferred to the younger generation over time.

As we see in our business, many investors have substantial 401(k) plans that they have no need to touch since they have other income. The vast majority of these 401(k) plans will be passed down to their second generation, and hopefully, that generation will pass it on to the third generation. What I am trying to emphasize is there will be such a huge transfer of wealth to the next generation that it will significantly improve the standard of living for most Americans due to the spending opportunity that the substantial wealth will offer to the economy in the future.

Cameron + friends looking stylish at the pre-prom picture party
while counting down the hours until the after-party.

People do not understand or fail to realize that there is a substantial issue producing Estate tax over the next several years. Currently, the Estate tax exemption is roughly $13.8 million for each person alive. For a married couple, that is roughly $28 million. Given that enormous Estate tax exclusion, virtually no one qualifies for Estate taxes at the current time. In fact, in all of 2023, only 4,000 estate tax returns were filed in the United States, and only 2,000 of those owed Estate taxes. Rest assured that those who owed Estate taxes were taxpayers who did not receive tax advice since there are so many ways to avoid this. What is interesting is that if you assume that only 4,000 Estate tax returns are filed and divided by the attorneys practicing Estate and Gift law, you can see the issue of that overcapacity.

If the current administration is re-elected, they have assured everyone they have no intention of continuing to allow the income and Estate tax laws that President Trump passed which will expire at the end of 2025. If they do not allow these Estate tax limits to move forward, the exemption will drop from $13.8 million to approximately $7 million. Therefore, for a married couple, the exemption falls from $28 million to roughly $14 million. Suddenly, many people who thought they were outside of the Estate tax will fall within it. For more than any other reason, this emphasizes the importance of transferring wealth during your lifetime to a younger generation to avoid Estate tax.

Many of my clients express a desire to understand and participate in generational wealth, but they often feel unsure about how to do so. The good news is that you do not need to do much to achieve this goal. As I often advise my clients, it is quite straightforward to fund your child’s Roth account, even though they have meager earnings from a summer job. If you were to calculate a Roth account for an 18-year-old child, accumulating from age 18 to 65, you would be amazed at the significant wealth transfer you could initiate with minimal contributions.

Joe, age 7- all he’s missing is his briefcase and Sharpie
(which, fun fact, wasn’t invented until 1964)

Upon reaching age 73, many of my clients are reluctant to take their Required Minimum Distribution payments. They often feel they have no need for money at that stage of their lives. One effective strategy could be to take the required minimum distributions and gift them to your children or grandchildren. There are numerous ways to transfer wealth while maintaining control over your money. For instance, consider placing a vacation home in an LLC and transferring the minority interest to your children. This way, wealth can be transferred to the second generation without relinquishing control of the money. I strongly advocate for helping your children prepare for their own retirement. Contributions to an IRA or Roth to those children are substantial ways of moving wealth to the second generation. This helps your children build wealth while not hurting your pockets.

Another significant transfer of wealth is through charitable contributions. Through a donor-advised fund, you can contribute money annually even though you have no specific charitable entity in mind for the transfer. I encourage people to contribute over five to 10 years to a donor-advised fund and accumulate a relatively large amount of money that can contribute in the future to a charitable cause. This is a way to move substantial assets from your name into a charitable cause that does worthwhile activities. The fact that you can move substantially appreciated securities without paying income taxes on those securities is another reason to make these transfers.

As these numbers indicate, there is going to be a significant transfer of wealth over the next 20 years. To give you an example, it is now believed that $84 trillion in real estate, stocks, cash and other assets in the United States alone will be transferred. Of this amount, roughly $6.6 trillion sits in 401(k) plans that will need to be transferred over the next few years. This transfer of wealth will forever change the U.S. economy due to the spending power of the people who receive this money. It is highly likely that over the next couple of decades, the U.S. will become the second wealthiest country in the world, second only to the oil cartel in the Middle East. One of the last things you want to do is hold on to your wealth without attempting to transfer it to the next generation as you sit back and allow the Estate tax exclusion to catch you after 2025.

Josh and girlfriend, Kasten, celebrating the end of
tax season with a Braves game!

After they reported the GDP for the March-ending quarter of 2024, there was much handwringing by economists and Wall Street. That report indicates the GDP is 1.6% for the 1st quarter of 2024, well below the anticipated percentage. I have studied this number and compared it with earlier projections, and almost assuredly, this amount will increase. It does not look like they had the full and complete inventory totals on the first read, and when the final numbers come in, I expect that percentage to be closer to 2% rather than 1.6%. Regardless of the actual numbers, 1.6% was still a satisfying number and a welcome amount given that we wanted to see a less hot economy, so that we might get lowered interest rates in the future.

If you actually believe that the economy was weak, you are not currently reading all the information available. The Federal Reserve of Atlanta projects that the GDP growth of the 2nd quarter of 2024 will be at 3.3%. That would be basically double the reported rate of the 1st quarter of 2024. I saw so many so-called Wall Street experts predicting that the fall in earnings due to a weakening economy would occur in the 1st quarter of 2024 and would bring down the stock market. Just so you understand the magnitude of the numbers, I thought I would give you the earnings of the five major tech-like stocks.

For the first quarter of 2024, Microsoft reported net after-tax earnings of $22 billion; Apple reported $24 billion; Alphabet (Google) reported $25 billion; Amazon reported $10 billion; and Meta, the old Facebook reported $12 billion. It does not seem like the earnings were diminished in the first quarter since all these companies’ earnings reports are near the all-time best in their history. In addition to the earnings, Apple announced they would buy back $160 billion of their own stock. That is the largest announced buyback ever in the history of American finance.

Ava’s long-time love of horses “mounted” after meeting
these beautiful Icelandic ponies

The numbers we are talking about are so large, they border on science fiction. To give you an example of how large they are, Warren Buffett announced his company, Berkshire Hathaway, is currently sitting on $169 billion in cash. If you can believe those numbers, the interest income earned by that cash investing in treasury bills yields interest income to the company of over $8.5 billion per year. Just think of the earning power generated by $8.5 billion of idle cash attributable to that company.

It is clear that the economy continues to be on solid ground, and corporate earnings continue to be extraordinarily good. Even though the market pulled back in April, I would anticipate that the rest of 2024 will be good. Typically, during the Presidential election year, the markets bounce around through June and, from July to November, tend to be positive. This, unfortunately, leads to what happens with incumbent Presidents. If you want to enhance your ability to be reelected, you will use the massive spending power of the government to enhance the possibility of being reelected. In order to have the best opportunity to be reelected, you want the economy to be good and everyone to have a job so that all outward appearances during your Presidency were positive. However, you do not want to do anything that will be detrimental to the economy beyond your term.

Never too young for a bucket list - Ava and her classmate
enjoying the Northern Lights in Iceland!

Unfortunately, that is exactly what is happening now. It appears now that the government is going crazy spending taxpayers’ money that will, in the long term, be a detriment to the U.S. economy. If you think I am exaggerating, read the exact numbers. Over the last year, there has been an increase in manufacturing jobs in the U.S. of a mere 20,000 jobs. Manufacturing jobs lead to a higher and better economy and prove that the industrial backbone of America is strong. That number is only a fraction of the number of jobs created in healthcare, which is a whopping 765,000. The worst number is the number of governmental jobs created in the last year of 618,000. Another number is the social assistance number of 267,000, which includes household healthcare workers often supported by government programs such as Obamacare and Medicare. As you can see, the current administration has loaded up the economy and government with jobs to keep unemployment low and improve their reelection chances. The sad part of these numbers is that, unfortunately, all of us will be stuck with the number of government workers that are hard to get rid of and a drain on the real economy, and taxes to pay for these jobs that are probably unnecessary. At a time when we need to cut government jobs to reduce the out-of-control Federal budget, why on earth would we be increasing the number of government employees? This year, we are anticipating a Federal deficit of $2 trillion, and yet we have added 618,000 new employees to the payrolls and jobs that provide substantial benefits in positions that are nearly impossible to terminate.

There is not much anyone can do to control the Federal deficit other than elect officials who would be more responsible with taxpayer dollars. It just does not seem that the average taxpayer knows the facts and, therefore, misinterprets the readily available information.

I just wanted to revert back to generational wealth to point out something obvious to everyone. The Federal Reserve data shows that the average net worth in 2022 of people between the ages of 65 and 74 was $1.8 million. That number clearly is exaggerated by the wealth of a few people as compared to the average. The average wealth of those people is only $410,000. While it sounds like a relatively small amount, when rolled down to the next generation, it provides a good starting point in life and a substantial increase in assets they have as compared to the assets inherited by their parents. Like most people in the boomer generation, I received no assets from inheritance, but I will pass down assets to the next generation. I suspect most of the people reading this posting will be in a similar situation. This passing down of assets will change your children's lives and, hopefully, their children in the generations to follow. My one piece of advice here is do not make your children wait until your death to share some of your successes with them.

Bows and bling, it’s a cheer thing!! Go Caroline!!

I was taken aback when I read the headlines that the unemployment report went from 3.8% in March to 3.9% in the month of April. A 1/10th increase in unemployment seemed highly unlikely, given the shortage of employees available to be hired everywhere. So, I looked up where these figures were coming from and determined what was correct. April’s jobless rate was 3.86%, while the jobless rate in March was 3.83%. Therefore, the March unemployment rate was downgraded to 3.8%, and the April amount rounded up to 3.9%. As you can see, statistically the numbers were almost identical, but the headlines assumed something negative because the unemployment rate increased. I hope that if you get nothing else from reading my postings, you will learn to take what the mainstream media and Wall Street give you and better understand what the numbers mean and how easy it is to misconstrue them.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

You Can Create Generational Wealth – Why Are You Waiting?

2024-03-14T15:00:00.002-04:00

From the Desk of Joe Rollins

I know I write endlessly about the importance of investing early and often, yet most people do not realize how important this is in creating generational wealth. I am positive that most people reading this posting never thought they could even consider creating generational wealth for their children and grandchildren. However, it is within the reach of most investors, but so many are just not taking advantage of that opportunity. I want to discuss this in detail in this posting and give you some numbers to support those calculations.

Frank Thomas feeling the well-deserved love while surrounded by his son Don, daughter-in-law Sana, and grandsons Walker and Evan

I also want to discuss the current state of the economy and the general employment numbers that we recently received. Additionally, I want to address the pessimistic view of so many investors and how they have been proven wrong since the stock market hit all-time highs just last week.

Moreover, I want to delve into why China is having so many financial problems and why it is unlikely that China will be the financial success it has been in previous generations. I will also share my prediction on interest rate cuts, which are clearly expected to occur this year. Furthermore, I must discuss the immense financial reach of big tech and why it is crucial that you be invested in tech.

Before discussing those intriguing topics, I must report on the month of February 2024, which turned out to be quite a successful month. Year-to-date, we are enjoying an excellent run and we are all thankful for it. I think back to 2022 when the so-called experts on Wall Street predicted that with a downturn in the S&P and the 11-interest rate increases by the Federal Reserve, the U.S. would likely suffer a decade of nominal returns. I remember so many of these experts on financial news explaining that investors should be out of the markets and in cash rather than suffer the declines that would clearly be coming over the next decade.

Speaking of feeling the love – everyone wanted to wish the
wonderful Fran Gordenker a very happy 90th birthday!

Even though the major averages on the stock market in 2022 went down 20%, as of the month of January 2024 we have fully recovered from that downturn and more. Therefore, in a period of only 14 months, we now have set all-time records in almost all the major indexes. If you ever need a more prominent reason to always be fully invested, it is the quick recovery of a major downturn. Only those individuals who elected not to be invested suffered significant loss while the market roared back from a downturn.

For the month of February, the Standard & Poor’s Index of 500 Stock was up 5.3% and is up 7.1% for the two-month period ended February 29, 2024. Once again, the 10-year average on this index is 12.7%. The Dow Jones Industrial Average was up 2.5% for the month of February and is up 3.8% for the year 2024. The 10-year average on this index is 11.6%. The NASDAQ composite was up a very healthy 6.2% in February and is up 7.3% for the year 2024. The 10-year average on this index is up 15.2% per year.

Eddie and Jennifer enjoying the family ski trip
with daughters Harper + Lucy!

As a basis of comparison, the Bloomberg Barclays Aggregate Bond Index was down 1.5% in February and down 1.6% in 2024. The 10-year average on this index is 1.4%. Every day, I watch a lot of financial news, and one after another I see so-called experts praising the positive attributes of owning bonds in your portfolio. I am just one who thinks, why would you ever invest in an asset class that, over the last decade, cannot even produce returns greater than the inflation rate? From a more straightforward standpoint, if you have owned bonds over the last 10 years as compared to inflation, you have lost money.

When I talk about creating generational wealth, I do so with the understanding that everyone has their limitations, but virtually everyone reading this posting can create generational wealth. I do not know how many times I have written on the subject that you should set up and fund a Roth for your children. If a child makes a small salary during a summer job, you should fund a Roth investment for them. Think about the economics of investing in a Roth account in each of their teen years, and what wealth that will create by the time they need retirement 40 years from now. You are creating generational wealth for your children, and hopefully, your children will pass that along to their children.

Eddie trying not to be “extra” while enjoying time
on the slopes with his girls!

The same goes for IRA’s for yourself and your children. I write endlessly about the importance of funding your IRA early in the year, yet so many investors do not invest early in the year and, in fact, do not even fund their IRA’s on a regular basis. It seems that so many investors can find so many useless needs for their money that they forget the importance of investing for their future while they are still young enough to create generational wealth for themselves.

If you think I am exaggerating the benefits of investing, you just have not read the current data. Try this fact pattern and see if I might be closer to convincing you. Based on data released by the Federal Reserve, investors in the United States created $5 trillion worth of wealth for their households during the fourth quarter of 2023 alone. Think about how much money $5 trillion is. Also, remember that if you were not investing or if you were holding your money in cash, you did not participate anywhere close to this level. Generational wealth has been accumulated in investors' accounts, but if you are not invested, you will not participate.

If you think this is an isolated case, let us look at the rest of the data the Federal Reserve provided. Let’s go back to 2019, which takes out the COVID years, which were economically confusing and not representative of long-term trends. But from 2019 to the end of 2023, American households have added a staggering $39.3 trillion worth of wealth to their households. This amount of money will be passed on to your children and grandchildren for decades to come. This should serve as a clear example of how important it is to invest regularly and to remain invested even during difficult times.

Miller + Penny = 2 pretty cute couch potatoes

Remember that this period from 2019 through 2023 included the down year of 2022. I often quote Peter Lynch, one of the most famous stock investors of all time. He famously stated that “Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”

This period is an excellent example of that. Those who tried to avoid the market downturn in 2022 clearly lost out in the very satisfying year 2023. Also, remember that even today there is $5 trillion in cash that is not invested.

We received the unemployment report this week for the month of February, and once again, it was an excellent employment month. Employment went up 275,000 from the previous month, which far exceeded the so-called forecast of an increase of only 200,000. Also, within these numbers, they significantly adjusted the prior employment numbers to more reasonable levels during the month of January. What is essential in this employment report is that the unemployment rate went from 3.7% to 3.9%. Even though both of those numbers are great numbers, the trend to increase unemployment is very important to reduce the robust nature of the economy and to encourage the Federal Reserve to reduce rates to increase employment.

Historically, the 3.9% unemployment is still a many-decades record, but the trend to put more Americans out of work, while unfortunate for them, is actually good for the economy as a whole. As I have pointed out in prior postings, we need a slower growth economy in order to encourage more investment and lower interest rates. Also, do not forget that even though the unemployment numbers have gone up, there are still way more job openings than unemployed in America. There is a job for everyone who wants to work. The reality is that many people do not want to take on a job.

Mia giving her handsome nephew a squeeze before he heads off
to Tim Tebow’s Night to Shine! Keep shining, Michael!

I am one of the few people who read the details of the employment report, but something earth-shattering, in my opinion, came out of this report. The report for February was quite excellent, but it was interesting that if you read the underlying data, it is surprising to see how much the employment makeup in the United States becomes. For the last 12 months in the United States, the number of “native-born” Americans with a job fell by 881,000 workers. The question is, where did those workers go? However, more importantly, in the labor force in the United States, the number of foreign-born workers with a job rose by 1.5 million to 31 million.

Can you see the trend that is developing here? The United States-based jobs are being replaced by non-United States people doing those jobs. Of course, these aren’t the only workers on the payroll that caused this number to rise. None of us actually know how many millions of workers that are here that are working illegally are being counted. I rather suspect that the percentage of foreign-born workers is much higher than the 31 million reported by the Department of Labor.

The issue with the southern border in the United States has gone from silly to severe. Now we are receiving reports that not only are Latin Americans crossing the border, but we are having a large percentage of Chinese citizens working their way into the United States. Do not get me wrong, both houses of Congress and both political parties are equally responsible. There was a very positive immigration bill approved by the House Democrats, but the House Republicans rose to have it defeated.

But there is no question that the flood of undocumented immigrants in the United States is going to have lasting and long-term negative financial issues. We are certainly welcome to have them as workers in the United States, but we cannot be an entirely lawless country. We must have laws to control people entering the country we do not want. I get so tired of hearing that we cannot control these borders. We currently have a standing United States Army of over 2 million soldiers. They are not doing anything right now. They clearly could control the border, but they are not. It is unfortunate that, politically, we cannot get this matter under control, but we clearly need to.

Sparkle and Shine, it’s 1st Birthday Party Time!

I am often amazed when someone gives me answers to why they do want to invest in a specific stock. Often times, this opinion is based on something that is not economic. Do not ever forget that earnings are what makes stocks go up and earnings control the valuation of the stock. Whether you like the company or the product the company sells is irrelevant to the value of the stock since earnings actually control that amount. Let me give you an example of the absurdity that you will often hear on television regarding the valuation of stocks.

Several weeks ago, the Super Bowl was watched by an average audience of 125 million people in America. The next day in the media it was explained how extraordinary the advertisers were able to get 125 million people eyeing their commercials during a three-hour period. It is reported that these advertisers spent an average of $14 million per minute for the time on the Super Bowl. Obviously, the $14 million did not cover the actual cost of the production of the commercial and therefore the cost is likely much greater than the $14 million. Certainly, that is a resounding success but quite frankly, that is peanuts compared to other media outlets.

It is currently reported that in the entire world there are approximately 8.1 billion people living on this planet. At the current time, it is believed that only 63.5% have internet access, which is roughly five billion people. The five billion people are located around the entire world and in some cases in very isolated areas. Take into consideration that Facebook has a daily average usage in its website of 2.6 billion people. Therefore, one half of the world basically logs on to Facebook daily. When you consider the advertising potential of that usage as compared to the 125 million people that watched the Super Bowl, you can see that the Super Bowl was totally a rounding error. You may not like Facebook or you may not like its owners, but you have to respect its earnings, which are extraordinary. If anyone thinks the major tech stocks are going to have a downturn, all they have to do is consider the potential reach of something as simple as Facebook.

Middle School class trips have come a long way –
Ava and her friend living it up in Jamaica!

I often write about China because I do not think people really understand its economy. I wish I could tell you how many times I have read that by 2030, the Chinese economy will overtake the United States economy. Those that write those articles have clearly not done much research on the subject. In recent years, the Chinese communist party has decided that they will not be friendly to private enterprise. This failure to work with private enterprise has run many companies out of China, and they are relocating on a regular basis to southeast Asia, such as Vietnam, and more recently to India. This lack of foreign investment in China will have a material long-term effect. Just as an example, foreign investment in China has increased every quarter since 1998. However, in the third quarter of 2023, foreign investment in China actually fell as companies moved their operation elsewhere.

The biggest misnomer about China is that people believe its economy is so robust, that itself generates its own revenue. Nothing could be further from the truth. China currently has debts that are greater than 300% of its gross domestic product. Even though the United States is embarrassingly deep in debt, their debt is only a fraction of the debt owed by the Chinese. As we all know with higher interest rates and a slowing economy, it will be harder and harder for the Chinese to fund this massive debt loan in the future.

One of the major concerns in China is that its population is aging. In 2023, the population of China fell for the first time in generations. Everyone recalls the one-baby rule the Chinese government imposed and the lack of new babies is creating problems with the population. At the current time in China, the number of citizens over the age of 65 in the year 2000 was 6.9%. In the year 2023, the percentage of the population over age 65 is 14.2%. The population is getting much older, and this is happening very quickly.

There are major concerns when the population starts to age at this accelerated rate. First and most importantly, since the government is responsible for healthcare and we all know older generations require more healthcare, it is a drain on the central budget. In addition, the care of the elderly is quite important. Oftentimes, family members must take time off from work to care for the elderly, creating a void in manufacturing and production. This aging population is extremely hard to turn around. If you think about it for a second, due to the 40 years of the one-child rule, there were more males created than females and, therefore, a lack of couples to create more babies. With the economy slowing in China and the government’s inability to fund future growth, I fully anticipate seeing China slow down for years to come.

Megan hitching a ride with My Neighbor Totoro’s Catbus

One of the ways China has kept peace among its employees is by keeping them working. The Chinese government borrowed heavily to finance and build entire cities with no one to live in them. Do not forget that still over 50% of the population in China lives in poverty. We all see pictures and newsreels of the prosperity of the cities, but the rural areas continue to suffer financially. With the anti-capitalist mentality of the government, now we are seeing businesses leave China and move to other countries, taking their jobs with them.. China would like to continue manufacturing and exporting to other countries, but the United States is fighting back. If the United States refuses to accept imports from China, China’s economy will grind to a halt.

I continue to read about the one worry that many investors have about China overtaking Taiwan in the near future. It is clear that the United States supports Taiwan and that under no circumstances would the United States stand idly by if China invaded. Think about the financial implications of China overtaking Taiwan. If the United States put a total halt on the imports of Chinese goods, the Chinese economy would grind to an almost immediate halt. Why would any government in China take the risk of destroying its economy to take over a relatively small country?

The current state of the U.S. economy continues to be quite good. Over the last several years, I made a lot of fun of the Wall Street forecasters predicting the dire financial circumstances that actually never occurred. One of the most famous in that group is Jamie Dimon, who is by many considered to be the most respected executive in all of America. Jamie Dimon is the CEO of JPMorgan Chase banking empire. In mid-2022, Jamie Dimon warned that a “hurricane” was coming to the United States economy, and “you better brace yourself.” Of course, as we now know, no hurricane did come to the economy in 2022, even though the stock market went down in reflection of that potential risk.

Penny and Miller looking to escape and soak up some rays!

In early 2023, the “experts” on Wall Street predicted that there would be a 61% chance of recession in 2023. We now know that in 2023, the economy actually grew at 3.1%, which is a long way from a recession predicted by the so-called experts.

You would think that these experts would eventually give in and admit they were wrong in predicting the recession when no recession occurred. However, like the proverbial broken clock that is right twice a day, they are doubling up on those predictions. At the current time, economists now predict that the recession within 2024 is down to 39%, which, of course, is down from 61% a year ago. They were wrong then, and they are wrong now; it is just a matter of when they might get around to predicting it.

If you look at the Atlanta Federal Reserve’s prediction of economic growth for the first quarter of 2024, it is predicting a gain of 2.5% as of today. As we look forward into the remainder of 2024, it is hard to imagine that recession would be anywhere in the future. One of the most important aspects of valuing stock is looking at earnings. At the current time Wall Street analysists are forecasting an 11% increase in earnings for the S&P 500 companies in 2024. That is a major increase from the amount of 2023 when the gain was 2%. But what is even more important is that these analysts are projecting that the growth in earnings in 2025 will be a robust 13%. If you analyze the numbers, it is projecting net income to be up 11% in 2024 and 13% in 2025. How anyone with any objective analysis of these numbers could predict recession is a little bit of a mystery to me.

Going into 2022, the Federal Reserve moved to increase interest rates, and since March of 2022 they have increased them 11 times. Now, these interest rates stand at a 23-year high. The economists projected that these 11 increases would destroy the housing market and would create mass unemployment and bankruptcies in business. There is no question that mortgage interest rates are dramatically higher than before, but still not anywhere close to historic highs. Those who think the housing market is not robust have just not tried to buy or sell a house. Housing numbers are down because so many homeowners have such low interest rates and are reluctant to sell their houses and take on higher interest rates. The house building industry just cannot keep up supplying the number of houses needed in the economy. Contrary to what you hear on the financial news, the housing market is quite strong and there is no downturn forecast in that industry.

Megan’s spectacular view of the Garden of the Gods

There has been so much talk in the financial news that the financial markets will improve as interest rates begin to drop. Quite frankly, the economy is quite good, and inflation has dropped dramatically, so there is not a lot of urgency for the Federal Reserve to cut interest rates. Also, 2024 being a political election year, being deemed as being political by cutting interest rates to affect the ultimate election would be the last thing the Federal Reserve would want. Going into this year, the so-called experts on Wall Street predicted six interest rate cuts during 2024. I said then and say today, that is ridiculous. Most importantly, I think that the Federal Reserve will not cut interest rates around the election just to prove it is outside politics. So, the actual question will be when will rates actually go down?

I project that the Federal Reserve will cut interest rates one-quarter point in the June meeting and will also cut interest rates at one-quarter point in November and December of 2024, which both dates will be after the election. Everyone is predicting that these decreases in interest rates will power the economy higher, but that is not the case. Just as the higher interest rates have not really hurt the economy, I think lower interest rates will do little. The economy has survived during these high interest rate cycles because corporate America was so flush with cash that it did not need to borrow money and therefore did not affect earnings. Only the small companies actually use bank financing now, and the larger companies self-finance their own operations. It is fairly clear that the economy is in an exceptionally good pattern and with a slowing economy and inflation coming down, it is fully anticipated that the rest of 2024 and 2025 would be economically strong. If you want to create generational wealth for your children and grandchildren, now is the time to be invested.

We would love the opportunity to sit down with you and discuss your portfolios or any other matters that you find of interest from a financial standpoint. We can help you with Estate planning, gifting programs, and how to invest money for your children and grandchildren. We would love to have the opportunity to get you invested, even with small amounts, for future generations. In order to build financial wealth, money needs to be invested long-term. You cannot start building that financial wealth until you get invested. I hope that the readers of this posting will take my advice and do what is best for their families beginning today.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

Weather Forecasters Are More Trusted Than Economists

2024-02-07T16:00:00.001-05:00

From the Desk of Joe Rollins

Over the last several years, the profession of an economist has fallen to new lows. And quite frankly, they deserve the demotion they have received. Going back to 2022, the economists were adamant that the economy would shrink and recession was inevitable in the coming years. They could not have been more wrong. The most recent economic data has even further elevated the U.S. economy and projects a more robust economy for 2024.

Breathtaking! Client Caroline Matton enjoying the view
after hiking up Mount Batur in Bali.

I want to discuss the economy in greater detail in this posting since it is extremely important. I also want to reflect on earnings in the fourth quarter of 2023 and how they should impact stock prices going forward. Since 2024 is an election year, I have to report on the shenanigans going on in Washington to boost the economy and improve the chances that one politician or another might win the election. From an economic standpoint, these decisions are very damaging, but from an investor in the stock market, they are extremely helpful.

I also want to discuss the recent demise of the Chinese economy and many problems with China that have not reached the media yet. The stock markets in China and Hong Kong have been dismal, and until China changes, they will continue to be dismal.

Client Cindy Craft enjoying time with her handsome boys
and their beautiful families in Charleston, SC.

The most famous fund manager of all time is Peter Lynch, who successfully managed the Fidelity Magellan Fund for many years. Peter Lynch had a famous saying that you did not need to read economic statistics; all you needed to do was go to the mall and check out the people flow to determine how good the economy really was. I took a trip on Saturday, and I want to give you my impressions of the economy as I saw it while I was on the road.

Before I discuss all these incredibly exciting topics, I need to update you on the January trading period. For the month of January 2024, The Standard and Poor’s Index 500 stocks were up 1.7% for the month. This index would have been up much more except for a significant sell-off of 1.6% on the last trading day of the month. Federal Reserve chairman Jerome Powell made a speech that day indicating that no interest rate decrease would be in the cards for March 2024. The stock and bond markets sold off dramatically based on these statements. Theis interesting to note that both of those markets recovered and even went higher as the week progressed. But in any case, even a 1.7% increase in January is immensely satisfying. Remember that if each month this year has a similar return, the index would have an annual gain of over 20%.

Clients Wyatt and Beverly Foster doing a little sightseeing
in Singapore (try saying that 10 times)

With the S&P up 1.7% for the month, that gives it a one-year return of 20.8% for the one year period. The NASDAQ Composite was up 1.1% for January and 32% for the one year period ended. The Dow Jones Industrial Average was up 1.3% for the month of January and is up 14.4% for the one-year period then ended.

As a comparison, Barclay’s Aggregate Bond Index was down .1% for the month of January, and for the one-year period, it is up 2.2%. I always try to give you a bond equivalent so that you can understand the difference in returns between stocks and bonds. The long-term performance of stocks versus bonds is dramatic. The S&P over the last 10 years is up 12.6%, the NASDAQ Composite over 10 years is up 15.1%, and the Dow Jones Industrial Average is up 11.8% annually over the 10 years. Compare that with the Bond Index, which has averaged 1.6% for the last 10 years. I speak about this often in these postings, but if you had been invested in bonds over the last decade, your investments would not have generated even enough return to exceed the rate of inflation. I do not see bonds contributing significantly going forward, even though they may have a small gain in 2024.

Ava and her friend off to the Fox to see Hamilton.

On Friday, they announced the job market for January 2024. The so-called experts were predicting a gain in employment for that month of 187,000 workers. To shock everyone, the payroll numbers increased by 353,000 for the month. It is vital that you understand that for employment, January is one of the worst months of the year. You have the double negative effect that many construction workers are unable to work due to weather in the north, and the retailers are laying off excess employment for the month during Christmas. The reported number that is so dramatically higher than what is expected is extraordinary.

Not only was that number good, but they also increased the number of employments in December. Therefore, for two straight months, you have increased employment of more than 300,000 new employees, which is very strong. Unbelievably, the unemployment report was once again reported at 3.7%, which is a low level of unemployment, and it leads back to a sub-4% jobless rate, which goes back to December of 2021. Take into consideration that for all the months of 2021 and 2022 and the first month of January 2024, unemployment has been less than 4%.

DeNay enjoying the snow and sandstone at Red Rocks over the holiday.

Obviously, this is an extraordinarily strong labor market. I have quoted many times in this newsletter that recession is highly unlikely if employment continues to be full. When I went to college, they taught us in economics class that full employment was 5%. Here we have the last two years where unemployment has been less than 4%. That almost surely means that employment is full.

The good news continues to roll in with this employment report. It was announced that the average hourly earnings over the last year had risen 4.5%. An exceptionally large increase in earnings by employees. This increase will obviously flow into consumer dollars, as I will reflect later in this posting. As you recall, the so-called economists forecasted a recession in 2022, but here we are in 2024, and certainly, the recession is nowhere in sight.

Lauren and Jeff treating Henry to a day out at Fetch!

A year ago, economists saw a recession as highly likely and projected annual economic growth of only .2% for all of 2023. How surprised they must have been recently when it was reported that the GDP for all of 2023 grew at a 3.1% rate. It is hard to imagine that the so-called trained economists could have mis-forecasted the economy in such a dramatic fashion. Fortunately, in these postings, my projections were significantly better. What was interesting is that for the last two quarters of 2023, the GDP went up 4.9% in the third quarter and 3.3% in the fourth quarter. That would indicate that the economy is, in fact, slowing, which is a good thing. In order to slow down the Federal Reserve from increasing interest rates, the economy should moderate and settle in at a GDP growth of roughly 2.5% per quarter. If we were to get to that level with inflation down to 2% annually, I think you would see interest rates fall fairly dramatically by the Federal Reserve.

Ava posing next to her artwork – maybe the next Frida Kahlo?!

Everyone must have been in shock when the Atlanta Federal Reserve put out its most recent posting of the projected GDP for the first quarter of 2024. Their current projection for the GDP is at 4.2%. Can you even imagine the shock of economists seeing that print of 4.2% when you have been calling for a recession for over the last 25 months? People really do not understand what goes on when the chairman of the Federal Reserve comes out every six weeks and makes a projection of the economy. If you have ever watched the speech, you would see the stock market futures and the market itself move 200-300 points in a matter of minutes.

What is going on here is that the bond market, which is many times larger than the stock market, is trying to influence the Chairman and embarrass him on national television. There is no mistake about what the desire of the bond market is. To them, a good recession is extraordinarily profitable to them. If we have a recession, then clearly, interest rates would come down, and they would profit. I know it is a twisted philosophy that this segment of the invested public would really prefer mass unemployment so they would benefit. They must be terribly disappointed that the economy continues to do very well.

Client Sheryl Matton with daughter Caroline all dressed up
for a night out at Sunset Point in Bali.

For years, I have been saying in these postings that you must ignore the noise in the news and look to earnings. A couple of years ago, I had several clients who insisted that I sell the stock Facebook because of whatever philosophical difference they had with the company, they did not want to own it. I argued that at that time, regardless of how you felt about the company, you needed to look at earnings to evaluate it. What drives stock prices are earnings, and the misconception by the public on this subject is quite distressing.

I thought maybe you might be interested in a look at earnings for the fourth quarter of 2023 and see what we could learn from those earnings. Let us compare some old-line companies that have been blue chips for our entire lifetime as compared to the new tech companies that have risen to prominence in recent years. For the fourth quarter of 2024, Exxon made a $9 billion profit and Chevron made a profit of $6.5 billion. If you compare the two, General Motors made a profit of $2.2 billion and General Electric had a profit of a measly $348,000 for the quarter. All these are old line blue chip companies that have been around for generations.

Holy Moly! Sheryl taking a dive with her new friend
at the site of the USS Liberty in Amed, Bali.

If you compare the earnings in the fourth quarter of the tech companies, you can see why tech is profitable and a good investment and those companies are less profitable. For the fourth quarter of 2023, Apple made a cool profit of $34 billion, and for the year, had a profit in excess of $100 billion. The company Google, now called Alphabet, had a profit of $20 billion for the fourth quarter and an annual profit of $73 billion. Microsoft turned in a profit in the fourth quarter of $22 billion and has an annual profit of $82 billion. Even Amazon had a profit in the fourth quarter of 2023 with an income of $10 billion and an annual profit of $30 billion. The so-called Facebook, now called Meta, added a profit of $14 billion in the fourth quarter and an annual profit of $39 billion.

You really do not need to be a rocket scientist to understand the magnitude of these numbers. The earnings by these tech companies are extraordinary by any definition and, as an investor, cannot be ignored. It is interesting that after the massive sell-off in 2022, the so-called Wall Street experts project that it would be 2025 or 2026 until we got back to all-time highs. Interestingly, the Standard and Poor’s Index 500 Stocks and the Dow Jones Industrials both reached all-time highs in January 2024. Therefore, it only took less than 13 months for the market to recover all its losses and go to all-time highs. Much of this gain has been led by these tech companies, and rightly, their gain is based upon their extraordinary earnings. There is nothing in the evidence that indicates these earnings will do nothing but increase as the economy strengthens into 2024.

DeNay relaxing, recharging, and reflecting at the Red Rocks.

Historically, the presidential election year is almost always good for the stock market. There just seems to always be a way that an incumbent president can flood the economy with money and, therefore, increasing the possibility of re-election. That is precisely what is happening now in Washington. Last week, the House passed an income tax reduction bill that would increase the deduction for each dependent a taxpayer has. Interestingly, this reduction would go into effect retroactively on January 1, 2024. Notwithstanding, many people have already filed their tax returns, they want to give larger refunds to taxpayers with the intention of buying more votes in the presidential election.

You must understand now that the Federal deficit budget in 2023 is already forecasted to be more than $2 trillion. That is 7.5% of GDP, which is roughly double what the average has been in the economy from 2016 to 2019. What this means is that the deficit has run at roughly 3% of GDP in the years prior to COVID-19. Since COVID-19, the Federal deficit has not been lower than $2 trillion annually and continues to grow. I give you this information so that you can see that there could not be a worse time to propose a decrease in income tax rates. With Federal deficits running at extraordinarily high rates, why would you contribute to those deficits by cutting income taxes, unless you wanted to pour money into the hands of consumers? Buy votes?

Ava catching a few waves down in Florida.

It has been projected by the San Fransisco Federal Reserve that consumers continue to hold $430 billion in excess savings that came to them by the virtue of the pandemic. It is only a matter of time before these amounts start to go down as consumers start to spend more money. However, that is not good enough for the bureaucrats in Washington. Currently, they are flooding the economy with trillions of dollars from the INFLATION REDUCTION ACT, CHIPS, and the INFRASTRUCTURE BILL. The Administration, almost daily, announces funding from these various acts to companies that will benefit from this outflow of money.

Even though Congress has previously funded these programs, it is pretty obvious what is going on with the money flowing out of Washington directly into the hands of companies that will spend it, which will then improve the economy. You would not be terribly concerned by all of this since this is standard politics if the deficit were not so high.

At some point we need to start making progress on reducing the deficit. I know that I have written in my previous postings that deficits are not really a problem. As long as you can print your own money, you can overcome the problems with deficit. However, in so doing, you create inflation, which is a negative for all consumers.

“Live life with no excuses. Travel with no regret.”

I often quote the reality that, “How could Germany during World War II, launch war against the entire world?” Germany had a relatively small economy and certainly did not have the financial recourses to launch a war on the rest of the world. However, by virtue of them printing money in order to fund their military desires, they created hyperinflation. At the end of the war, it was said that Germany had devalued their currency so far that they had to pay their soldiers on a daily basis since inflation was so bad.

I do not intend to make a direct reference to compare the German economy to the American economy, but only to point out that continuing deficits will eventually create inflation. At some point we need to get serious about balancing the budget with the revenue, but it now seems that at this point, Washington is only focused on spending more and more money regardless of the financial outcome.

Not many people are focused on China these days, but they should be. China is, of course, the second largest economic power in the world and controls an enormous amount of financial influence in the worldwide economy. A few years ago, they decided that they would attack private industries within China and bring them back under the control of the Communist Party. The result of that has been that many American companies are pulling out and moving their operations to other Southeastern Asian countries.

“Traveling – it leaves you speechless, then turns you into a storyteller.”
– Ibn Battuta

Clearly, Vietnam, Indonesia, and Malaysia have benefited from these moves. More importantly now, we have seen a significant shift in manufacturing capacity from China into India. India has a similar number of citizens as does China. However, the population in China is dropping compared to India, where it continues to grow.

For many decades, the Chinese government promoted the one-child per couple limit. The idea was that the limit would slow down the growth of the population by limiting the number of babies being born. The data shows that there is a significant imbalance in the ratio of men to women. Last year, employment in China fell, and the population is increasingly getting too old. As the population continues to age, the cost of healthcare and maintaining a reasonable lifestyle for the elderly will grow and that will create a major deficit to the national economy. At the current time, along with Japan, China has one of the oldest average of its citizens in the world. This, along with their anti-private enterprise and huge debts that are owed to China, has forced many industries out of the country and caused them to move to other parts of the world to create commerce.

What is interesting is that this major shift in philosophy has dramatically reduced the desirability of investing in that country. It is hard to believe that the stock market in China was down in 2023 and that it was the third straight year of decline in that market. Even more importantly, Hong Kong’s Hang Seng Index dropped for the fourth consecutive year. As you can see, your money is not treated well in China, which is a direct reflection of how they treat private enterprises in their country. As has been proven so often in the history of the world, when a communist government starts to privatize businesses, everything goes down. It happened in Cuba, it happened in Russia, it happened in Venezuela, and it is currently happening in China.

It is unlikely that China will turn the corner back to prosperity until they adopt a more pro-business mentality than what they are currently exhibiting. It is currently the policy in China that they would like to increase their population. They are encouraging couples to have more babies and even giving them financial incentives. The way China has maintained control over the population is that they have kept them busy by building and working in manufacturing plants. It is believed that in many cases that China has built entire cities with no one in them, just to keep workers busy. But the end result is that China is extraordinarily indebted. With the debt they owe, the only way that they can maintain the lifestyle of the population is by increasing their own GDP. They know as does the rest of the world, that if a major unemployment period strikes China, in all likelihood, the communist government will fail. I fully expect to see China change their philosophy regarding private industry before it is too late, and they suffer political negative ramifications.

As I mentioned earlier, Peter Lynch says that all you have to do is go to the mall and see what the flow is like. I had to run an errand on Saturday to a city outside of Atlanta, which was a 45-minute drive from my house. I was absolutely blown when I saw what was going on. Along the way I passed not less than 10 major buildings under construction. I passed a Golden Corral, and not only was the parking lot full but there was a line wrapped around the building of people waiting to get in. At 10 o’clock on Saturday morning, you would not expect such a show of consumer support. There is no question that the cost of eating out in restaurants has gone up dramatically, but that is for good reason due to the high cost of food and service in the industry. Even though the cost of eating out is high, restaurants are enjoying record participation.

I mean, who doesn’t love seeing a picture of a giraffe?

You can only draw the conclusion that people would not be eating out in restaurants that are on the more expensive side if they did not have the discretionary income to spend. Coupled with the huge traffic jams on my way to this city and observing the huge turnout in the restaurants, you have to assume that the consumers are in really good shape. Maybe you have read that Christmas sales this year were up from the preceding years even though the projections proposed that they would decrease close to 10%. Virtually everything the consumer does these days is higher than anyone could possibly project.

I recognize that this is a very limited anecdote evidence of the economy, but it should illustrate a point. Consumer spending is currently very strong, and 60% of the GDP is consumer spending. If you assume that the consumer is strong and fully employed, and inflation is down and interest rates will fall, you cannot project anything other than an increase in equity prices in 2024.

I get up every morning and watch the news, both financially and otherwise. I read about the Ukrainian War in more detail than most people do. I am also very aware of the conflict in Israel and the issues with Iran, Iraq and our soldiers. I recognize that the world is a tinder box that can blow up almost anytime. It might be possible that Russia will win the war in Ukraine, but what on earth would they have won? They get to take over a bankrupt country that would have no place for the population to live. No industry, no utilities and certainly no desire to be Russian. I would hardly call that a victory under any circumstances.

Happy Birthday, Sweet Caroline – double digits and loving it!!

The issue with Israel and Palestine will shortly be over one way or the other. Either they will reach a compromise, or Israel will kill enough people to make the conflict go away. This will be short-term. The issue with Iran and Iraq, in my way of thinking, is relatively simple. If we withdrew all of the forces from Iraq, it is likely that this whole issue would also go away.

Yes, all of these areas are of concern and if any one of those were to blow up, it would massively affect the stock market. However, hopefully, by now, you have learned that you cannot invest due to geopolitical events. If one of these events occurred, you would react to that, but you cannot invest in anticipating one of these events will occur.

The other day, I had a client say that he would not invest until after the Presidential Election. I thought to myself, “You had an outstanding 2023 and are likely to have an outstanding 2024, and you are going to wait for an event that quite frankly has no economic effect on the markets whatsoever.” If you start to invest emotionally without analyzing the financial and economic effects of the market, you are more likely than not to fail in your investment future. The best philosophy is to be always invested, regardless of geopolitical and economic circumstances.

Little Penny laughing it up as usual!

In summary, I believe the markets will be as good in 2024 as they were in 2023. I do not anticipate a gain as high as 2023, but I do anticipate a gain that will be satisfying. The economic news starting in 2024 has been good, and I fully expect it to get better as Washington floods the economy with money. I mentioned in my last posting about people who are resisting doing IRAs in 2024. I continue to note that the resistance is a mistake.

If you invest early in the year, you earn tax-free returns that will benefit you for a lifetime. There is absolutely no better investment than earning tax-free returns.

If you would like to discuss any of these matters in further detail, please let me know.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

“Everyone got burned: Wall Street missed the great stock rally of 2023”- they might have missed it, but we did not.

2024-01-10T16:16:00.001-05:00

From the Desk of Joe Rollins

It is hard to explain how satisfying the financial year was for 2023. After the dire predictions of Wall Street for recession and a down financial market, we had one of the better financial performances in the U.S.’s economic history. The stock market rally resulted from improving inflation, the concept that the Federal Reserve was through increasing interest rates, and the clear indication that the economy was not falling into recession.

SGo Dawgs! Clients Payal and Ketan Patel enjoy
the Georgia game with their handsome sons!

Almost a year ago, on January 11, 2023, I forecasted that the financial markets would increase roughly 20% in 2023. I admit that I was called many unflattering names due to that projection. After the loss in 2022 of over 18% in the financial markets, how could I even conceive a gain of 20% in 2023?

As I have repeatedly pointed out, I did not think there would be a recession in 2023, and fortunately, I was correct. I also forecasted that Corporate America would continue to hire people, and as long as people were working, they would spend money. Consumers were the most crucial component of Gross National Product (GDP).

So, I finally admit in writing that I was wrong. I thought that the number I predicted in 2023 of 20% was a high-end number. The final number ended up being higher than my optimistic prediction. The S&P 500 was up 26.3% during 2023, considerably higher than my projected 20%. I am happy to report my error.

Caroline ready to compete!

There are many things I want to discuss in this posting, but first, I must reflect upon the excellent year we had in 2023. I also want to give my projections for 2024 and describe why it will be a fantastic financial year based on today's economic conditions. In addition, I want to try to explain the difference between the economic “soft-landing” and the so-called "hot-landing."

The main component is higher stock prices, with their most significant contributor being earnings. It looks like earnings are accelerating in the tech section, and I would be shocked if tech earnings in 2024 were not significantly higher than what they were in 2023. I also want to do some basic arithmetic regarding Roths and IRAs. I never entirely understood why there was such resistance by clients to funding IRAs or Roths annually. Lastly, I will not spend much time on it, but I need to describe why Chinese stocks are in a downturn and whether the likelihood of emerging market stocks taking off in 2024 is remote or attainable.

A sweet moment between Josh and his favorite little sister

Before we get to the exciting information, I do need to report the excellent financial year in 2023. The Standard and Poor’s Index 500 stocks were up 26.3% for the year. Those stocks gained 11.7% in the last three months of the year and have a 10-year average of 12%. The NASDAQ Composite was up 44.6% for 2023 and made 13.8% in the year's final three months. That five-year index is up 14.8% per year. The Dow Jones Industrial Average is up 16.2% for the year 2023 and was up 13.1% for the fourth quarter of 2023. That 10-year average is 11.1%.

I always point out the returns on the bond index so that you can see the comparison between investing in stocks and investing in bonds. For the first time in quite a while, the Bond Index actually rallied during the fourth quarter. The Bloomberg Barclay’s Aggregate Bond Index was up 5.5% for 2023, earning 6.6% for the final quarter of 2023. This bond rally was predicated by the fact that the Federal Reserve would not increase interest rates further.

Reid and Caroline in Montana discovering
the next best thing to having wings

It is likely that in 2024, interest rates will fall, further rallying bonds. I will warn you to be careful and temper your excitement regarding bonds. Even though the fourth quarter was excellent, the 10-year average for bond performance is 1.8%. If you compare the three major indexes, which have a 10-year annual average in double digits, the 1.8% return on bonds is disappointing. There is a high likelihood that bonds will perform well in 2024 due to the possibility the Federal Reserve will cut interest rates. However, that rally should be significantly less than the return from stock investing.

I do not want to insult your intelligence on Roths and IRAs, but I am confused about why the public resists funding these accounts annually. I question when you can put money on a tax-deferred basis in a traditional IRA and pass up that opportunity. The “Cadillac” in investing is a Roth IRA. If you can get money into a Roth account that accumulates tax-free for a lifetime, you can make no other wiser investment. Every year in January, I encourage people to make these contributions; these encouragements are usually ignored. I also encourage people to make Roth contributions for their children. Contributing to a Roth account is huge if your child has any earned income. The compound effect of Roth’s being tax-free adds financial stability to anyone’s retirement, but so much more for a young child.

Jennifer enjoying the lights with some of her favorite people

Take this simple arithmetic: If you add $100 a month to a Roth account when you start at age 25 and invest that in the S&P 500 until age 65, you will have over $1 million. However, if you wait until you are 35, that same amount goes down to $300,000. The dramatic difference in these two calculations is the compounding of interest. As Ben Franklin often said, “The most powerful force in the universe is compounded interest.”

By putting the money in earlier, you are compounding a more significant number at the end of your life, building financial wealth. I have never entirely understood why this concept is so universally misunderstood. Here, we have a situation where a relatively small amount of your net worth can be invested, and the compounding effect on a tax-free basis is unprecedented. Yet, every year, I am met with stiff resistance as I try to remind my clients to invest in IRAs or Roths. Retirement is imminent, and we want to set you up for success.

Going into 2022, the so-called experts on Wall Street forecasted a dreary economy with the U.S. economy falling into recession. Many of them have quoted the long-standing Wall Street axiom that any time the two-year Treasury Bond is greater than the 10-year Treasury Bond, you will shortly have a recession in the U.S. The so-called inverted bond yield has now existed for two and a half years. We see no chance at the current time that the U.S. will fall into recession, and with the Federal Reserve beginning to cut interest rates, there is a high likelihood that the inverted bond yield will be right-sided sometime in 2024.

Lindsay and her daughter Marissa sporting their new hiking jackets,
courtesy of “Santa." Looking good, ladies!

After the historically lousy year in 2022, the so-called experts on Wall Street forecasted a dismal 2023. Bloomberg polled 22 top strategists and found they expected the S&P 500 to rise only 7% on average in 2023. Of the central banks, JP Morgan, Bank of America, and Morgan Stanley were among the big names forecasting a so-so year for equities. The only ray of light you saw in this regard was my projection of a gain of 20%. How could all of these major financial institutions have been so wrong for the 2023 year when, rather than the 7% gain, you had a considerable stock market rally with an increase of 26.3%?

The Wall Street experts were wrong in forecasting the economy because they missed the basic concept that the most critical component of the economy is keeping Americans working. In many of their minds, they were forecasting that corporate America would start right-sizing their employees and laying people off dramatically. Also, the enormous increases in interest rates were perplexing to them. In just 18 months, from March 2022 through August 2023, the Federal Funds Rate went from a historic low level of 0% to 5.5%, making all borrowing more expensive. Under prior financial times, this massive increase in interest rates would have made a significant dent in the economy and may have supported the big bank’s analysis. However, in 2023, that did not happen.

What actually came to fruition in the second half of 2023 is that inflation began to fall pretty dramatically. In 2022, inflation was up to a concerning 8%, but in the fourth quarter of 2023, it had dropped to roughly 3.8%. Falling inflation is a huge driver of corporate earnings. People do not realize that lower inflation reduces manufacturers' input costs and increases their margins. The most critical component of falling inflation is that it entices the Federal Reserve to cut interest rates. The decrease in interest rates increases the economy in many regards.

Evan and Alexis celebrating New Year’s Eve at the Georgia Aquarium

If you mention lower interest rates, everyone thinks about house mortgage rates; however, cutting interest rates affects the economy much more than consumer mortgages. For example, interest rates are a significant component of the purchasing of vehicles. Lower interest rates dramatically impact monthly payments for cars. Also, interest rates on furniture purchases, credit card payments, and other monthly payments are affected by interest rates. At the end of 2023, it was clear that the Federal Reserve would not increase interest rates further. The following rate change by the Federal Reserve would likely be a decrease rather than another increase.

So, you can say that you read it here first: the U.S. economy has now achieved the so-called infamous “soft-landing.” As I reported last month, we are in the Goldilocks economy of solid GDP growth, lower inflation, and potentially lower interest rates. We do not want an economy that is too hot or slow. The projected increase in GDP for the fourth quarter of 2023 is 2.5%. That is perfect. Not too hot, not too cold. The Goldilocks economy.

It is not like the Wall Street gurus do not have enough tools to create negativity. For the last two years, we have been talking about the fact that an increase in interest rates by the Federal Reserve would throw the economy into recession. It is clear that those fears of Wall Street were incorrect. So, the desired result was for the economy to fall into a “soft landing.” As mentioned above, I think we have accomplished that economic move. However, now, the so-called experts cannot control their concern about what is called a “hot landing.”

Mal isn’t quite ready to say goodbye to Christmas

Under this concept, the Federal Reserve would cut interest rates too fast, accelerating inflation, which would be highly detrimental to the U.S. economy. Based on the information at my disposal, it would appear that the Federal Reserve will cut interest rates slower than Wall Street anticipates. Most forecasts now are to cut interest rates six times during 2024, reducing the current interest rates from 5.5% to 4%. Most people would say that it is only a 1.5% decrease in interest rates, and how could that help the economy? Such a decrease would be massive in so many regards. Not only would it reduce home mortgage rates, but it would also reduce interest rates throughout the economy and likely create a new boom in consumer spending on cars, appliances, and basic credit cards.

There are so many examples of Wall Street warning us of potential financial disasters in 2022 and 2023 where they were wrong. The one that I find the most interesting is the price of oil. We all heard that due to the invasion of Ukraine by Russia and, lately, the unrest between Israel and Gaza, there would be a high likelihood that there would be a surge in oil prices to well over $100 per barrel. The oil price would surely increase with the U.S. sanctions on Russia and its oil exportations. In addition to those world conflicts, the OPEC Coalition vowed to raise oil prices by cutting back supply. These actions appeared to give oil the scarcity needed to dramatically increase the price per barrel.

A hole-in-one for client Lloyd King

But something interesting happened. Due to better technology, the U.S. began producing more oil per day than ever in its history. The U.S. average daily oil consumption in 2023 was roughly 12.9 million barrels. That is over a million barrels per day more significant than what was produced even in 2022, and more than 600,000 barrels per day than ever produced in the U.S. In addition, the U.S. became a major oil exporter, sending oil to oil-starved Europe and worldwide, filling in for Russia, which could no longer legally export. Suddenly, in one year, U.S. oil production filled the rest of the world’s needs, decreasing the price of oil instead of increasing.

Even though oil stocks were the best-producing financial stocks in 2022, they were one of the worst in 2023, having a negative rate of return. It is now anticipated that going into 2024, the price of oil will stay stable during the year due to the massive increase in production in the U.S. One of the significant components of the considerable rise in inflation in 2022 was the acceleration of the price of oil due to the Russia and Ukraine conflict. The U.S. has taken the lead in providing much-needed oil to the world, controlling the oil price.

The most important question that needs to be raised is, “What are we looking at for 2024?” When you look at the so-called economic indicators for 2024, it is pretty clear they are very favorable. Consider where we stand in the economy and what we expect in 2024. We know interest rates will fall in 2024, which is a massive positive for stocks and bonds. We also know that the economy is in a “Goldilocks” state, where the GDP is not too high or not too low. Once again, this is an excellent environment for stock market performance.

22-year-old client Phillip Hensley enjoying a round of golf at
Jack’s Point in Queenstown, New Zealand. Stunning view!

We also know that when there is a significant decline in the stock market, as we did in 2022, there are typically multiple years of positive performance. For example, in 2008, there was a 37% sell-off in the S&P 500 due to the economic downturn in the financial crisis. Not many people realize that after that terrible year, there were nine consecutive years of positive gain. I always think about this when clients want to go to cash when there is economic uncertainty. If you had gone to cash in 2008 and missed nine consecutive years of profitable operations, you would have endangered your retirement possibilities.

The most critical component related to future stock market performance is earnings. There was no question that we suffered from an earnings decline due to high inflation. Much of this earnings decline is related to Corporate America not wanting to increase prices too quickly and absorbing many costs associated with higher inflation. That was undoubtedly a good thing for the consumer, but a terrible outcome for corporate profits. In the first two quarters of 2023, corporate earnings were down 1.7% and 4.1%, respectively. It was not a pretty sight that corporate earnings were decreasing more throughout the year. I saw a significant change in Corporate America, where corporate payrolls were adjusted with falling inflation and improved profitability going forward. In the second and third quarters of 2023, corporate profits rose 4.9% and 2.4%, respectively. As you can see, as the year progressed in 2023, corporate earnings did a significant turnaround from negative to positive by the end of the year. So now, let me explain the good news.

A big congratulations to client/CNN anchor Michael Holmes on his win at the 44th Annual News and Documentary Emmy Awards.

Due to the proper sizing of Corporate America, corporate profits are anticipated to be higher in 2024 than in 2023. For example, it is expected that corporate earnings in the tech sector, in many cases, should be double what they were in 2023. However, the most critical component is the overall earnings of major corporations. FactSet’s survey of analysis projects 2024 earnings to accelerate through each of the following four quarters. They are projecting that by the fourth quarter of 2024, earnings will be 18.2% higher than in 2023. I cannot emphasize enough how vital this increase in corporate profits will be to stock market performance.

It is often said that while we sit and reflect on 2023 and how good a financial year we had, it is not an essential component of the valuation 2024. To evaluate 2024, you must be forward-looking. Celebrating the earnings of 2023 is excellent, but that is history. We do not care about prior financial information; we only care about forward-looking analysis. The stock market is always forward-looking and never backward-looking. If you analyze stock market performance based on previous history, you will miss the trends as Wall Street did for 2023. My favorite quote on the subject is from the famous economist Paul Samuelson, “The stock market has predicted nine of the past five recessions.”

So, what do we have for 2024 that is important? We have a moderate economy, potentially lower interest rates, and accelerating corporate earnings. That is the trifecta of components that lead to higher stock pricing. If the Federal Reserve does decrease interest rates throughout the year, corporate profits will begin to accelerate, and we will not have a significant fluctuation in the economy. Stock prices in 2024 will be higher than they were in 2023.

The fondest memories are made when gathered around the table

Every year, I predict what the market will do during the upcoming year. In 2023, I happened to be on the right side of that projection, indicating an increase of 20% in the markets, although the actual number was over 25%. I project that in 2024, the markets will be 11% higher, and then, if you add the dividends, the market should be 13% higher at the end of 2024 than at the end of 2023.

If you want to pick out sectors likely to accelerate, you once again have to give a nod to the tech sector due to its ability to produce revenue without incremental cost. I anticipate tech in 2024 will be substantially more profitable than in 2023. You should also see increases in anything related to interest rates. Utilities had an unbelievably lousy year in 2023 but will likely have a good year in 2024. Bonds had a modest gain in 2023, but I anticipate a more substantial increase in 2024. If interest rates significantly affect a stock, 2024 should be a good year. Therefore, 2024 should be a good year for virtually all financial segments, notwithstanding any significant political or world crisis.

I received a lot of interest in whether or not to invest in China and emerging markets. There are certainly times to do that, but people do not realize the difficulty the Chinese and emerging markets are having at the current time. China is undergoing a revolutionary change in its economy, which is not going well. China is one of the most indebted countries in the world. Their debts are so overwhelming that they must keep the economy going to break even.

Ava allowing for a quick photo during her gift opening regime

Due to the current philosophy in China, they are doing what they can to run non-Chinese enterprises in their country, and it is working. You are seeing a significant transfer of corporate America moving their facilities over to Vietnam, Southeast Asia, and now India. These companies leaving China to avoid the political repercussions of their government will significantly hurt China in terms of jobs and commerce. Currently, China is not investable until they resolve their internal issues and how they will treat foreign manufacturers going forward in their economy. It is the foreign manufacturers that made China powerful and the foreign manufacturers that will make China weak. Hopefully, there can be some compromise in the year to come.

Oil prices significantly impact emerging market countries and also interest rates. Since virtually all borrow money from capital, higher interest rates affect them more than others. You are starting to see some significant increases in productivity in some Latin American countries. Still, many of these countries cannot be created due to political unrest, corruption, and the lack of capital. Currently, emerging markets are not a buy due to the flat nature of the price of oil. This can change suddenly with a significant worldwide crisis, but I do not foresee that happening. The war in Ukraine or the war in Gaza is unlikely to begin a worldwide crisis. However, nothing is inevitable, and we will watch it closely.

It has been a great year in 2023, and I look forward to another great year in 2024. Now is the time to fund your IRA and 401(k). As we move into tax season, we look forward to sitting down with you and learning more about you and your finances so we can help you achieve a more secure retirement.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

The “Goldilocks Economy” Has Finally Arrived

2023-12-14T15:00:00.001-05:00

From the Desk of Joe Rollins

For the last two years, I have been expressing my opinion in these postings that the economy needed to slow down in order for us to realize future stock gains. That is precisely what is taking place at the current time and that is a very good thing. The Federal Reserve has increased interest rates numerous times over the last several years, thinking that higher interest rates would slow the economy dramatically and therefore would reduce inflation. While the economy has slowed down for sure, it is also true that the economy continues to be strong, with employment and earnings continuing to be excellent.

This week, it was announced that the economy during the month of November added 199,000 jobs and the unemployment rate fell from 3.9% to 3.7%. These substantial employment numbers seem to shock these so-called experts since they have for years forecasted the country would go into recession almost immediately after the Federal Reserve began increasing interest rates. It is clear now that they were very wrong and my opinion that recession would not occur was clearly evident in my postings.

Penny’s first Christmas!

But what is most interesting about the employment report is that suddenly, the number of employed people in the United States is going up. Year over year, the number of employed has gone up 2.17% over the last year in an economy that was forecasted to be going down. As I have pointed out on numerous postings, the more people working, the better for the economy. When you have more people contributing to the economy by paying taxes and using their salaries to promote their own family’s well-being, it is better for the economy for everyone.

In this posting, I would like to cover some topics that are interesting to me and, hopefully, will interest you. One of the things that I would like to cover is the high likelihood that the Federal Reserve has now engineered a “soft-landing” and that this soft-landing would not result in a recession. Also, I would like to discuss the upcoming GDP going forward and what to expect in 2024. I would also like to review the Supreme Court's recent ruling indicating that the commissions on real estate houses were anti-competitive and, therefore illegal.

Caroline and Reid know how to pose for a photo -
especially when Christmas is right around the corner.

I would also like to cover all these truly interesting items, but first, I have to give you the results for November, which was an excellent month for both stocks and bonds. As I indicated to you, we were “locked and loaded” going into November, which is historically the strongest time of the year for equity investments. I could not have been more correct in forecasting a strong November since it was quite a spectacular performance during this month.

For the month of November, the Standard and Poor’s Index of 500 stocks was up 9.1% and its year-to-date performance is 20.8% for this year so far. Once again, it emphasizes the ten-year record of this index, which is at 11.8%. The NASDAQ Composite was up 10.8% for the month of November and year-to-date is up 37%. The 10-year average on this index is 14.5%. The Dow Jones Industrial Average was up 9.1% for the month of November and is up 10.7% for the year 2023. The 10-year average on this index is 10.9% annually.

Once again, for the month of November, the Bloomberg Barclay’s Aggregate Bond Index was up at a very satisfying rate at 4.5%. To date, this index was up 1.7%. For the 10-year period, this index averages 1.4% annually. As you can tell, the three stock indexes above reported double-digit returns, while the bond index over the last 10 years has come nowhere close to covering inflation. Therefore, holding bonds you are losing wealth to inflation.

Ava and friends all dressed up and ready to go!

There is so much on the financial news that is either misleading or downright incorrect. The one news item they continually report is how bad the real estate market is. Rightly so, they indicate that the market is terrible because sales are down 50% year over year. However, to assume that the statement means the real estate market is bad is not only absurd, but it is also incorrect.

One of the reasons home sales are down is that during the pandemic, many homeowners refinanced and are now sitting on mortgages that are 3% or lower. Why would they be willing to upgrade their housing to go to a mortgage that is closer to 7% from 3%? Therefore, there is basically a seller strike on selling their homes, which is creating adverse numbers. But correspondingly, there is also a shortage of houses for people to purchase, meaning that in many cases here in Atlanta, people are paying above asking prices just to get into the doors. The real estate market is as strong as ever today, but there are just not as many houses selling, therefore leading to the misplaced perception that the real estate market is bad.

Harper and Lucy standin’ on the dock of the bay in Tampa

It was recently ruled that the real estate commission of 6% was anti-competitive and therefore illegal. For many years, I have personally questioned this 6% rate, where it came from and why it was not price fixing among the real estate agents. To give you an example, the thought pattern is if you found your own buyer for a real estate transaction on your home and therefore there was no buyer commission, you would still pay the 6% rate. This means that the agent would get the entire 6%. In many cases, the commission rate really has no correlation to the amount of work the agent puts into actually selling your home. As indicated, I recently had a client sell a home where they had 10 bidders over the listing price. This had nothing to do with the talent of the agent, but more with the nature of the real estate market today.

There is no question that the trial attorneys will now sue every real estate agent in America to recover prior commissions. How successful they will be is a mystery. What is good for the economy and good for home ownership is that going forward, real estate commissions will be fully negotiable and there will be no fundamental 6% rate. This is good for consumers and good for real estate, but not so good for realtors.

Robby’s first hole-in-one! At Pelican Hill Golf Club in California

The reason that the stock market was so bad in 2022 had little to do with the performance of the stocks, but instead had everything to do with the public's perception that the economy was going into recession. These so-called experts in the field predicted that there would be a long downturn recession in 2022 due to the inverted bond yield and the increase in interest rates by the Federal Reserve. As we now know, two years later, they were incorrect. You would think that they would now revise their projections to a more reasonable projection of the economy.

Just this week, the Wall Street Journal did a survey of economists and the survey indicated that 48% of those so-called experts predicted a recession within the next one year. What is fascinating about this projection is that it is the first time they put the number below 50% since mid-2022. It seems that these economists just will not concede the fact that they were incorrect in projecting a recession. They are going to hold on to their projection so that maybe they could be redeemed by a downturn in the economy. As the old saying goes, “Even a broken clock is right twice a day.” What do we know about the economy based on the information that is readily available? As you are aware, for the third quarter of 2023, the GDP was recently revised up from 4.9% to 5.2%. That was an incredibly sterling report on the economy, but quite frankly, too high going forward. As I indicated numerous times in these postings, we needed to moderate the economy and slow it down.

Penny and Cecilia enjoying the spooky spirit of Halloween… in Joe’s office!

For the fourth quarter of 2023, the Atlanta Federal Reserve is forecasting GDP growth at 1.2%, which is almost perfect. Also, as we know, inflation is falling and is now at 3.2%, which is moving quickly towards the Federal Reserve’s target of 2% inflation growth. Therefore, we have an unusual situation where we have extremely low unemployment, moderating job gains and easing inflation. All of those are extraordinarily positive things for the economy and clearly should lead to a “soft-landing” in 2024. The definition of a “soft-landing” is the time when inflation cools, but the economy does not fall into recession. I really do not see any potential for a recession coming up in 2024.

There is also an interesting set of projections going on regarding the 2024 economy. Even the Federal Reserve is now forecasting that there will be two interest rate decreases during the 2024 year. The so-called experts on Wall Street are taking that even one step further. They are forecasting that there will be a total of four rate increases during the 2024 year. My personal opinion is that I would lean more toward the former than the latter as a moderate projection. These experts are rarely correct.

Rise up, Falcons! Lauren and Jeff enjoying the game

As you know, if interest rates start to fall, it is particularly good for both stocks and bonds. It looks like 2024 could also be another positive year for equity investing. Now, we are seeing forecasts that earnings by corporations will grow by 10% in the year 2024. Put all of this in perspective; we are talking about a year when the economy moderates and does not fall into recession, yet corporate earnings grow and interest rates fall. You could not ask for a better combination for setting equity growth higher.

The reason that the markets climbed so high during the month of November was the realization that the Federal Reserve would not be increasing interest rates any further. As pointed out above, it was the good news of moderating inflation, the economy slowing on its own, yet employment stands high and unemployment stands low. The Federal Reserve has a dual mandate in control in the economy. The first is price stability, which means no inflation and low unemployment. Since they have always had low unemployment over the last three years, they basically had a free hand in increasing interest rates whenever they wanted to accomplish the goal of reducing inflation.

Clients Andree Ljutica and Robin Thurau-Ljutica, along with their son, Julian, and friends. Leaving a little sparkle wherever they go…

As has now been proven, they were successful in reducing inflation and since the unemployment rate today is the same as it was a year ago, they have not increased unemployment. There were so many experts who predicted that we would see job layoffs in the 500,000 to 600,000 number per month back at the beginning of 2022. In fact, over the last two years, we have not had a single month where we had negative job gains. For the year 2023, the stock market has been extraordinarily volatile. We had a major run-up in January and February and then a major pullback in August, September and October. It just seems like a roller coaster going up and down based on every speech given by the Federal Reserve or any reference to higher interest rates.

But November was completely different. We had a period of time in November for 16 straight trading days where the market did not move greater than 1%. We should all like such boring stock markets. Over that 16-day trading period, the index was actually up 1.8%. Even during the start of December, volatility has gone down dramatically and the market has moved up marginally.

Ava and the girls having fun at their Christmas party.
“The sky is full of stars and there is room for them all to shine.”

There are many out there that are forecasting that the market is grossly overvalued and, therefore, is due to a pullback. I guess maybe they do not keep up with current financial information. Currently, analysts are projecting a call for growth in earnings next year in 2024 of 10% to 12 %. While that number seems aggressive, it clearly is obtainable. Remember, going into 2024 many corporations have right-size their employment and with lower interest rates in the economy, the consumer should be again holding the economy to a higher level. But with this increase in earnings, you also have right size the valuation of the markets.

The most important consideration in valuing the stock market is what earnings are going forward, not what earnings were in the past. As of November 15th, the S&P Index was trading at 19.7 times forward earnings. While that may seem high, that is exactly near the average over the last seven years. As I have indicated before, this is the “Goldilocks” where you could not argue that stocks are cheap, but they also do not appear to be overvalued.

Evan and Alexis dressed to the nines for a holiday party!

There is no question that the economy has been helped over the last several years after the pandemic with the extraordinary spending by the U.S. government. The deficits incurred over the last four years are staggering in their proportion to the GDP of the U.S. economy. There is no question that the economy has benefited from all this money being spent by the U.S. government to support the economy. But it also is true that there will be a day of reckoning to come. The U.S. cannot continue to spend money in such a reckless fashion as they have done recently. It would be easy to argue that the government is justified in spending this money to support the economy after the downturn of Covid. However, it cannot continue to be so extravagant with its spending; otherwise, we will be a net debtor country and that is just not sustainable.

A recent parallel appeared in the papers over the weekend regarding this same matter. The state of California, due to the stock market increases of new technology companies two years ago, had a $100 billion surplus in its budget. This weekend, they are forecasting the current budget would have a deficit of $68 billion and they are projecting a four-year deficit in their budget of $155 billion. Basically, what California did was that during the good times, they expanded their budget to waste a lot of money on social causes and when the financial crutch came, they had overspent and therefore could never catch up. Just to give you an example of the difference, they are forecasting a $68 billion deficit for this year, while the entire budget for the state of Florida is only $46.1 billion. As you can see, the spending differential is enormous and will not be easily covered by future tax revenues.

Reid and Caroline just discovered that
the actual movie came out over 30 years ago!

California has recently decided that the way they could balance their budget would be to tax the rich at a higher level than everyone else to cover their deficits. By enacting a super high tax rate for the wealthy, they have basically run the wealthy out of the state. Two years ago, everyone was fascinated by the fact that Elon Musk decided to sell all of his principal residences in the state of California. At that time, he owned four homes that had a valuation of close to $30 million. Everyone was perplexed as to why Elon Musk would be selling all of his principal residences since everyone has to have somewhere to live.

After selling all of these homes, Elon Musk ended up living in Austin, Texas. As you may know, Austin, Texas is a zero-income tax state as compared to California, which has the highest individual tax rate. In order for Elon Musk to change his residency from the state of California to the state of Texas, he had to sever all financial ties to California, which meant selling all of his principal residences. Shortly after establishing residency in Texas, Elon sold $15 billion in stock, which in California would have cost him $2 billion in income tax. Since he was currently living in Texas, he was able to save that $2 billion that he would have owed.

Still a kid at heart… Happy 51st, Robby!

That is what is happening to many wealthy taxpayers in the state of California. They are severing all ties with that state and moving to a tax-free state in close proximity. You may have heard recently that Mark Wahlberg moved his entire family from Los Angeles to Las Vegas. When you consider the amount of income he earns as an actor and the fact that he can reduce his tax rate by 12.3% since Nevada is a zero-income tax state, you would have to be somewhat illiterate not to make a similar move. So, it can be said that the U.S. economy has clearly moved into the “Goldilocks” economy that we so desired. Inflation is down from 9% to roughly 3.2%. Unemployment has stayed steady below 4% and in fact, we have more people working in America today than we did one year ago. Job openings have fallen roughly 20% over the last year, which is a good thing since employers are finding people to actually do the work.

GDP has fallen from 5.2% in the third quarter of 2023 to a projected 1.2% in the fourth quarter of 2023. This moderating economy will help significantly reduce inflation rates. They are forecasting now that earnings growth is no longer falling but will increase by 10%-12% in 2024. The most important consideration in the economy is that even the Federal Reserve is projecting for 2024 two rate cuts by them, which will stimulate more consumer spending, such as car purchases and new home purchases.

Overall, you could not forecast a more moderate or favorable economy going forward. As I have said many times in these postings, while we all enjoy a strong economy, it is not in the best interest for equity investing to have an economy that is too hot. We are much better off with the “Goldilocks” economy, “Not too hot and not too cold.”

Bobby trying to convert dog years into days
for the countdown to Christmas!

As we start the holiday season, I just want to emphasize again the strength of the equity cycles during the November through May investing period. We started out with an extraordinary month in November and this year has proven to be an extraordinarily good year for investing. I do not anticipate a falloff in the coming months. I would not expect the growing increase in November but rather a gradual move that would push the indexes higher during the coming months.

The title on last month’s posting was "Locked and Loaded." Well, it is time to reload in anticipation of the 2024 year. Roughly two weeks from now, you will be allowed to make a new IRA contribution for the 2024 year. If you are under the age of 50, that amount will be $7,000. Over the age of 50, your amount will be $8,000. Anyone reading this post who has earned income should make an IRA contribution as early as January, if possible. This is a particularly good financial vehicle for children. If your child has any type of earned income, you should make a Roth contribution on their behalf. The earlier you contribute within the year, the more your account will build up to assist you financially in your retirement years.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

Locked and Loaded…

2023-11-08T15:00:00.001-05:00

From the Desk of Joe Rollins

I have many issues I would like to cover within this posting, which will give you some insight into why I titled this “Locked and Loaded.” First, I would like to discuss the economy and why the slowing of the job market is extraordinarily positive for the U. S. economy. I would also like to explain to you why an index used by the Federal Reserve is more than likely incorrect. The CPI is used for many things in the U.S. economy, but I analyzed it this week, and I decided that it is flawed beyond repair. The most important issues I would like to discuss are the earnings of major corporations and how they held up during the third quarter. While certainly, the economy is the most crucial component of future stock prices, earnings are very much related. If the economy is strong, you would expect earnings to be strong, and that is precisely what we found out in the third quarter.

Penny putting a cute spell on anyone and
everyone who crosses her path!

After nearly two years of arguing, I finally convinced the world that there will be no recession in 2023 and likely none in 2024. It was already confirmed that there was no recession in 2022, although virtually all the so-called experts predicted that recession was most certainly a reality. I argued over the last 20 months that there cannot be a recession when there is full employment. As long as there is full employment, you have people spending and therefore holding the economy higher. I guess everyone else missed that not-so-trivial point.

It is interesting to note that the Federal Reserve has been wrong so often that it needs to gain credibility; I will give you a couple of examples. Going into 2023, the Federal Reserve predicted that by the summer of 2023, we would have a recession. They also projected that unemployment would be 5.5% by mid-2023 and reaching close to 6% in 2025. I guess their predictors could have been better.

Jedi Reid and Princess Leia (Caroline) feeling the Force!

I want to cover many other interesting items, but I must report on the relatively slow month of October. The reason that I highlighted the title of this posting is that we are going into the best time of the year for stock gains. We are already seeing a higher move, which I will refer to later. For October, the Standard and Poor’s Index of 500 stocks was down 2.1% but continues to be up 10.1% for the one-year period then ended. The NASDAQ Composite was down 2.7% but is still up 18% for the one-year period then ended. The Dow Jones Industrials Average was down 1.3% in October and is up 3.2% for the one-year period then ended.

I always like to compare bonds to stocks; the Bloomberg Barclays Aggregate Bond Index was down 1.7% in October and is up a miniscule 0.3% for the one-year period then ended. It was terrific that Barron’s weekly publication came out last week, and the title in large letters indicated that it was “Time To Buy Bonds.” At the time, the 10-year treasury was hovering at 4.9%, and therefore, if that interest rate did not move, you would earn that rate of return over the one-year period. Interestingly, towards the beginning of November, the S&P 500 generated a total return of 5.9% in one week. Therefore, in one week, you would have earned essentially the exact amount that you would have made in one year holding the bonds.

Our newest CPA – not sure he has the stomach
for tax season, but we’ll see…

Much has happened in the first week of November that is highly favorable for the stock market. First, the 10-year treasury has fallen from roughly 5% to 4.52%. Such a significant drop in a 10-year treasury in such a short period is very unusual. Also, as you know, the lower the interest rates are, the better it is for stocks. The reason the bond interest rate dropped so much over such a short period had to do with several factors. First, the Federal Reserve indicated, to no one's surprise, that they would not increase interest rates at their most recent meeting. In addition, it was announced that the Treasury would borrow less money to cover the deficits on a seasonally adjusted basis. Most importantly, it was announced that for October, only 150,000 new jobs were created, which was below estimates and indicated that there would be a softening in the upcoming labor market. More importantly, the soft number for October was coupled with revisions of the prior two robust employment reports, and 101,000 previously reported new jobs were eliminated from those calculations.

As reported last month, the GDP in the third quarter of 2023 was announced at 4.9%. With GDP that is close to 5%, how can anyone say we are close to recession? The unemployment report most recently announced at 3.9%, well below the projected amount by the Federal Reserve and historically close to full employment.

Ava and her friend rockin’ their Mario and Luigi costumes!

Those three factors are enormous and increase the outlook for the economy as we advance. Even though the third quarter GDP was at 4.9%, all learned forecasters now indicate that GDP in the fourth quarter will be 1.2%. The average economy reader would be startled to think that a reduction in GDP from 4.9% to 1.2% would be a good thing. However, that is precisely what I have been arguing for some time. We need to reduce economic growth to reduce the pressures to increase interest rates further. As the economy slows down, there will be a natural reduction of inflation due to less competitive pressures on prices and wages.

We are now entering the optimal time when the economy will grow somewhat, but employment will stay high, and earnings will stay even higher. That is the “Goldilocks Economy” that I expect for most of 2024. Many will argue that it is a negative that the economy is slow, but I would say that a slowdown is a good thing. Also, remember that the Federal Reserve is a political animal, and next year is a political presidential election. I would not be shocked, and in fact, I expect that sometime during 2024, you will see the Federal Reserve cut interest rates twice before the presidential election in 2024. Historically, election years are almost always positive for stocks just due to the ability of a sitting president to impact the economy and, therefore, increase prices. In 2020, the S&P 500 was up 18.4%.

Chris and Noelle Barg’s beautiful daughter –
she’ll be graduating in the Spring! Congrats, Lily!

Employment is a funny thing since it is so transitory. Few jobs were added during October, but you can expect an avalanche of new jobs going into the Christmas season. Many argue that one of the reasons the labor market was soft during October was that there were 30,000 UAW workers out due to a strike in the automobile industry. Since those employees were not working, they were deemed unemployed, reducing the number of new employees added. However, large employers have already indicated that they will add more than five million new part-time workers during the holiday season. Amazon alone has forecasted the hiring of 250,000 new employees to handle the Christmas crunch. Even though the unemployment rate has ticked up to 3.9%, I would not expect the upward trend to continue as we go forward. I would be surprised in 2024 if unemployment ever gets above the 4% level.

I have been arguing for a long time that the CPI indicator was incorrect. As you know, the CPI indicator is used for many things throughout the economy. It is, however, the most critical indicator of inflation. During the summer of 2021, inflation reached an unsustainable 9.6%. That rate has dropped dramatically, where the inflation rate is now deemed to be 3.5%, which is a considerable decline over the intervening 20 months. However, my assessment is the CPI is miscalculated, and maybe the Federal Reserve is making a big mistake relying upon the CPI as they did in forecasting a recession in the summer of 2023.

Alexis doing what she loves, while standing next to the reason
she doesn’t get to do it as much as she’d like!

A significant indicator of the CPI is the cost of housing. This index looks at the increase in rents as being a component of the CPI, and therefore, as rents go up, so does the CPI ratio and, hence, inflation. However, reviewing the data leading to the calculation, you will note that the index used for the CPI housing is over one year old. We all know that when inflation was at its worst in 2021, rents, along with everything else, were going up virtually every month. However, that trend has stopped. Rents are now flat, and the cost of housing should be constant. However, when calculating the CPI, the Federal Reserve uses that index, which is outdated and incorrect. The inflation rate is already at 2%, in my opinion. Therefore, it meets the Federal Reserve’s requirements to be at 2% or lower.

I mention this because it is essential to understand the future moves of the Federal Reserve. While they may increase interest rates one more time at the end of 2023, it will be the last increase. However, as indicated above, they will note the reduction of inflation and likely cut interest rates during 2024. I know it sounds counterintuitive, but they have to increase rates high enough so they have the comfort to cut them next year. Even though Federal Reserve Chairman Powell now indicates that we will “have higher interest rates for longer,” he has clearly shown that he and the people in the Federal Reserve who forecast the economy are rarely accurate. They are so inaccurate it makes you wonder about the competence of the staff on the Board. Remember, the tea leaves are apparent for an economy that is slowing in 2024 and will likely need a boost in confidence by a rate cut. Given that 2024 is a presidential election year, the Federal Reserve will be accommodating and, therefore, likely to follow through with some rate cuts.

The Weiss Family – only needs one more to field a team!

As mentioned previously, the number one factor that affects the value of the stock market is the economy. The second most important indicator is the earnings of the corporations. I guess you could argue that they are linked hand-in-hand when it comes to stating that if the economy is good, profits will be good and vice versa. So, the secret of investing in stocks is knowing when earnings will be reasonable compared to the opposite.

I picked up The Wall Street Journal the other day, and the bold headlines read as follows, “Exxon, Chevron Profits Surge As Mega Deals Bind Them To Oil.” I was a little taken aback by that article because, as we all know, oil is an industry whose future is not very bright. During the quarter, announcements were made by Ford and GM that they were abandoning their aggressive plans for the production of electric cars since they could not be produced efficiently and profitably. As we all know, EV cars are the wave of the future and have been mandated by the state of California as exclusive beginning in 2030. The world is attempting to move away from oil, and you would think that these vast oil companies would respond by reducing their exposure to oil, but that is not the case. They are buying more oil companies and becoming more significant in the industry.

The main thing I want to illustrate here is that so many people investing in stocks get so tied up in the whirlwind minutia that they do not look at the facts. For example, this headline from The Wall Street Journal appears most favorable to the oil companies. Therefore, if you look at the underlying numbers, you will see that Exxon for the third quarter of 2023 made $9.1 billion and Chevron made $6.5 billion; excellent numbers for sure, but are they earthshaking, as this article would lead you to believe?

Former co-worker and current client, Nadine Hooks,
stopped by to reminisce with Mia and Joe.

Something that has happened is there continues to be a massive shortage of labor. Without adequate workers, companies are forced to produce more with fewer people or to improve their technology to increase profits. Most recently, it has been announced that productivity in the United States increased to 3.5% in the second quarter of 2023 and made a considerable increase of only 1.4% annually going back to 2008. This substantial increase in productivity allows companies to be more profitable with fewer employees.

One of the biggest misnomers these so-called stock market experts keep throwing out is that the consumer is tapped out. I’ve never really understood what they’re talking about in this regard. As long as people have a job, they have income to spend. Everyone has to buy food, clothing, and other necessities of life. The only time they do without these necessities is if they don’t have a job. With unemployment at 3.9% and close to 10 million job openings, everybody in the U.S. who wants a job has a job. As long as these people are working, they will continue to earn money to buy necessities. Of course, this should relate to buying things that they consider to be important, like technology. We are seeing a revolution in technology that is unprecedented.

Ava is all “set” for a great volleyball season!

Even though the experts keep saying that the economy is slow and that it would be impossible to continue to increase sales, the third quarter of 2023 proved them incorrect. For example, take the tech companies and their increase in sales in the third quarter. Tesla’s revenue is up 9%, Alphabet (Google) grew 11%, Microsoft and Amazon expanded 13%, and Meta Platforms increased 23%. Of course, Nvidia stood out, improving its revenue by a staggering 88% during the quarter. Do those numbers give you any idea of the economy's strength since virtually all those companies sell consumer discretionary items? That means they are discretionary for the consumer to buy, but the consumer continues to purchase these items, or the revenue would not increase.

I mentioned that the real reason stocks go higher is profits. Did you look at the earnings in the third quarter for the major tech companies? For the third quarter of 2023, Apple showed a profit of $24 billion, Microsoft’s profit was $22.3 billion, and Google profited $19.7 billion. Even Meta (Facebook) delivered a profit of $11.6 billion for the quarter. Above, I mentioned that Exxon made $9.1 billion for the quarter, and Chevron made $6.5 billion. Each one of those tech companies far exceeded the profits of the so-called blue-chip oil companies.

Evan and Alexis all dressed up and enjoying a Fall wedding in Alabama. Looking good, guys!

Another example I would like to quote is that if you want to consider true blue-chip stocks, you would have to consider IBM in that category. It is the bluest of the blue stocks and the original tech giant. During the most recent ending quarter, IBM had gross sales of $14.8 billion and a net profit of $1.7 billion. Impressive numbers indeed, but minuscule as compared to the tech companies. For example, IBM’s gross sales of $14.8 billion for the quarter were substantially less than Google’s net profits at $19.7 billion. Therefore, Google made more profits than IBM even had sales.

Here is another example I thought might clarify the magnitude of the earnings of these corporations. Apple recently announced that they earned net profits for the quarter of $23 billion. To put that in perspective, I will do the arithmetic for you. There were 90 days in the quarter, meaning Apple earned a net profit of $256 million daily. I often think to myself how discouraging it would be to try and invest in cash at Apple when, if you took a long weekend off, you would have to deal with close to $1 billion in new money when you came back to work the next day. Apple also reported that they have on hand cash over $100 billion, meaning it is doubtful that they would need to borrow money in the future.

You let go first. No, you let go! Joe and his buddy, Babar!

It was also announced on Friday that Berkshire Hathaway had accumulated $157 billion in excess cash. Because they can earn money market rates close to 5% on short-term treasury bills, their earnings increase substantially on the interest income only. Assuming they can continue to get close to 5% short-term rates, they will earn close to $8 billion annually in interest income alone. What I am trying to emphasize is these profits are beyond anything anyone has ever seen in America and world finance. These profits are so extraordinary as to illustrate how strong the economy is. For all those so-called experts that forecasted recession, the downturn in corporate profits, and, therefore, significantly lower net income, I think this illustrates they were just wrong.

And yes, it is for tech companies, but how does it affect everyone else? At this point, of the 500 large companies in the S&P 500, 250 have published their reports so far this reporting season. As I am currently writing this posting, the reported earnings are 7.7% above their estimated earnings. This is the best over-percentage of the last ten years. If the economy were poor and consumers were cutting back, how can you possibly justify the GDP growth during the third quarter of 4.9% and earnings above estimates of 7.1%? I think it is pretty clear that these earnings and the increase in sales support the economic concept that the economy is just fine. Not too hot, not too cold, but just right, a beautiful “Goldilocks” economy.

Handsome little guy that Lindsay and her friend encountered
while hiking last weekend.

For decades, everyone has been bashing Amazon since they do not make large profits, and everyone seems to disagree with the company. I love Amazon, and if we do not get a box delivered a day from them, I feel ignored. During the third quarter of 2023, Amazon generated a net profit of $9.9 billion. Remember, this company makes most of its earnings in the fourth quarter, and the third quarter is historically a down quarter. As you can see, they turned out pretty well for a down quarter.

To many, Tesla is still considered to be a startup. Many people dislike Elon Musk for personal reasons that are unclear to me since the guy is brilliant beyond belief, in my opinion. A man who has accomplished all he has accomplished by 52 is quite extraordinary. I am convinced that one day, history will look back on Elon Musk and consider him the Thomas Edison of our generation. But what about the company itself? In the third quarter of 2023, Tesla showed a net profit of $1.9 billion. They admitted it was a weak quarter since they cut prices to increase market share. To point out, Tesla made more profits than IBM. You are seeing a transformation in the automobile industry. Tesla is now the most valuable car company in the world. They will produce two million electric vehicles in 2024, and there is a high likelihood that both Ford and GM combined will produce less than one million.

Did someone say my name?

I give you all these facts and figures for only one reason. I want you to evaluate profitability on headlines. As we go into the most profitable period of the year in stocks, you need to be fully invested in good stocks. With interest rates falling, the economy moderating, and earnings accelerating, there is a high likelihood that we could see a bonified Santa rally. Therefore, if you are not “locked and loaded” and fully invested, you should be moving to that level of investment as we speak.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” - Warren Buffett

2023-10-13T19:00:00.004-04:00

From the Desk of Joe Rollins

Josh and Carter saying their goodbyes to Wrigley Field

As we roll into October, we are happy to have survived the downturn of August and September. Historically, those two months are the slowest of the year for investing and the fact that we only shed a few percentage points during that period was quite positive. We are now moving into the superlative time of the year for stocks, and the best time of year for your investments. As Warren Buffett says in the title of this posting, invest now.

There are many reasons why the months of August and September are slow for stock market investing. Many of them center around the fact that people are vacationing with their families and are not paying as much attention to what is happening on Wall Street. There is also the low volume that is present during this time of the year which makes the market easier to manipulate and move by the large hedge fund type investors. We saw greater volatility during August and September but fortunately, the large sell-off that so many were predicting did not come to fruition.

Is this a dream? Penelope celebrating 6 months

One of my favorite Warren Buffett phrases is when he talks about people who forecast the valuation of stocks. It goes something like, “The only value of stock forecasters is to make fortune-tellers look good.” Boy, this year has proven that statement to be so true. This quote illustrates one of the items I wanted to cover in this posting. How could the forecasters be so wrong and continue to be wrong even today? I also want to discuss why corporate profits are likely to be higher than anticipated, which is a huge support for the anticipated stock increases. I must also cover the current state of the economy, the misinformation about the housing market, and of course, touch on our dysfunctional government that continues to be a laughingstock to the rest of our world.

Before I cover all those terribly interesting topics, I need to report on the returns for the month of September. The Standard & Poor’s Index of 500 Stocks was down 4.8% during September but is up 13.1% for the year and up 21.6% for the one-year period ended in September. The NASDAQ composite was down 5.7% in September but was up 27.1% for the year 2023 and for the one-year period ended in September up 26.1%. The DOW Jones Industrial Average was down 3.4% in September but is up 2.7% for the year 2023 and up 19.2% for the one-year period that ended.

Family Bonding - Tom Fowler, Sherie and Steve Foster,
Betty Florence and Paula Fowler on their way to Normandy

Just for a basis of comparison, the Bloomberg Barclays Aggregate Bond Index was down 2.5% for September and is down 1% for the year 2023. For the one-year period ended September, it is up 0.6% for that one year. As you can tell, investing in bonds has been a losing proposition all year long, and for those who believe that bond investing is safer than stock investment, you can see the difference between the double-digit returns of the market indexes and the virtually flat returns on bonds for the one-year period ended September 30, 2023.

One of the most amazing things about all this is how wrong the so-called forecasters have been about the economy going all the way back to the beginning of 2022. As you recall, the major market sell-off in 2022 was principally a reflection of every major forecaster indicating that the U.S. was quickly going into recession and there would be a severe downturn in the economy, thus the number of workers unemployed would be staggering and U.S. profits would plummet accordingly. As we now know, 20 months later, there was no recession and we still do not have a recession even today.

Nadine (above) and Steve Hooks (below) celebrating “His and Hers”
holes-in-one, while Steve reminds her this isn’t his first!

What is most amazing is that the GDP growth in the first quarter of 2023 was a very satisfactory 2% and in the second quarter of 2023 the GDP growth was 2.4%. It is now projected by the Atlanta Federal Reserve that the GDP would grow in the third quarter of 2023 to 4.9% based on their posting on October 5, 2023. I am now reading numerous postings indicating that the fourth quarter of 2023 will have GDP growth of roughly 4%. What is interesting is most recently the Federal Reserve actually revised its projections and increased its forecast for GDP growth in the U.S. to 2.1% for the year 2023. Their previous projection would have been 1% annual growth.

Although the evidence of robust GDP growth in 2023 is quite evident, the Federal Reserve does not agree with those assumptions. They believed we must surely be turning the corner for the U.S. economy to go into recession. I guess the labor report on Friday blew up that bad prediction on their part as well. On Friday, the job report stated a shocking increase in employment of new hires reached 336,000 of non-farm payrolls in September. What was amazing about this number was that it was roughly double the consensus of the economist’s estimates.

To add further shame to the projections, the month of August employment report was revised to include an additional 119,000 employees. It is amazing that this economy, as strong as it is, continues to put even more people to work. Although the unemployment report remains steady at 3.8% unemployed, the number of people actively seeking work increased and therefore the entire labor report on Friday was overwhelmingly positive.

Rosemary Church and Patrick O’Byrne
enjoying the sunset in beautiful Tuscany!

As mentioned so many times before, there are currently 9,610,000 job postings and the current unemployed are 6,360,000. As is evident, there is more than enough work for anyone who wants a job. Recall the forecasters indicated going into 2022 we would have a massive number of people unemployed during 2022 and 2023 which would lead to substantially lower profits by major corporations since people could no longer afford nonessential consumer goods. As the last 20 months have illustrated, those forecasts could not have been more wrong. You read in my previous postings that I just did not see how a recession could be possible with less than 4% unemployed, which fortunately ended up being an accurate call.

As we go into the last Federal Reserve meeting of 2023, this strong employment report will most likely lead to the Federal Reserve increasing interest rates one last time at a quarter point. I am not sure exactly why the traders on Wall Street fear this increase so dramatically. The Federal Reserve has increased interest rates aggressively over the last two years, and to this point there has been little or no effect on the economy. More importantly, there has been little or no effect on employment. The projections of mass unemployment, even with higher interest rates, have not had much effect whatsoever on the consumers’ ability to spend.

Lloyd King and son Michael in town for the playoffs.
At least someone is happy (womp womp)…

So, as we go forward into the end of 2023 and the beginning of 2024, what can we expect? If it is true that the third and fourth quarter GDP is 4% as illustrated above, there is a high likelihood that the economy will slow in 2024 as 4% GDP growth is not sustainable over the long term. It would be much better for all of us if the economy would cool down to the 2.5% range, which would allow inflation to continue to drift down, which would have a positive effect going forward.

So even though I believe the Federal Reserve will increase interest rates one more time on November 1, 2023, I believe that will be the last time. Since it has been proven that the Federal Reserve’s one and only perceived function these days is to put people out of work, I cannot help but think that the only conclusion they will draw at the next meeting is, “How can we run more jobs out of the U.S. so we can meet the artificial goal we have established of inflation being 2%”?

We see you - Alexis and friend made it on the Jumbotron!

We are currently at an inflation rate of roughly 3.5%, but there is much evidence that it is falling quickly. Even the most recent labor report indicated wages have only increased slightly when compared to prior reports. We are also moving into a time when we will see a dramatic decline in the price of oil going into winter. The effect from the reduced cost of oil affects virtually everything we use in our everyday lives, anything that must be transported from manufacturers to consumers, which in turn should decrease the cost of goods if precedent is to be trusted.

It looks likely that by the first quarter of 2024, the Federal Reserve will have reached its target of roughly 2% month-over-month inflation and can call an end to their continuous desire for more unemployment in America. Do you realize that what has happened with inflation has allowed corporations to be more profitable?

Think about it for a second, last summer everyone dramatically increased the prices of virtually everything. The price of food went up dramatically overnight when we were at a 9% inflation cycle. You heard the public complaining about the price of everything going up, and the price of groceries increasing dramatically over a short time. Have you noticed that even though those prices went up and the commodity prices are going down, there has been no change in pricing?

Lauren and her beau arriving at a wedding in style!

Suddenly corporate America is enjoying the benefits of higher prices but lower commodity costs to pass the products along to the public. I think once again the forecasters will be surprised when the third quarter corporate profits come out and people realize that corporate margins have improved over the last six months not because of higher prices but because of lower commodity prices.

You have seen moves that truly defy reasonable economic understanding. We have a large-scale strike going on in the union-based automobile industry. Twenty years ago, virtually every car in America was built by a unionized company. Today it is estimated that only one in five cars built and sold in the U.S. is built by unionized companies as all imported cars have no union representation. So, though the union automobile companies are on strike, and even when the President of the United States is walking the picket lines, they are losing their market share to those who are not on strike.

Being a mom is exhausting!

One of the major manufacturers in the United States of cars is Tesla. Usually, everyone thinks of Tesla as a smaller operator compared to the likes of GM or Ford, which of course would be correct. However, last quarter Tesla was more profitable than both GM and Ford combined. The manufacturing workers are now campaigning for substantially higher wages and a shorter work week. This will only damage the companies they work for and at the end of the day will lose a substantial amount of wages while the strike goes forward. All in all, their actions actually help inflation since with reduced wages they are not likely to consume as much, and at the end of the strike whatever is decided will take them years to catch up with what they lost while on strike.

I remember back when the so-called forecasters were predicting that these dramatic increases in interest rates would create absolute chaos in the real estate markets. One I recall most dramatically was that the price of housing would fall 25% almost overnight due to the actions of the Federal Reserve. Here we are 20 months later, and what do we know?

First, the truth of the matter is that there is a huge shortage of housing in the U.S. The combination of higher interest rates, inflation, and greater scrutiny by banks has led to fewer houses being built and a much more difficult situation for young people trying to buy houses. In my opinion, the main reason there is a shortage of housing is that people are just not willing to sell their houses and incur higher interest rates. If you are sitting on a mortgage with a 3% interest rate, why would you be willing to sell and incur a mortgage of 7% to buy a new house? This leads to fewer homes being sold thus creating a shortage of houses that are within the new buyers' price range.

DeNay channeling her inner Lorax - I speak for the trees!

If it were true that the housing market was in severe decline, why are virtually all homes in Atlanta sold at or above listing price? Something extraordinarily unusual is happening. For the first time in my professional career, not only is there a shortage of homes for sale, but the homes that do sell are sold at much higher prices than listed. Of course, this leads to properties becoming overpriced which will continue for the foreseeable future as those buyers eventually sell the properties that they paid entirely too much for. This keeps us in an endless cycle of selling the home for too much, buying an overpriced home and the value of property continues to go up. Those forecasters that indicated housing prices were going to fall by 25% were correct, they were just facing the wrong direction.

Last week the biggest headline was when the Speaker of the House was voted out by our Congress. The news commentators were almost foaming at the mouth in their explanation of their reasons. Out of curiosity, I watched some of the reporting on this subject, and I realized that no one really cares what is going on in Washington at the current time. Washington is so dysfunctional that it is almost the laughingstock throughout the rest of the world. Throughout all the silliness due to removing the House’s Speaker, they are not legislating, which is their one and most important job.

Ava unsure about this” trust game” with her back turned
to the wildlife in the heart of Africa!

Now we are going to have two candidates for the presidency that are each close to age 80. There are no new ideas coming out of Washington, there is no innovation. Obviously, you cannot make progress when every decision is made based on your political affiliations, regardless of the integrity of the action. Everyone is deeply divided including the Republican party, which is split between the conservatives and the ultra-conservatives. I guess this can be compared to the famous acts of Nero, who played the lyre as Rome burned.

Congress does not seem to get the point that we have $32 trillion in debt and the cost of borrowing that debt is double what it was only a year ago. The increase in interest expense to service a national debt is going to be a staggering amount going forward. It looks like the current deficits are going to be close to $2 trillion for as long as the eye can see and yet our government is so dysfunctional that all they want to do is spend more money rather than less.

"Happy Fall, y'all"

I do not want to pretend that this is a current issue, because it is not. Any time you can print money, cash flow issues can be solved immediately. However, there will be a day when this issue will become paramount. The amount of interest to service the Federal debt will soon be a major driving force in the budget and if some politicians do not begin to take this into consideration, we will have issues much more serious than they are today.

Congress should also be embarrassed by how they are handling the southern border debacle going on now. The illegal immigration issue has become paramount, and Congress cannot even have a civil conversation on the subject. We cannot fiscally continue to allow thousands of illegal immigrants into the country daily and support them while they are here in limbo awaiting immigration proceedings. Any other legislative body would get together, recognize the issue at hand, and come together for a solution to this issue. I personally think the current administration believes the immigrants will come in and eventually vote to support their causes. As we all know illegal immigrants do not have the right to vote at the current time. If Congress were truly concerned about doing something to help America, they would spend less time worrying about who will become Speaker of the House, and more time worrying about how to deal with the immigration issue on the southern border.

We could not be more excited about the upcoming six or seven months of investing. The economy is in excellent shape and corporate profits are continuing to rise. You are seeing an opportunity now to put new money to work, notwithstanding the negative projections of the forecasters who have been so very wrong. After 20 months, many of the so-called experts are no longer calling for the recession they predicted, but rather just a slowdown. What is most amazing is that during this entire time from the beginning of 2022 to now, the economy has not slowed, but accelerated. As you recall the first two quarters of 2022 were marginally negative and the GDP has gone up every quarter since that time.

"Pose for the tourists, they said.
We’ll throw in a wildebeest, they said."

If you have not made your IRA or maximum 401(k) contributions, you should do so immediately. The time for investing is beginning November 1st through May 1st and if you are not invested you may lose the opportunity for a nice acceleration. Consider meeting with us, giving us the opportunity to spend time with you and discuss anything about investing or your portfolio. We would be happy to meet with you at any point and discuss your goals and opportunities going forward. What we know with some precision is that you have been misled by the media over the last 20 months, and we are hopefully headed into a period of positive financial results that will once again prove the critics were never giving you accurate information.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

There is a saying, “Economic expansions do not die of old age: they are murdered by the Federal Reserve.”

2023-09-13T18:00:00.007-04:00

From the Desk of Joe Rollins

“Nature’s great masterpiece, an elephant -
the only harmless great thing.” - John Donne

Astonishingly, the U.S. economy has been so resilient for almost the last two years. Going into 2022, it was almost a unanimous consensus by all the major forecasting brokerage houses that the U.S. economy would fall into a swift and deep recession in 2022. However, you didn’t hear those words from me. I maintained the position that there would be no recession in 2022 and likely none in 2023. So far, I have been more accurate in my projections than those brokerage houses.

What is amazing to me is that these brokerage houses will not stand up and admit that they were flat wrong. In the last week, Goldman Sachs lowered their projection for recession in the U.S. over the next 12 months to 15%. I am not sure how useful this information is since their projection at the beginning of 2022 was 80%.

Bank of America only recently scrapped its forecast for a U.S. recession next year, indicating that now they do not think it is likely. The massive banks, Barclays and Citi, postponed the anticipated start of a mild recession downturn until next spring. I suppose if you keep postponing your projected recession date, everyone will eventually forget whether you were right or wrong.

Ava, Dakota, and Joe with their new friend - for comparison, Joe is 6’4”

I think back to the swift and severe selloffs we had in the markets in 2022 and cannot help but be convinced that they occurred due to these extraordinary and frankly scary calls for a severe recession. Looking back, now that we know the economy never spiraled into recession during that time, I wonder whether all those capital losses could have been circumvented.

I have several items to discuss in this posting, and I thought I would give some insight into our recent trip to Africa. I wanted to share all the beauty and exotic nature of that continent we witnessed. I will also discuss our economy, and current financial matters while reviewing why, once again it is highly unlikely that there will be a recession in 2023.

Before I delve deeper into those terribly interesting thoughts, I must report on the financial outcome for the month of August. As you know the year 2023 has been quite excellent for investing, and even though August fell off somewhat, it continues to be a vastly profitable financial year. The Standard and Poor’s Index of 500 stocks was down 1.6% in August but is up 18.7% for the year 2023 so far. Also, for the one-year period ending August 31st, that index is up 15.9%. The Dow Jones Industrial Average was down 2% for the month of August but is up 6.4% for the year 2023 and is up 12.6% for the one-year period ending August 31st. The NASDAQ Composite was down 2.1% for August but is up a sterling 34.8% in 2023 and is up 19.8% for the one-year period ending August 31st.

A little chilly, but the view was worth it!

Just to give you a basis of comparison, the Bloomberg Barclays Aggregate Bond Index was down 0.6% for the month of August and is up 1.5% for the year ended August 31st and is down 1.2% for the one-year period ending August 31st. As you can tell, bonds have performed rather poorly if compared to stocks for the last several years. I have often been asked when it is a good time to start investing in bonds and the simple answer is that you should be investing in them when the interest rates start falling, not while they are increasing. There is still a high likelihood that the Federal Reserve will increase interest rates once again before the year is over, therefore investing in bonds should be on hold for now.

I have been asked repeatedly why the so-called experts in the field of finance were so wrong about the U.S. falling into recession. I cannot help but think that a major reason for this failure to accurately forecast recession is that the financial system as a whole has changed. At one time, the entire American economy was dependent on the ability to borrow from banks and to use that cash in their operations.

A sight to behold, indeed!

No longer do major corporations need to borrow from banks. Many of these corporations have more available cash on their balance sheets than banks. They no longer need to borrow as frequently for their operations, so an increase in interest rates on bank loans has little or nothing to do with making Americans tighten their belt and reducing the pressure on the economy.

There has been much said about the concept of people having extra savings, which I have also seen firsthand during business. After the flood of money, the government bestowed upon individuals during COVID, many are still living off these extra savings to ride out the economy. While it is true that unemployment went up from 3.5% to 3.8% last month, that had nothing to do with more people being laid off. For the first time in a long time, the actual number of people seeking employment went up in July which increases unemployment. With the number of people seeking employment being higher, the unemployment rate would clearly have to increase, but this is not a negative. Throughout this entire two-year period, employment has stayed enormously strong. Even to this day, employers are reporting that it is difficult to hire employees for any level of classification. Even my firm has suffered through long bouts of not being able to hire qualified employees to fill our positions.

Josh and Carter checking out the Golden Gate Bridge.
Did you know it took a little over 4 years to build it?

It is now believed that there is close to $5 trillion in cash sitting on the sidelines waiting to be implemented either in investing or purchasing consumer goods. As an example, if some of these excess savings are removed to complete a project on your house, that keeps the economy growing and higher interest rates will have no effect whatsoever on that financial activity.

The Wall Street Journal reported on Friday that home prices are rising again. The reason home prices continue to rise is scarcity. There are just not enough houses on the market for people to buy. It is true that interest rates and mortgages have reached a 22-year high, but most people who own a home and have locked in low rates years ago have no intention of selling and subjecting themselves to a higher rate. What we are seeing in Atlanta is that home ownership is more difficult because, for each home on the market, multiple offers are above the original listing price. It is hard to believe now, but the listing price is now only the beginning of the bidding war on the purchase of new housing.

So, what do we know about the economy now that we did not know before? As I mentioned in prior postings, all the evidence of the economy continues to be quite good. But what does the official record say? For the first quarter of 2023, the GDP was up a very satisfying 2%. In the second quarter of 2023, the GDP was up 2.4%. While we do not have the final numbers for the third quarter’s GDP, on September 8, 2023, the Atlanta Federal Reserve projected that the GDP for the 3rd quarter would be 5.6%. Wow!

DeNay setting out to explore The Last Frontier

It is pretty clear from these excellent GDP numbers in 2023 that there has been no recession at this point. This is interesting given that the Federal Reserve's calculations of GDP would have already put the U.S. economy into recession. There are two more meetings of the Federal Reserve before the end of the year, and they will not increase interest rates in their September meeting. However, there is a high likelihood that they will increase interest rates in November 2023 for the last time.

For those of you who sit on the edge of your seat whenever there is an interest rate increase, just look at the prior two years. Even though the Federal Reserve has increased interest rates 13 times over this period, there has been almost zero effect on the economy and that is an exceptionally good thing. In the most recent announcement, we now have inflation starting to fall from last summer’s rate of 9.8% inflation to 3.2% inflation. The Federal Reserve has done an excellent job of bringing down inflation and creating an economy that continues to be strong.

Four generations of Battle boys – Bill, Pat, Will, and little Paul!!

For those who argue that the economy cannot withstand these higher interest rates and that the valuation of stocks is excessive given those rates, consider the fact that there is a high likelihood that during 2024 rates will have to come down to a more reasonable level to allow the economy to expand. If that ends up being the case, stock valuations at this level with lower interest rates are a long way from being stretched. Yes, there are all kinds of problems in the U.S. but notwithstanding all the political strife that we are seeing in the financial news, the economy continues to expand and there continues to be plenty of jobs for U.S. workers to fill.

A-weema-weh, A-weema-weh…

I thought I would share a few thoughts on our recent trip to South Africa. All the preconceived misconceptions we had about Africa being a hot and dry climate ended up not being true when we arrived. It was extremely cold and, particularly in Cape Town, extraordinarily wet. Even though the weather was not ideal, it did not prevent us from enjoying the pristine jungle and all the animals therein.

Our first stop was Cape Town, where we spent three days. I found Cape Town to be uninteresting for the most part, particularly when one considers all the racial problems they have. While the end of Apartheid brought a close to institutionalized segregation, racial tensions did not end with it.

We did see some interesting sights and visited the Cape of Good Hope which was the most southwestern point of the African continent, but I was anxious to get to the jungles and see the animals. You may be familiar with the Cape of Good Hope and the legendary boat accidents that have occurred there due to the roughness of the water around the Cape. I can confirm that the water is extremely rough.

“Cheese”

From Cape Town, we flew out to the Jabulani Safari. This is a game reserve privately owned by a family who is passionate about the conservation and rescue of elephants. They began their efforts in 1977 when they were called to rescue an elephant calf who was injured and stuck in the mud. On the property, they have a sanctuary where there are roughly 16 elephants but the entire property shelters roughly 100 elephants that are still running wild.

The Big Five (lion, leopard, rhino, elephant, and African buffalo) were so named because they were the most difficult to hunt on foot. On our first day on safari at this location, we were able to witness all five of these animals and many more. I am not sure exactly what I was expecting when it came to the animals and their reactions to humans. We have all heard how protective a mother lion can be, but in one instance we were as close as 10 feet to one with her nine cubs and she was not concerned in the least about our presence.

Not always a gentle giant!

On another excursion, we were following a leopard as it was getting dark. The trail guide lost sight of it and could not locate the leopard since it was moving so quickly. I looked down next to the jeep, and the leopard was right next to my hand. I could have easily reached down and petted the leopard but, of course, that would have been ill-advised. The only case where we had a negative interaction with an animal was when we were observing a rhino that was in the process of marking his territory. After a while, the rhino grew agitated over being followed and turned around and charged the car. Fortunately, the trail guide was able to pull away safely and the chase was off.

In the back of my mind, I was expecting we would be sleeping in tents without air conditioning and lacking necessities, but I was completely wrong. All the accommodations were 5-star hotels in the middle of nowhere, deep in the jungle. The first resort we stayed in only had 10 rooms and was situated in the middle of the jungle, such that we were not allowed to walk around the premises without an escort. The food was nothing short of extraordinary, even though it is difficult to focus on food when you have seen the jungle two times a day for a week.

Patience is a virtue…

After a week we took a bush plane to another private resort, Singita Ebony Lodge, and this was even more extraordinary than the first. This lodge only had 12 rooms and hospitality was over the top. What was amazing is that everywhere we went in South Africa everyone spoke perfect English. I guess I realized that South Africa at one time was a British Colony. I asked some of the trail guides about languages and they told me that all the children in school are taught both English and the local language, therefore they are all bilingual and speak perfect English.

At the Singita Lodge, we were able to see a lot of different animals that we did not see at the first resort. We saw a great many giraffes, hyenas, and wild dogs. Wild dogs are very difficult to locate since they move in packs and work mainly at night. But we were able to come across a group of about 10 as they were hunting.

We also came across three young male lions hunting buffalo along the plains. Once again, even though they were hunting for their food we were right beside them as they stalked buffalo. As the buffalo moved, we moved with them and followed them for several miles until it became too dark to follow them. The picture of these male lions, in my opinion, is quite extraordinary.

It was an amazing experience in every regard and one I had wanted to have for many years. It is not likely that I will return to South Africa, or Africa itself, but I just wanted to emphasize what a beautiful place it is and how pristine the area with wild animals is to see.

Lucy, Jennifer, Harper et Eddie en balade à vélo à Paris!

The last thing I wanted to mention is that this country is richer now than it has ever been. If you look at the definition of the generations of Baby Boomers alone, they are defined as those people born between 1946 and 1964. They are now reaching full retirement age and have started to spend some of the money they have accumulated during their lifetime. Based on the Department of Commerce, the Baby Boomers were worth $74.8 trillion at the end of the first quarter of 2023. $19 trillion of that is in real estate which includes their personal homes.

At some point during their retirement years, they will sell their principal residences and use some of that money to spend on travel and entertainment. However, if you think that money is illiquid, the bulk of it is in savings accounts and is believed to be worth $8.9 trillion in bank deposits and money market accounts alone. I bring up these facts just to illustrate that there is enormous spending power that has not been fully tapped. When it does, it will keep the economy going for many years to come.

Long-time clients, Pat and Alice Anne Battle with their growing family: Mary Raines, Annie, Danielle, Will, and little Allie
at the christening of William Paul Battle

So, the fear that the excess pandemic savings will be gone by the end of the year is not based on fact. As illustrated above, even if the excess earnings are depleted, the Baby Boomers have trillions in firepower that can keep the market going higher.

As we go into the last quarter of 2023, we need to be reminded that the best time in the stock market is November through May of any given year. Yes, August and September are volatile, but they mean nothing when building long-term wealth. Yes, a recession is unlikely any time soon, interest rates are likely to have topped out, inflation is clearly falling and getting better on a monthly basis, and corporate America continues to generate consistent and excellent profits.

There is nothing that I see that can bring down the market dramatically unless there is a geopolitical bend that none of us see. It is a shame we are all so focused on politics when it comes to money, but it cannot be avoided when it comes to a Presidential election year. I sense that even with the volatile August and September, the market has been great up to this point and is very likely to go higher before the end of the year. If you have not contributed to your IRA, now is the time to do it - and remember to make an IRA contribution every year.

Proud mom Paula Herraiz with sons Blake and Mason –
congratulations, Mason!

This is a great time to sit down with us and let us review your financial plan. It is never too late to update that plan to current events. I have also been reviewing a lot of testamentary wills and trusts for clients. What I am finding as I review more and more is that these documents are way out of date and need to be updated to your current situation. If it is only you and your spouse in the household and all your children are grown, a simple will is appropriate but extremely important in passing your estate to your next of kin.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

In spite of the Federal Reserve’s attempt to crush the U.S. economy, it continues to grow nicely

2023-05-12T21:00:00.002-04:00

From the Desk of Joe Rollins

I am not sure I ever recall a time when there was so much confusion about the U.S. economy. I have clients call daily to express their concerns regarding the extraordinary events and request a different approach to their investment philosophy. The truth of the matter is that the economy is actually quite strong, and the recently announced unemployment rate of 3.4% is the best in the U.S. since 1969. Think about that for a second. We have the best unemployment rate in the last 54 years, and yet the financial media only discusses the upcoming recession, and the negative aspects of the Federal Reserve increasing interest rates.

Keep looking up, Cameron… That’s the secret of life!

There is not a lot of news so I thought I would discuss the issue regarding employment and the upcoming recession as predicted by the Federal Reserve. I also want to discuss the ongoing so-called banking crisis in the U.S. but as a change of pace I wanted to discuss the most recent points raised in The Economist that a client furnished me with titled “The Lessons of America’s Astonishing Economic Record.”

R E T U R N S
I have a great many things I want to discuss, but first I must report that the month of April was quite satisfactory in its performance and the year-to-date numbers on the S&P 500 were quite spectacular. For the month of April, the Standard and Poor’s Index of 500 Stocks was up 1.6% and year-to-date for 2023 that index is up 9.2% which is absolutely an excellent return.

Joe, Dakota, and Ava helping Josh celebrate his 28th birthday!!
Hope it was a good one, Josh!

I also want to point out that the 10-year average on this index, even including the terrible year we had in 2022, is still a double-digit return of 12.2%. The NASDAQ Composite for the month of April was barely up at 0.1% but has a year-to-date return of 17.2%. The 10-year average of the NASDAQ Composite is quite a satisfying 15.1% per year. The DOW Jones Industrial Average was nicely up in April at 2.6%. Unfortunately, the year-to-date numbers are less satisfactory, at 3.5%. Once again though, the 10-year average on this Index is double digits, up at 11.2%.

The Bond market had a good month during April due to interest rates on government securities falling. The Bloomberg Barclay’s Aggregate Bond Index was up in April by 0.6% and for the year it is up 3.7%. As with the others, the 10-year index return over a 10-year period is 1.3%. As you can see the return on bonds over the last decade has been minuscule compared to the returns on stocks.

E M P L O Y M E N T
The big news of the week is that the Labor Department announced on Friday that there had been 253,000 new jobs added to the U.S. economy for the month of April. This came as a stunning rebut to the government’s attempt to destroy jobs and lay people off. They indeed revised the previous two month’s labor numbers down so that the average is roughly 222,000 new jobs added per month. For example, last year, the economy was adding roughly 524,000 new jobs per month, but that was a reaction from the pandemic and employers were hiring back their employees. The evidence is still clear that the economy continues to be strong despite the efforts of the Federal Reserve to destroy the economy.

Caroline trying to convince Reid that this is in fact their new home!

Employment numbers are actually quite good (a 54-year record). Once again, this month’s job openings were 9.59 million and the total unemployed is 5.6 million and once again, this month there are roughly two jobs for every unemployed person in America. One of the things that could be said is it is clear now that the demand for labor is easing as employers hire fewer people every month. But what is even more clear to me is that the supply of labor is getting increasingly scarce. When you have an unemployment rate of 3.4% virtually everyone that wants employment can be employed with ease. As an increasing number of people go to work, employers are having a challenging time finding qualified employees. Once again, the participation rate this month was 60.4% which means more and more U.S. citizens are actively looking for a job.

R E C E S S I O N
At the beginning of 2022, all the so-called experts pointed out that due to the interest rate increases by the Federal Reserve, we would suffer a severe recession in 2022. I countered that until you saw unemployment starting to soar you were unlikely to see a recession. Here we are, 15 months after those incorrect calls for a severe recession and we have yet to see any signs of one yet. There is no question that the economy is slowing down, but that is actually a good thing since it takes the pressure off the Federal Reserve to continue to increase interest rates. Unless we see unemployment start to move dramatically higher, I doubt that we will see a recession in 2023 either.

Proud mom, Ramani Damera, with her lovely children Sohan and Sonali. Sohan will be graduating from UC Davis next month! Congratulations!

One of the sad attributes of the volatility of the last couple of years is that certain clients have pulled their money from investment accounts and put it into cash accounts. For the first time in an exceptionally long time, cash is now paying a decent rate of return where you can get money markets that pay 4.5% to 5% annual returns. However, if you compare that with the performance of the Standard and Poor’s Index of 500 Stocks, which is up 9.2% for the year through April, a 5% money market account hardly compares. Once again, when investors start to view their investments on a short-term basis, they lose the long-term performance that these indexes provide. As mentioned above, each of the major indexes over the last 10 years had double-digit returns even with the 18% that the S&P 500 Index lost in 2022. The value of long-term investing is that the short-term problems get wiped out by the long-term horizon. You should never focus on short-term volatility in a long-term investment philosophy.

B A N K I N G
There seems to be a great deal of negative reaction from investors regarding the volatility of what is going on in the Regional Bank selloffs. First, I should make it clear that there is no economic threat to the U.S. economy due to this volatility. A great deal of it is centered strictly on the traders on Wall Street attempting to sell off these stocks for their benefit. As you have noticed, some of the Regional Bank stocks were down 40% in a week, but last Friday, they jumped back up 10%. This has nothing to do with the economic effects of the bank, but more to do with the act of trading by the short-term traders attempting to bring the stocks down.

Ava not letting the fear of striking out keep her from playing the game!
Go Ava!

For those of you who have not kept up with the ongoing crisis, it started innocently enough when the Federal Reserve began increasing interest rates in March 2022. The Federal Reserve has now increased interest rates ten times over the last 14 months, which is an all-time unprecedentedly large increase in rates. The Federal Reserve intended to starve consumers of credit so they could not buy houses, cars, or other sizable items. The theory was that if the Federal Reserve could make interest rates high enough consumers could not afford large ticket items, therefore the economy would slow and correspondingly inflation would go down. However, the effect of the rate increases was surprising to most. A bank by charter is required to keep the bulk of its assets in Treasury Bonds or zero-risk interest rate certificates. Many banks invest in these on a long-term basis, so they keep all their customer deposits either loaned to other customers or invested in long-term government securities, never investing short and lending long.

Client Lloyd King enjoying a night out with his son, Michael,
as he cheers on the Sixers!

As the Federal Reserve began increasing interest rates, the value of the bond portfolios owned by banks decreased. As we all know, bonds move inversely into interest rates. Due to the rapid and unprecedented increase in these rates, the bond portfolios of the banks were materially impacted. But the real news came when other financial institutions were able to offer interest rates to customers in the 5% range. Banks were unable to provide interest rates that high due to their long-term loan commitments to customers. Suddenly, cash became king in regional banks, as customers moved money out of these banks and into other financial institutions that paid higher rates of return.

There became a flood of money out of these banks because they could not compete with the higher rates of interest offered elsewhere. This, coupled with the serious deterioration of the bond portfolio created the issue of possible bank failures due to liquidity issues.

Three banks have failed, but in each of those cases, the Federal Reserve stepped in and made sure that no depositors’ money was lost. They also did something else that was even more important. In the period after the first two bank failures, the Federal Reserve pushed money into these banks with a $300 billion cushion.

All smiles from the Musciano-Howard clan –
Mia, Barb, Marti, Ally, Brittany and Mitch

The Federal Reserve wanted to make sure that these banks were well-funded and could manage withdrawals by customers. Essentially, at that point, the crisis was over. Banks had ample liquidity to meet the redemptions and the benefactor of all that cash was the Federal Reserve. While the short sellers on Wall Street continue to push this point for regional banks, there is really no crisis. These banks were stabilized by the government and even though they continue to have mass withdrawals in an effort by consumers to receive higher interest rates, it is unlikely that these banks will fail because of that action. Therefore, when you read every single day about the so-called bank crisis, just feel a bit of peace to know that truly it is not a crisis at all “If it bleeds, it leads” with the financial media.

D E B T
We have received many calls from clients concerned about the impasse regarding the Federal debt limit which comes due in July 2023. During my working career, I have witnessed many of these crises come and go. Back during the Clinton administration, the Republicans controlled both levels of the House and they pushed the government into default which created complete chaos in the economy. At the end of the day, what happened was that all the government employees were laid off, and the government shut down for some time. However, no employees lost any money since they were hired back and were paid their back wages from the time they spent laid off.

DeNay on her way to help celebrate a friend's marriage in style

While it is true that it may be a situation where the government cannot pay its bills, do not think for a second it is going to impact their ability to pay their debts. First off, one of the largest holders of government debt in the U.S. is the U.S. Social Security system. In addition, the government can print money whenever it likes, and if there is any attempt to reduce their credit, they are likely to manufacture the money necessary to keep their debts under control.

There may be a brief time when the government cannot pay its bills for a couple of months, but once again no debts will be left unpaid. I believe that this particular Congress is so polarized by their political differences that there are going to be difficulties regarding the debt limit whenever it comes up. But I have high confidence that they will compromise before the debt limit expires in July. Even if they cannot agree, no substantial damage to the U.S. economy will be done.

E C O N O M Y
It seems now in 2023 that the number of U.S. citizens has become increasingly concerned about the economy. In a recent poll, 4/5 of those polled believe that their children will be worse off than they were when they grow up. That 80% rate of people that are gloomy about the economy, is substantially higher than 1990 when only 2/5 of the American citizens felt that way. Roughly double the number of U.S. citizens are now questioning whether their children will be better off in the future than they are today.

Alexis shaking off tax season at Taylor Swift's Eras Tour in Atlanta

As mentioned above, a client sent me the article from The Economist titled “The Lessons of America’s Astonishing Economic Record.” This article basically points out that regardless of the pessimism from current U.S. citizens, the economic facts are clear that America remains the world’s richest, most productive, and most innovative economy. As the article points out, no one really comes close. The interesting facts in this article explain how strong the U.S. economy is compared to the rest of the world. As pointed out in the article from 1990, America accounted for one-quarter of the world's output of goods and services. Thirty years later, that share is almost unchanged even as China has gained economic clout.

With the huge run-up in China’s economic base, the percentage that the U.S. produces remains the same over the last 33 years. What is even more astounding is that the U.S. accounts for 58% of the G7’s GDP. If you think that the U.S. economy is deteriorating, that same percentage in 1990 was 40% of the level of the G7’s GDP. This fact alone indicates that the level of the U.S.’s GDP as compared to the richest countries in the world has grown substantially since 1990 and has not deteriorated as many would believe. Truly astonishing facts.

W O R K F O R C E
The article points out that one of the major reasons that the U.S. has held up its economic place in the world is that over the last 30 years, the number of workers in America has increased by 30%, while workers have only increased by 10% throughout the rest of the world. I also want to point out that due to the innovations of the American economy, if you would have invested $100 into the S&P 500 in 1990 that initial investment would be worth more than $2,000 today. They indicated in the article that the return would be four times higher than if you had invested in any other major country in the world.

Cecilia and Nathan smiling a-roar-ably while at the
Fernbank Museum of Natural History

One of the main reasons why the economy continues to be so strong compared to the rest of the world is the heavy influx of migrants into the United States. At the current time, immigrant workers make up 17% of the workforce, compared to only 3% of immigrants working in the Japanese workforce. Many countries are dealing with aging populations. Much has been written about the effects on the Japanese workforce and even the Chinese workforce which is getting older. It is astonishing to believe but even though the fertility rate in the U.S. has dropped, the average age in the U.S. is lower today than it was 10 years ago. This is due to the influx of migrants. While the rest of the world continues to age, the U.S. on average is getting younger. In China and Japan, an aging population is their biggest fear.

Caroline ready for the D2 Summit Finals in Orlando -
the D must stand for darling!

Everyone ignores the fact that the average income for Americans continues to be one of the highest in the world and it continues to grow. You see prosperity everywhere you look, and you just cannot ignore it. I drove from my office in Buckhead into Midtown to meet a client and I was astonished at the number of buildings under construction along Peachtree Road. The Midtown area in Atlanta exploded into high rises and large corporate tenants. Even though the construction of apartments continues to grow daily, it is still inadequate to keep up with the number of people that move into Atlanta.

If you want proof of this wealth being built in America, the Economist article points out that the income per person in America was 24% higher than in Western Europe in 1990. If you took that same measurement today, income per person in America is 30% higher than it is in Western Europe today. As pointed out in the Economist, the most important attribute of a country building wealth is the large workforce and productivity of that workforce. Basically, the larger the workforce and the more productive they are, the more the economy grows overall.

Mia with Josh- he still looks to her for advice after all these years
(but he now has to look down when doing so)

What is interesting in America is that the population of critical working-age 25 through 64 has risen from 128 million in 1990 to 175 million in 2022. That is an increase in the available workforce of 38%. However, compare that to Western Europe where the working age population rose 9% during the same period from 94 million to 102 million. As you can see the increase in the workforce population is dramatically higher in the U.S. than in the rest of the wealthy countries in the world.

From the analysis made by the Economist, the income median in the U.S. is increasing leading to salaries increasing. As more and more employees earn higher middle-class wages, they spend that money on consumer goods and services which increases our economy. As pointed out by the Economist, even though 80% of the population believes that their children will not be financially better than they are, the facts are quite different. If you read the analysis as pointed out in the Economist, the economy and its citizens are getting stronger, not weaker. With this ability to buy consumer goods and basically retire with adequate income, the outlook for the future of today’s children looks brighter than people expect.

O I L
One of the most astonishing facts is that the U.S. in the early 2000s imported roughly 10 million barrels of oil per day in net terms. As you know it became a matter of national security that we could not provide the amount of oil needed to run our country. In the case of war, if we were unable to provide adequate oil resources, this would result in a major detriment to the military front. However, due to learning about hydraulic fracturing and horizontal drilling, the U.S. oil industry turned around quickly to supply this need. The U.S. became a net exporter of oil in the year 2020. Even though we could completely fund our oil needs in 2020, the new administration decided to attack fossil fuels, and the U.S. has not been able to keep up with its energy needs since 2021.

The Florida sun proving every day can end beautifully!

C O N C L U S I O N
I must agree that the news on the U.S. economy has been unpleasant for the last 14 months. However, as I pointed out back in 2022, I did not think the recession was imminent and I still do not believe it will be. If we have a recession, it will be short and relatively modest. The Federal Reserve announced that the GDP was up 1.1% in the first quarter of 2023. You must understand that the first quarter when reading GDP is historically the weaker of the quarters. GDP is held up by severe weather in the U.S., particularly in the northern states, and GDP tends to increase substantially as you get into the more productive summer months.

I am not sure that the Federal Reserve will allow the economy to continue to grow. It seems to be their motto now that to make our economy better, they must destroy it. Hopefully, they will stop long enough to allow the economy to realign itself with the higher interest rates and begin to grow again.

Joe looking forward to discussing how we can help you
reach your goals and needs.

This year has seen extraordinary gains through only four months of the year so far. If the economy continues to accelerate as we go through the summer, then these numbers will be even higher at the end of the year. I projected a gain of 20% this year based on my read of the economy and so far, the indexes have kept up with the prediction. Now is a suitable time to come in and visit us and discuss your goals as well as your retirement plan. I just feel sorry for those investors that left the market and have missed this large run-up that has occurred so far this year. Remember, I warned you here first (numerous times).

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

A Day to Rest After Tax Season

2023-04-18T17:30:00.001-04:00

As is our annual tradition, Rollins Financial Advisors will be closed on Friday, April 21, to allow our staff a well-deserved holiday following a tough tax season. We will reopen with normal business hours on Monday, April 24.

If you have a matter that requires immediate attention while our offices are closed, please contact any of our partners:

Danielle Van Lear - dvanlear@rollinsfinancial.com
Eddie Wilcox - ewilcox@rollinsfinancial.com
Joe Rollins - jrollins@rollinsfinancial.com
Robby Schultz - rschultz@rollinsfinancial.com

Thank YOU for choosing us for your accounting and tax needs again this year. We appreciate your trust, patronage and support!

Are we finally going to talk ourselves into a recession?

2023-04-12T15:30:00.001-04:00

From the Desk of Joe Rollins

Since the beginning of 2022, all the talk you hear in the financial press is about the upcoming recession. Many forecasts predicted we would have a recession in 2022, but alas that did not happen. As we rolled around to 2023, those same people said that we missed the recession in 2022 but clearly it was only a matter of time. As we finished March 2023, there is still no evidence that recession is forthcoming. But that all could change with a media blitz to convince us hard times are coming. As the saying in the media goes, “If it bleeds it leads.”

Penelope Lu Flores commending herself on arriving early and
getting her mom, Elizabeth, out of the end of tax season

Due to the normal pressures of tax season, I decided to cut this blog short and only cover the more compelling stories for this early spring season. I must reflect that the first quarter of 2023 was quite excellent. Even though the loud screams of the financial media told us that the world was coming to an end and breadlines would soon be forming on the streets, the S&P 500 Index had an excellent quarter up 7.5% for the quarter.

I wonder how few of those on Wall Street actually projected such a nice increase for the first quarter of 2023. While I can’t get into all the important issues, I want to discuss the current economy and the enormous pressure that the financial media is forcing on America with this call for recession. I also must cover the situation with the banks that went out of business during the month of March.

A day at the zoo is a day well spent! (Ava and Josh)

I want to cover those interesting subjects, but first I must cover what has become quite an excellent quarter. The Standard and Poor’s 500 Index stocks were up 3.7% in the month of March, and up 7.5% year-to-date for 2023. The NASDAQ Composite was up an excellent 6.8% in March and is up 17% for the year 2023. The DOW Jones Industrial Average was up 2.1% in March and is fractionally up 0.9% for the year 2023. All these Indexes performed very well during the first quarter of 2023.

Even the Bloomberg Barclays Aggregate Bond Index was up 2.5% for the month of March and was up 3.1% for the year-to-date. For the first time in over three years, it looks like the bond funds are now starting to become competitive with stock funds. While the Federal Reserve was increasing interest rates was not a good time to be invested in bonds, the time has come to review them and determine whether they should be a part of a portfolio.

Lauren Lukowicz out for Easter brunch with her mom

Almost every day I watch the financial news and virtually every other sentence uttered by the anchors revolves around the upcoming recession. What is interesting is that they have been discussing this since January 2022. So far, the recession has not occurred. However, there is a high likelihood now that public sentiment will in fact create the recession that the media has been calling for over a year now.

Take, as an example, a corporate executive who would be negligent in his duties if he did not begin to lay off people due to an upcoming recession. You hear famous entrepreneurs such as Jeff Bezos telling the public that they need to be careful and should not purchase a new car, new home or go on expensive vacations. Might it be possible that we talked ourselves into a recession when no recession actually exists?

It does not require much to turn the economy from positive to negative if suddenly consumers quit spending. What if, due to these misplaced fears, people decide not to purchase a new car, home, or go on expensive vacations? We might just in fact turn this strong economy into a weaker one and end up with the result that the media has been forecasting.

A “Penny” for your thoughts…

Once again, the news on the economy was quite good for the month of March. During the month of March, the U.S. economy added 236,000 new jobs which was pretty much as anticipated. More importantly the unemployment rate dropped during March to 3.5%. This is an extraordinarily low rate and is only one tick above the lowest ever recorded (not in wartime) at 3.4%. Even though the national unemployment is at 3.5%, the unemployment rate in some states is even quite lower at 2%. There is no question that the job market is extraordinarily strong and has not faulted due to the ever-increasing interest rates by the Federal Reserve.

What is more important is that even though the number of job openings has fallen, there are still 1.67 jobs for every unemployed person in the U.S. For the month of March, new job openings measured 9,931,000. The total number of unemployed in America is 5,839,000. As you can see, there are ample jobs for every unemployed person in America that wants to work. Every time I discuss the subject, it always goes back to the point of why there are not enough workers in America to fill the necessary job openings.

Carter and Josh showing Ava and Dakota why it’s called the Windy City.

There is a general belief that due to the enormous amount of government funding that we had in the Covid years there are a lot of potential workers that are not taking jobs because they still have money left over from the government. One of the ways that we know this to be true is that currently there are $5.6 trillion in money market and savings accounts in the U.S. alone. In recent months, those accounts have now been paying market rates that are attracting new investors to these money market accounts. However, this huge sum of cash is also fuel for the next run-up in the stock market. If interest rates start to fall and these money market rates can no longer compete, much of this money will flow out from the money market accounts into ordinary equities and bonds. This is a lot of fuel for a potential runup in the financial markets.

There was also great news in this more recent employment report. For the first time in years, the participation rate has increased and there were actually people looking for a job during March. If this is the case, more people are coming out and filling the gaps in the job marketplace. That is very much a benefit to the economy, because these people become consumers that were before only living off their savings. Maybe there will be a day soon that the public will all go back in unison, jobs will be filled, and every able American will become a tax-paying consumer that will increase GDP for us all.

Cecilia taking one for the team – Happy Birthday!

So, what is the actual state of the economy today? Even though they have been forecasting recession now for a year and a quarter, the Atlanta Federal Reserve forecasts the GDP will be up 2.2% (as of April 10, 2023) for the first quarter of 2023. While not a great increase in GDP, it is still a very long way from negative. Also, we should be reminded that the first quarter is typically a weak quarter for GDP, mainly due to weather and constraints in the northern states.

So, as we sit here today there are still no overwhelming signs of an upcoming recession. But as mentioned above, maybe this negative attitude of the media will force the country into recession due to consumers pulling back on products or services they normally would have purchased.

I have always been a firm believer that sentiment in the U.S. is extremely important for keeping GDP higher. If an employee is worried about their job, they are not likely to purchase a new car, a new house or go on an expensive vacation. It might just be that consumers will shut down the economy due to the fear of the unknown recession in the future.

Nathan and Cecilia Cmeyla cheesing it up outside of Truist Park!

The other answer may be that it is just political. The financial media, which clearly supports the current administration, will continue to talk down the economy until we get closer to the election cycle. At that time, they may pivot and comment about how great the economy is doing, and that greatness will be directly attributed to the current administration even though the economy was even stronger in 2019 before Covid. We went through a huge contraction in the economy due to Covid, and now we are getting back to where we were. This has been an enormous transformation in the economy, but it continues to be strong and, likely, will get stronger and not weaker as the months progress.

There is no question that the Federal Reserve has put tremendous pressure on interest rates. What is somewhat amusing is that with these increases in interest rates, the first bank to fall was one of their own. During March, we had the failure of Silicon Valley Bank in California and Signature Bank in New York. There were runs on these banks to remove cash just like it happened in “It’s a Wonderful Life.” If you are familiar with the classic Christmas movie, the people withdrew more money from the bank than its liquidity, and then the bank failed. Basically, that is what happened to these two banks.

Lauren and Jeff discovering “anything is possible
with sunshine and a little pink!”

Think about it in this fashion: a banker loans money to a local business on a 6-year loan at 6%. At that time when the bank made that loan, they were paying virtually nothing for customer deposits at their bank. So basically, the bank could take the customer deposits that they were getting for basically free and loan that money to the local business owner at 6% and make a nice profit.

Beginning in March of 2022, the Federal Reserve started a massive and too rapid increase in interest rates over a relatively short period of time. Suddenly, banks were required to offer higher interest rates on their deposits, in order to satisfy the public. However, the banks were constrained by the fact that they already had long-term money out at rates that would not allow them to pay higher interest rates on their deposits. At that time, the public saw what was happening, and made a major movement to remove their money from the banks.

Henry letting Lauren know he’s had enough fun at the Beltline

The evolution of technology has created the most powerful force in money today. With your iPhone you can move literally billions of dollars in minutes from one bank to another. You can be at the beach or somewhere other than home, but if you have access to an internet connection you can move money from one bank to another that is paying a higher rate of return. This is exactly what happened to Silicon Valley Bank. When interest rates began paying up to 4%, the bank was unable to meet the demand for money, leaving the bank to go to these higher rates.

It was quoted by the Federal Reserve that in one day, that bank lost over $100 billion in assets with money being transferred to larger and more stable banks. On Wednesday of that week, Silicon Valley Bank was forced to sell their bond portfolio of $20 billion to satisfy customer withdrawals. Due to the extremely fast increase in interest rates by the Federal Reserve, this bond portfolio had deteriorated in value and the bank suffered a loss after tax of $1.8 billion. When that news broke on Thursday, customers lined up to withdraw their cash from the bank thinking it would surely fail at this point. If the Federal Reserve had not closed the bank on Friday, it was forecasted that the entire liquidity of the bank would have been gone before the close of business on Friday.

Josh Portschy’s dog “Hank”ering for a Braves win!

The good news is that the failure of these two banks did not create losses to consumers. It is true that the shareholders lost all their money, and the bondholders probably lost theirs as well, but no depositor lost their money due to the insurance held by the banks. However, there was a general run-on banks after this event of people moving money out of smaller banks into larger ones or to money market accounts that paid higher interest rates. Once again, the Federal Reserve stepped in to protect the smaller banks and last week they loaned out over $380 billion to member banks, allowing them to keep their liquidity higher. It appears to me that the Federal Reserve, due to its swift movement, has stopped the outflow of funds from local banks and therefore the crisis that we had in March has probably passed us at this point.

The strength of the labor market for the month of March reported above will probably lead the Federal Reserve to increase interest rates one last time during its meeting in May. It is interesting that the futures in the bond market are actually forecasting that the Federal Reserve will cut interest rates later in 2023. It is very confusing to the public and certainly to me that the Federal Reserve would go ahead with an interest rate increase in May, if only a few months later they would be forced to cut it in the Fall of 2023. That is the proof to me that the Federal Reserve has gone too far and if they are forced to cut rates over such a short period of time, why would they just pass on an increase in interest rates at this time? I guess when they write the book a few years from now we will get a better insight into what the Federal Reserve is thinking.

Evan and Alexis making the most of a Monday – Go Braves!

All we know is that in the financial markets it is going to be a bumpy ride. This year, even though the first quarter was excellent, there is no guarantee that the coming quarters will be just as good. However, what is clear to me is that corporate earnings will never be as negatively impacted as financial media outlets forecast. Many of the companies have downsized their employment base and cut their expenses so profits will stay higher even if economic activity is lower. That is exactly what businesses should do. They should right size their expenses based on their projected revenue. During Covid, so many businesses overstaffed to meet the pandemic requirements. Now those days have passed, and it is time to right size their businesses for future profits.

I continue to believe that this year will be a positive one with profits around 20%. We are off to a great start with profits up 7.5% for the first quarter of 2023. Also, it is clear that the international markets are improving, and those markets are undervalued as compared to their U.S. counterparts. My recommendation is for everyone to remain invested and to increase investments where you can. We are at the time where you can make IRA contributions for 2022 and 2023. Everyone reading this post should contribute to their IRA’s annually without fail.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

“You are listening to either an economic illiterate or a silver-tongued demagogue.” - Warren Buffett

2023-03-09T14:00:00.001-05:00

From the Desk of Joe Rollins

The above phrase was an excerpt from Warren Buffett’s annual letter to shareholders related to the 2022 year. Basically, what he is referring to is that the economics of his buyback program are correct and the Biden administration and other opponents of it have misunderstood them. What is shocking about this is that Warren Buffett has been a Democrat his entire life. He was a huge supporter of Hillary Clinton and has elected not to criticize Washington in the past. I guess all of that has changed and I will explain.

Joe with the Guest of Honor/expectant mother Elizabeth Flores

I have a lot of things I find interesting to discuss in this posting. The major headline in Barron’s recently was “What everyone got wrong about the economy and the ominous implications for the Fed.” I have been posting for the last year and a half that things were never as bad as they seemed and certainly were not as bad as the media led you to believe. I think we can now reflect on why the so-called experts got it wrong.

I also want to explain the economy and why it continues to be stronger than anticipated by virtually everyone. I also want to go through the numbers and tell you exactly how much each segment of the population pays in income tax. You would believe from the rhetoric of the administration that the rich do not pay their fair share and I can give you the exact numbers that prove to you that they do. I also want to explain why you should not be concerned about the debt limit or Taiwan. Most important of all, I have a solution that could have prevented the Ukrainian War from even getting started.

Client Stephanie King’s love of horses is more than just a hobby!

Before covering all of those terribly interesting subjects, I have to report on the stock market for the month of February 2023. Basically, this month was down a little from the incredibly hot January we had recently. Interestingly though, virtually all the growth segments of the markets were higher than the value components. That is an unusual turnaround where growth lost less than value during February. The strongest segments of the market were the small-cap growth stocks, which is a good sign. Usually, the small-cap growth stocks are the ones that will rally first if a market increase in forthcoming.

For the month of February 2023, the Standard and Poor’s 500 stock index was down 2.4%, but was still up 3.7% for the year then ended. Just for comparison, the 10-year return on this index was an annual increase of 12.2% even with the horrible year of 2022 included. The NASDAQ Composite stock index was down 1% for February but was up 9.6% for the year 2023. Its 10-year returns are 14.9% annually. The Dow Jones Industrial Average stock index was down 3.9% for January and is down 1.1% for the year 2023. Once again, its 10-year returns reflect an annual gain of 11.3%.

Bond funds are getting hit historically hard since the increase in interest rates continues to rise. The Bloomberg Barclays Aggregate bond index was down 2.6% for the month of February and is up 0.6% for the year 2023. Its 10-year returns are 1.1% annualized. As you can clearly see, bonds continue to be underperformers of the markets, and with interest rates likely to go higher, that will most likely impact bond funds negatively. Why anyone would want to buy bonds with interest rates rising is beyond my comprehension.

Josh introducing Ava to some greens she might actually enjoy

During the President’s State of the Union Address, he focused some of the speech on the negative impacts of companies buying back their own stocks. One of the points that he emphasized was that the oil and gas companies bought back stock rather than using the money to invest in production to keep gas prices lower. It almost seemed to be comic relief that the President was criticizing the oil companies after all he has done to limit oil exportation and production in the United States. However, he could not resist criticizing them for not investing more in future production even given the enormous restrictions that he has imposed to limit their growth. Clearly, he does not understand oil economics.

Basically, what the President was proposing was that he would quadruple the tax on corporate buybacks and encourage long-term investments. There is currently a 1% tax on buybacks, and he is proposing a 4% new tax to limit this repurchasing. In Warren Buffett’s quote above, he is saying that if you do not understand the economic positive implications of stock buybacks, you are either an economic illiterate or a silver-tongued demagogue. Unless I am reading that incorrectly, Warren Buffett is calling the President those exact names.

Robby and the lovely Caroline all gussied up for the
Daddy Daughter CKS Dance

I too have wondered why politicians criticize buybacks. If you think about it in its truest form, the people selling the stock back to the company must pay tax on that transaction. The company that is buying back the stock does not get to deduct the cost of the buyback. So, for revenue going to the Federal Government, it is a win-win. They collect the income taxes on the person who is selling the stock back, but the corporation does not get to deduct the cost of that buyback.

I would think that any reasonable politician after reviewing the economic effects of the buyback would agree with Warren Buffett that they do not harm shareholders and do not enrich the chief executive officers. What is incredibly interesting about this statement by Warren Buffett is that he appears to be openly criticizing the President and the party for which he has been a lifelong voter. I am not sure what that means for the political future, but rarely do you see Warren Buffetf saying anything political and certainly nothing politically negative.

I have asserted in these posts all along that I thought the media and Wall Street in general were overexaggerating the economic effects of the current economy. I wrote that there will be no recession in 2022 and still believe there will not likely be a recession in 2023 even though investors were being bombarded with statements to the contrary. I have gone back and reviewed some of the information I have previously written and came across the following fact that seem to be relevant.

DeNay, Alexis, and Lauren dressed in pink to celebrate the upcoming arrival of baby Penelope

In March 2022, Goldman Sachs forecasted that there would be a 20% to 35% of an economic contraction within 12 months. One of the most respected CEOs in America is the CEO of J. P. Morgan Chase, Mr. Jamie Dimon. In June, he was shouting to all the news outlets that the U. S. was in store for an “economic hurricane.” I guess he was wrong about that also. Even Bank of America predicted a mild recession would hit before the end of the year of 2022. To double up on this policy, the Federal forecast for economic growth for the year 2022 was going to be a meager 0.2% for the entire year. All these so-called experts in the field of economic forecasting were absolutely just “slam dunk” wrong. Not one of the predictions above came true and everyone in fact suffered a price.

It is almost a foregone conclusion that if you keep pounding the public with this negative economic forecast, sooner or later the public will begin to believe it. It is a self-fulfilling prophecy when those times come. If the public believes that recession is on the way, almost immediately they will start cutting back on employees, new construction and virtually everywhere else they can cut so that they can weather the recession that was coming. But what happened when the people realized that these predictions were false? Did you see even one of these so-called experts above come back with a correction of their projection? Not even one. Even a broken clock is correct twice a day.

Clients Wyatt and Beverly Foster enjoying the daffodils at Gibbs Garden

The Wall Street Journal said that, “The depressing outlook dragged down consumer sentiment and convinced roughly three-quarters of Americans by late fall that the country was already in recession.” Think through that statement for just a second. Three-quarters of Americans believed, due to the media’s reflection on the economy, that we were already in recession last fall, yet we are not even in recession now, five months later.

Many of the major financial publications are trying to explain why the economy has not fallen into recession yet. The biggest reason they quote is that the consumer continues to hold up the economy. I am not exactly sure as to why they find this concept so hard to understand. When you have 3.4% unemployment, that means virtually everyone that wants a job is working. Even the lowest-paid person still has to buy groceries, gasoline and various other consumables.

Each of those purchases by the lower-paid people produces Gross Domestic Product. When the lowest-paid person buys goods at the grocery store, the grocery store pays its employees, an electric bill and buys more products to sell. It is said that the velocity of money is seven times, which means it has been spent seven times before it has finally returned to the Federal Reserve. If everyone is working and everyone is consuming, why would these so-called expert economists not realize that you cannot fall into recession when the labor market is so strong?

Jose realizing that there is no chance of the
packages containing a PlayStation 5

The Federal Reserve has been surprised that their unprecedented increases in interest rates have not slowed down the economy dramatically. They thought that increasing interest rates eight times over the last year, and likely another time this March, would have dramatically slowed down the economy, but it has not. There are many reasons why the economy has not slowed but the overwhelming evidence is that a great many Americans are insulated from these rate increases. Back in 2008, most homeowners had adjustable mortgages. Now only 10% of homeowners have adjustable mortgages, and the vast majority of Americans have locked in low interest rates, so these increases have little or no effect on them.

It is true that higher interest rates have slowed the purchasing of new residences by the American people, but this is a short-term effect. As I explain to anyone who wants to purchase a home, if you are waiting for interest rates to come down, you are clearly making a mistake. By waiting, you have allowed the cost of housing to go up due to inflation and you are much better off biting the bullet and pay the higher rates with the hopes of refinancing in the future. Staying another year in an apartment where you are paying rent creates no economic benefit to you in any way.

Lauren and Mia thinking Friday lunches at Ansley Golf Club should become a regular occurrence

The biggest obstacle that the Federal Reserve cannot overcome is that many Americans continue to spend their savings to keep their lifestyle at a high level. We are only a couple of years removed from the enormous cash the government transferred to individuals and as every report indicates there is still over $5 trillion in money market accounts that consumers are pulling down to go out to restaurants, make purchases and even take trips.

History has indicated that if you increase interest rates, eventually you will throw the country into recession and therefore slow inflation. As I commented in the last posting, do you really think that the Federal Reserve is willing to destroy the economy to improve it? Given that this year is an election year, and we are only one and a half years away from a new Presidential election, I do not believe that the Federal Reserve has any desire to further hurt the U. S. economy.

What is even more baffling in this wacky U. S. economy is that the Atlanta Federal Reserve is forecasting GDP for this first quarter to be 2.0% positive. Since we are approaching the end of the quarter and the Atlanta Federal Reserve has been closer to right than anyone else regarding projecting the economy, it must be a huge let-down to the Federal Reserve that given all their extraordinary rate increases the economy continues to be positive and the employment market continues to be fully employed. Every employer I know is still seeking more employees to hire.

Erik, Danielle and Robby just excited to be out of the office!

One of the most favored phrases by politicians that you hear virtually every day is, “Make the rich pay their fair share.” I guess the politicians have never bothered to look up the correct information, otherwise they would not use that phrase so often. The facts indicate almost exactly the opposite.

Using the Internal Revenue Service’s own records, it indicated for the year 2020 that the top 1% of earners paid 42.3% of this country’s income taxes. That is a two-decade high in the share of taxes that 1% of earners paid. What is even more interesting is that the 1% reported 22.2% of the adjusted gross income of all the tax returns in the United States, but they basically paid double the income tax as their earnings. You can make no other assumptions looking at these statistics than to understand that the income tax rates in America are highly progressive already, and do not need to be further increased since the 1% pays the vast majority of taxes.

Pinewood Derby Car Champion of the World – Reid Schultz
(ok, maybe not world but he sure is cute)

But if you look at the numbers a little closer, the 1%, which reflects income above $550,000, had an average income tax rate of 26%. Those making more than $220,000 but less than $550,000, paid a tax rate of 17.5%. If you look at the next grouping between $220,000 and $150,000, the tax rate is 13.1%. Above $85,000 is 9.5%, above $42,000 is 6.5% and the bottom 50% of the taxpayers whose income was below $42,000 paid an average rate of 3.1% income taxes. I am not sure exactly how you can get a clearer definition of a progressive rate structure than these numbers indicate. These numbers do not indicate any social security tax, excise tax or fuel tax. This just solely reflects income tax. I hope that once and for all we could stop this argument that the wealthy do not pay their fair share.

I have been confronted by clients in recent months related to the fact that the Federal Reserve is now in excess of their federal debt limit. Some clients have expressed outrage that there might be a shutdown of government and we will default on our Treasury Bonds which are held around the world. I am not sure exactly why these clients are concerned about this situation since it is clearly academic and certainly not troublesome.

Let me give you an example of why this is not a problem. Imagine if you, as an individual, went through a troubling financial time and maxed out all your credit cards and did not have enough income coming in to fund your lifestyle, pay all those credit cards and you are facing ultimate default on all. But wait, due to the magic you have you can go down to the basement and print some new money which can then be used to pay off all your debts. Magic has been done, and even though you are above all your debt limits, you were able to pay off and satisfy all your creditors.

Cutest sister-in-laws - Carter and Ava Rollins

That is exactly where the United States stands today. Even though they do not have the congressional power to borrow more money to pay off their debts, they just conveniently go down into the basement and print more dollars and use that to satisfy them. You should never be concerned with these types of political shenanigans, since as long as the United States has the capacity to print money, it will do so when it is in danger of a credit default.

I have used this example many times before, but it bears repeating. People were always bewildered by the fact that Nazi Germany could fight a war around the world even though this county was a relatively small industrial power at the time. Basically, how they financed the war was to print more money and use that money to fund the war. It was believed that near the end of the war, their money had become so worthless that they were having to pay their soldiers daily because the value of the money could not keep up with the cost of inflation.

Proud soon-to-be parents Jose and Elizabeth – Congratulations!

A good example today is Argentina, which reports inflation exceeding 100% annualized. Yes, there is great danger to printing money to pay off debts. But due to the overall strength of the United States economy, the printing of several billion dollars of new money will have minimal effect on the currency.

I am always fascinated by clients that get concerned with the potential of China invading Taiwan, taking over Taiwan or, in recent days, providing military support to Russia in the Ukraine War. I think these fears are unfounded due to the economic effect of the relationship between China and the United States. China’s major export consumer is the United States. Why under any circumstances would they take the risk of overturning that economic relationship with relatively small ventures like taking over Taiwan or helping Russia with their war in Ukraine?

This does not have anything to do with the bullets that would be fired, it has everything to do with the economic effect. If China were to invade Taiwan today almost assuredly the United States would completely stop any type of economic relationship with China. It is extremely important for China to keep its population working and being paid to prevent backlash or violence from the population. If China did not have the United States as a consumer of its products, most assuredly there would be major unemployment and economic disaster to the Chinese population.

Ziming happy to be enjoying a meal outside of the office
– no fork and knife required

Think about the consequences of providing lethal military armaments to Russia. People are completely confused about Russia and its economic prowess. Russia after its breakup in 1989 is a relatively small country. The GDP of Russia is not as high as the GDP of Texas. It is a very small country economically, and certainly the economic consequences of this war are huge.

Think for a second of the generational long-term effects if it is true that Russia has lost 100,000 military troops in Ukraine. Firstly, you have to consider the demographics of how many babies will not be born in Russia due to the loss of manpower. Also, consider that these are the young men that provide workers for their industries and keep their economy moving. These men will no longer be available to do that work.

Some tailgating that even Ava could enjoy with Josh and Carter

Notwithstanding the fact that Ukraine has reduced Russia’s military capabilities by a significant amount and with Russia’s loss of manpower, the long-term economic effects for Russia are historic. Also, it is hard to fathom that if Russia does win the war in Ukraine, that would be a peaceful relationship. Does Putin himself even believe that due to the damage that Russia has done to that country, it could possibly be a country that they could govern?

Russia certainly does not have the manpower to maintain that country by military force and it is hard to fathom that the citizens of Ukraine would be loyal to the Russian government given the damage they have done. In Ukraine, you have entire cities that have been leveled and you have entire utility systems that are no longer functional. Who could possibly afford to rebuild that country other than the United States or China? Therefore it makes it even more improbable that Putin will be successful in his venture, given that even if he wins the war, he will not be able to govern the country. Putin has made a serious mistake.

As we move into spring in the United States, the economy continues to be strong, and employment continues to be even stronger. There has been a very strong start to the year with the economy and with the stock market. We are finally seeing some stabilization and growth and to this point there is certainly no sign of recession on the horizon. To create recession, the Federal Reserve would have to find a way to reduce the workforce by over 4 million people and force those people out of their jobs and into unemployment. So far, all we have seen are layoffs in the high-tech industries which puts highly skilled people back into the labor market who will quickly get brand-new jobs. I realize that the Federal Reserve is frustrated by their inability to create chaos in the economy, but that has more to do with the strength of the United States economy and less to do with the weakness of the rate increases.

New Rollins team member, Josh Portschy,
hitting the field with his brother

There will be a slowdown in the economy as we progress through the year 2023 by no other reason than the Federal Reserve will continue to force rates up to try to reduce the influence in the economy. However, it is my opinion that they are going to be unsuccessful in creating recession in those acts because the economy is just too strong at the current time to turn around so quickly.

As I mentioned in the last posting, the international markets are certainly strengthening, and we need to be invested. China has now reopened again from its shutdown from Covid-19 and Europe appears to have turned the corner, and there is unlikely to be recession in Europe. In fact, the economies around the world appear to be improving and I believe that bodes well for future stock increases.

Pi Kappa Phi’s newest member, Bailey Musciano-Howard

In the opening, I indicated that I have a solution that would have prevented the Russia-Ukraine War from even proceeding to begin with. It was rumored that Putin wanted direct access to the island of his territory in Crimea but had no access since Ukraine controlled all the roads between Russia and Ukraine. It seems to me that if Putin was a rational human being one of the ways that you could have satisfied both sides at the beginning of this war would have been to build a very nice four-lane superhighway, right down the middle of the highway to provide Russia direct access to Crimea. I know that it is a simple solution, but sometimes simple solutions have the potential to avoid hundreds and thousands of casualties and billions in properties destroyed.

One of the things I am currently seeing as a tax preparer is that people owe less income taxes than in the last few years. Due to the sharp correction in the stock market in 2022 we do not see the capital gains that taxpayers have been experiencing for years. What is interesting about this concept is that this is a direct hit on the revenue that the United States government receives. Roughly 45% of all the revenues that the United States government collects is from individual taxpayers. Since these taxpayers are paying less tax due to the market selloff in 2022, that will make the deficits worse than anticipated.

We are now 1.5 years away from a Presidential election and I have to think that sooner or later the Federal Reserve will indicate that they do not want to be a part of the political process and will announce that they are sticking with their current economic forecast and will wait and see what effect rate increases have on the economy before increasing again. Whenever that speech is given by Chairman Powell, where he concedes that rate increases will stay at current levels, you will see a dramatic increase in the value of the stock market. You cannot participate in that rally sitting in cash. I know people are excited that they can make 4% on a money market account now but they are oblivious to the fact that the stock market has already far exceeded that level through the first week in March.

Ziming and Josh taking a break from taxes

If you have an interest in coming down to visit with us, we look forward to seeing you. We are in the midst of tax season for our Firm, but I will have the time to sit down and review your portfolio, taxes, or anything else you might be interested in.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

Unemployment rate falls to the lowest level since 1969 – a 53-year low. Do we have to destroy the economy in order to fix it?

2023-02-09T12:34:00.001-05:00

From the Desk of Joe Rollins

The title of this posting sums up my views regarding how there could there be a recession this year with virtually everyone who wants to work having a job. One of my biggest mistakes in 2022 was that I did not believe that the average investor would accept the fact that recession was imminent in 2022, as the so-called experts were projecting. In fact, I was correct, and they were wrong. There was no recession in 2022. But the big question now, as we sit here in February, is there a recession expected in 2023?

I must admit I was surprised by the huge January 2023 rally in the financial markets. More than anything, it was just a reversion from the oversold market in 2022. But there are some very interesting trends going on that confound investors, which I will try to explain in this posting. I also want to give you an update on employment, which has been extraordinarily strong and the resurgence in Europe and China that will make this year better than most people expect.

Carter and Josh Rollins in Chicago with festive Foster and Freddy

I also want to teach a remedial course on the valuation of the dollar and international commerce and the effect it had on corporate profits in America in 2022. I have so many interesting things I want to discuss in this posting, but I must report on the excellent month that we had in January.

The Standard and Poor’s 500 stock index was up 6.3% for the month of January after being down 18.1% for all of 2022. The NASDAQ Composite stock index was the winner in January by being up 10.7% after being down close to 30% in 2022. The Dow Jones Industrial Average stock index was the laggard at 2.9% for the month of January and in comparison, even the Bloomberg Barclays Aggregate Bond index was up 3.2% during the month of January. By all standards, the month of January was an excellent month and both stocks and bonds made money.

It is hard to draw a conclusion from just one month’s performance; you really need to look at a longer time span to judge an index. As an example, the S&P 500 stock index for the 10-year period ending January 31, 2023, was up 12.7%. The NASDAQ Composite stock index was up 15.1% and the Dow Jones Industrial Average stock index was up 12% for the 10-year period. These are annual returns, not cumulative returns. Only the Bloomberg Barclays Aggregate bond index had a dismal 10-year performance at 1.4%. It is clear to see that even with the huge losses we incurred in 2022, these indexes produced double-digit returns for the full ten-year period.

Shane and Alexandra Jarmin hanging out
with Cameron, Mickey and Cooper!

Understanding the excellent news on the performance in January, the result of the performance for 2023 will hinge upon whether there is in fact a recession in store for the U.S. economy this year. As I have been arguing for the last two years, there are no obvious indicators that would imply recession is imminent in 2023. I fully recognize that in 2022 we had two negative GDP quarters. Just as a refresher, in the first quarter of 2022, the economy was down 1.6% and was down 0.6% in the second quarter. But then suddenly, the GDP turned around and in the third quarter, the U.S. economy expanded on an annualized basis at 3.2% followed by a 2.9% growth in the fourth quarter of 2022.

The old standard was that if you had two back-to-back negative GDP quarters, you were in recession. However, the strong comeback of GDP in the last half of 2022 belies that old standard. In fact, if you review the entire year of 2022, you will note that GDP increased by 2.1% for the year, which is quite a satisfactory performance given the very difficult Covid-19 situation and the worldwide increase of interest rates.

Partners Danielle, Robby, Joe and Eddie
still waiting for you to come see them soon!

I must admit that I was totally amused when they announced that the GDP for the fourth quarter of 2022 was 2.9%. All these so-called experts on TV rushed to explain that they were not wrong about a recession in 2022, it was just postponed. Their thinking, even though we were able to dodge the recession in 2022, almost assuredly it will occur in 2023 as they proclaimed. These “experts” were predicting basic carnage to the U.S. economy, which I assume included bread lines and mass unemployment. I’m beginning to wonder if maybe those who found their way onto TV are not as well-educated in the signs as older economists like me.

The last really bad recession we had in the United States was in 2008. We have had some small blips along the way with Covid-19, etc., but 2008 was a bona fide recession. Perhaps these so-called experts that appeared on TV were just not around during 2008. Remember, that was 15 years ago.

Can you imagine their disbelief when the employment numbers for January were reported at an almost unbelievable growth of 517,000 jobs? January, for the most part, has always been a negative month for obvious reasons. In many years in the past, retail will lay off a sizeable number of their employees after the holiday season. Therefore, retail almost always suffered negative trends during the month of January. But, not so during the month of January 2023. Virtually every segment of the employment market showed net increases in jobs in January except for the tech industry. Maybe what we are seeing here is that it is so hard to hire people in this full economy that employers are holding on to them rather than suffering the risk of not being able to hire others when needed. As a reminder, the same has been true for almost one year.

Ava in Quebec City, Canada – “C’est le fun!”

We will get back to the same equation that I have been discussing for the last two years. With the unemployment rate at 3.4% and at a 53-year low, virtually everyone in America that wants to work is working. Job openings in December jumped up to 11 million and the total number of unemployed dropped once again to 5,694,000. Once again, this month showed that there are twice as many job openings as there are unemployed; but with the lowest unemployment rate in 53 years, there is just no one to fill that many job openings.

The so-called experts are now saying that unemployment will accelerate as the year goes forward and that we might see as many as 600,000 job losses monthly. I find that assumption to be almost absurd and should be taken with great skepticism. Just run the numbers and you can see exactly what I mean. There are 5,694,000 people unemployed, yet there are 160,138,000 people employed - divide the two numbers and you get, short of rounding, the unemployment report.

Patrick Reaves, Josh and Joe on Hole 6 at Pebble Beach Golf Club

In order to reach the recession numbers that the Federal Reserve is forecasting at 6%, there would have to be 9,608,000 unemployed Americans. Note, that even at this level, there are still enough job openings for every unemployed person. But in essence, that would mean that there would need to be four million additional unemployed people in 2023 to meet the Federal Reserve’s goal of 6% unemployment by the end of the year.

With the announcement of over 500,000 new jobs created during the month of January, the Commerce Department also increased the number of new jobs in both December and November. If you take that 90-day period, the average increase in jobs monthly has been 350,000 new jobs per month. What is astonishing and almost hard to believe is that this number is higher than the number of jobs that were being created in 2019 prior to the Covid-19 outbreak in 2020.

The reason that I am so skeptical about these numbers even being obtainable is that people seem to forget that we are in a Presidential election cycle, even today. Already, there are announced candidates and the election is only 18 months away. To think that the Federal Reserve would orchestrate the unemployment of four million Americans over the next nine months, during a Presidential election cycle, borders on absolute insanity.

Joe Rollins and the late, great Craig Sager at
the Lonely Cypress at Pebble Beach

I think what we will see coming up is that the Federal Reserve will propose another increase of 0.25% at their next meeting in March, which will meet their goal of having the short-term interest rate at 5%, and then they will go away. The reason that the Federal Reserve does not want to be held accountable for problems in an election cycle is that they deem themselves to be anti-political. If they can achieve their goal of reaching 5% Federal funds rate in March, it would be fully understandable that they would take no further action for the rest of 2023. The very day that the Federal Reserve announces that they are through with rate increases, you will see a substantial movement to the upside in the equity markets.

The downward drift in the market during 2022 was no doubt substantial and followed a previous year filled with wild and crazy speculation. Who can forget the GameStop fiasco of 2021 that ran the stock from $10 a share to $360 a share to subsequently drop 90%? This was a company that was never profitable and certainly did not deserve those types of valuations. But when you have rampant speculation without any type of financial analysis, you are going to get those wild swings.

“When I was your age…” Joe Rollins with his first computer in 1983.
$6,200 with 12% interest

As we were watching substantial losses being accrued on our mutual funds in 2022, I took great confidence when reviewing the holdings of the mutual funds and noting that they held the same stocks that were being targeted in concerted effort by professional traders. Despite moving technology down close to 30% in 2022, there was a massive rebound in technology stocks in January of 2023 from the oversold positions of 2022, allowing investors to feel a little vindicated.

There are many interesting things occurring in 2023 that will offset some of the negativity that we suffered through in 2022. It was projected early in 2022 that the European countries would suffer a severe energy crisis after Russia invaded Ukraine. In fact, it was noted that virtually all the natural gas and oil in Europe were sold to them by Russia. Many so-called experts projected that the European continent would freeze over the winter with no natural gas to heat their homes. Further, the long-term stability of their economies in Europe would be compromised since they had no natural resources of their own. Absolute chaos would attack the European countries since they could not heat their homes, factories or produce goods and services.

Client Scott Weiss celebrating with grandsons,
Cooper (1) + birthday boy Cameron (4)

In China, the country was working on a zero Covid-19 mentality. Even if they only had a few cases in a particular city, the Chinese government would shut down the entire economy. For long stretches, many of the major cities were not allowed to work. In fact, they were not allowed to even leave their homes to get food. The Chinese government was imposing essential embargos around the world and the citizens of China were suffering without normal goods and services. How quickly have things now changed?

In 2023 we now know that Europe did not freeze over the winter. Now it is reported that they have obtained enough natural gas to fill 90% of their storage. A great deal of that natural gas came in from the United States in the form of liquified natural gas. Also, the European countries have cut off all purchases of oil from Russia and it was reported that the oil pipeline from Russia directly to Europe has had its capacity cut by 90% with virtually no oil flowing from Russia into Europe. Here we have a situation where at the anniversary of the first year of the Ukrainian War, Europe has dealt a major blow to Russia by no longer purchasing oil through Russia, thus cutting off a major economic stimulus.

Reminiscing – Client Liz Mercure surprising Ava
at the Aquarium on her 6th birthday

Also in 2023, China has now completely reopened and has basically taken the opposite position from before, letting Covid-19 run through the population so they can put the country back to work. It is now projected that the GDP of China will be up closer to 5% in 2023 given their reopening. You do not have to look far to know that the Chinese economy is virtually the same size as the U.S. economy. The fact that they are now reopening, and their citizens are now consumers will greatly enhance the economy of the entire world. It is really difficult to buy iPhones if you are not able to leave your apartment as was the case in China. Certainly, the fast food restaurants of the U.S. companies located in China were unable to sell product during the shutdown.

Now all that has changed and there will be a surge in consumer purchasing throughout Asia due to the opening of China. Do not forget that much of the growth from Asia has been in Southeast Asia. When you see the growth of Vietnam, Malaysia, and Indonesia, this is growth transferred out of China during the Covid-19 shutdown. Once China is back up and running at full speed, along with the strength of the South Asian countries, you should see a dramatic increase in economic activity from Asia. One of the most powerful countries in the world in the next decade is likely to be India. With their huge population and their technological innovations, India should become a major consumer along with China in the coming years.

In recognizing this trend, we are starting to reallocate substantial assets of ours to emerging markets where these companies are represented. I think you will notice that we are buying a great deal of international investments. What is clear is that whether the U.S. has a recession or not, there will be a slowdown in growth in 2023 which is the sole goal of the Federal Reserve. So as the U.S. slows down, the rest of the world will speed up.

Josh and Carter Rollins in Hawaii – A hui hou!

Do not be surprised to see the economic rate of growth in Asia and South America exceed that of the United States in the coming years. That is a natural evolution of their economies starting back up as ours slows down. The U.S. has enjoyed extraordinary growth in the last 10 years, but to contain inflation, it is not only correct but important that we slow growth down for the economy to catch up. Inflation is not good for anything other than making you feel better that your assets are growing year over year. But it also diminishes the value of everyone’s lifestyle by making necessities more expensive.

I cannot emphasize enough the importance of everyone working, not only in the United States but in China and Southeast Asia. It is the little things that make a difference in the economy. One additional job creates income to that employee and he passes down that income to not only his family, but to local merchants. He spends that money at the grocery store and the grocery store pays their employees. He buys gas at the gas station and the gas station employs more people.

The most important component of increasing GDP is to keep everyone working. As long as everyone has a job, they have discretionary spending and that discretionary spending increases GDP. For the Federal Reserve to want to decrease that consumer buying, they will have to destroy jobs for millions of employed Americans over the next 9 months. I think the odds of that happening are close to zero. No president could survive with unemployment growing.

Joe’s favorite picture of little Ava (5)

If you review all the numbers that are now currently available, you would have to squint to see a recession anywhere close to being around. There is just too much strength in the economy to turn that battleship around over such a short period of time. I am not saying it cannot happen, but it does seem highly unlikely. I projected a huge increase in our performance during the start of 2023 and quite frankly a good portion of that in January has already been realized. I feel sorry for those investors that drank the Kool-Aid and got out anticipating that recession in 2023. They really missed out on a fabulous month during January.

In the recent Apple report for the 4th quarter of 2022, the so-called experts were astonished that the revenue for Apple actually decreased in the 4th quarter by 5%. They were visibly baffled since this was the first time that Apple has decreased revenue in several decades. However as often is the case with stock analysts, either they did not understand the effect that foreign currency has on corporate America, or they just elected to ignore it for whatever reason. As mentioned above, a great deal of the public that would buy the Apple products were locked down in China and could not get out to purchase new iPhones. But the main reason for the decline was the strength of the U.S. dollar compared to the rest of the world.

For a remedial lesson in currencies, we must look back to the beginning of 2022. In March of 2022, the Federal Reserve decided that it had been behind the curve on increasing interest rates. At that point, they launched the largest increase ever in interest rates in one year. They significantly increased interest rates all 2022 and even into the early weeks in 2023. When they did that, they strengthened the U.S. dollar since money goes where it is treated best. Suddenly you could get 4% on Money Market rates in the United States and money flowed from all over the world into the U.S. currency system.

Josh sharing basketball tips with “Sir Charles” Barkley

It is pretty easy to understand that in a worldwide economy, in the blink of an eye money can be transferred from countries all over the world into the U.S. When that happens, they sell local currency from wherever they are coming from and they buy U.S. dollars, thereby strengthening the American dollar. Conversely what happens when you sell into those foreign currencies, you receive a reduction of the value of that currency by converting it from U.S. dollars to foreign currencies. The substantial run-up in American dollars put a serious decline in earnings from all U.S. companies doing commerce in international countries. It is believed that the decline was somewhere in the neighborhood of 10% of currency transfers.

Therefore, if you analyze Apple’s sales and you do it on a stable currency like in the United States, their sales were actually up and not down. Now if the increase in the dollar were going to be consistent year over year in the same direction, it would not be beneficial to add back that change. However, now that foreign countries are starting to increase their own interest rates to match the United States, the increase in the dollar is declining. You are starting to see every country, other than Japan, desiring to slow down a recession by increasing their interest rates.

Just compare the numbers. Currently, in the United States the 10-year treasury is at 3.519%, in the United Kingdom that same bond is at 3.046%. In Germany the 10-year is at 2.214% and in Italy the 10-year is at 4.025%. France is at 2.644% and Japan is at 0.486%. As you can see most of the world is behind the U.S., but they are quickly gaining ground. It looks like we will be at the end of rate increases in the United States after the March meeting of the Federal Reserve. As the rest of the world catches up, this will bring the dollar better under control and will increase profits of U.S. companies that deal in international commerce.

Lucky #9 - Happy Birthday, Caroline!

What is also interesting is even though the Federal Reserve has increased interest rates to 1.5% over the last three meetings, bond yields which should be rising are currently falling. Falling interest rates reduce borrowing costs for companies and homebuyers. This helps the real estate market. The U.S. dollar index is off by 10% from its 2022 peak; a boom in earnings for U.S. corporations competing globally. And the most interesting part is that with the decrease in interest rates, the S&P 500 is actually up 16% from its mid-October lows. It is very unusual to see the Federal Reserve increasing interest rates as bond rates are falling. I think it is fairly clear with the action of the bond market that they are anticipating that interest rates will have to fall over the next couple years and the Federal Reserve will have to cut the Federal funds rate.

I found it amusing when the current administration in the White House decided to attack big oil companies because of excess profits. I am reminded that during the late 1970’s the same thing happened in Washington where they accused big oil of exploiting the shortage of oil due to the Middle-East oil embargo and proposed and passed an excess profits tax in the United States to punish them for their excess profits.

May there always be Tradewinds behind you,
Rainbows above you and Aloha all around you!

In a great many ways, the reason why the price of oil went up was, in fact, the very actions of the current administration in Washington. By restricting permitting and not approving drilling on government land, the current administration forced up prices, improving the profit of oil companies and unfortunately enhancing the ability of Russia due to the sale of oil to fund their war in Ukraine. I am not exactly sure whether the administration understands how oil is priced. It is not an election set by a particular company but a worldwide phenomenon with how oil is traded in international commerce.

As an example, Exxon does not price its oil based upon its interpretation of the market, but rather the price of oil is dictated by market conditions. I am not exactly sure what the administration would like for these companies to do, but clearly they have never understood the economics of oil since they were trying every way possible to eliminate fossil fuel production in the United States.

What is interesting to me is that if you look at the oil companies, they are a dying industry. It is absolutely clear that in 20 or 30 years from now, the use of fossil fuel in the United States will have to decline. The evolution of electric cars and other oil reduction techniques will dramatically decrease the amount of fossil fuels needed to run the U.S. economy. That is not today, tomorrow, or even 10 years from now. But clearly that day will come.

Josh and Carter hoping to be recruited by Christmas carolers

But what is even further interesting is that the corporate profits realized by the oil industry are certainly not anywhere near the profits earned by big tech. While Exxon had a $56 billion profit in 2022, Apple had a profit of close to $100 billion.

Even Google and Microsoft had profits greater than any of the oil companies. It just goes to show that if you really want to punish and tax wealth in the U.S. as the current administration does, positioning that target on oil is certainly misplaced.

As we go forward in the next 10 years, I fully expect to see big tech far exceed the profits of oil. I wonder how long it will be before Washington realizes that the true windfall lies within tech and not oil? You cannot forget that tech has distanced the U.S. from the rest of the world over the last decade. Big tech companies are now the most vulnerable companies in the world. It will be interesting to find out whether Washington will attack tech in the same way they attack oil in order to find more tax dollars for them to waste in Washington.

Edna Taylor – a client for 30 years!

If you have an interest in coming down to visit with us, we look forward to seeing you. We are moving into tax season for our Firm, but I will have the time to sit down and review your portfolio, taxes, or anything else you might be interested in.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

“The stock market is a device to transfer money from the impatient to the patient.” – Warren Buffett

2023-01-11T15:02:00.000-05:00

From the Desk of Joe Rollins

I guess it could be said that I really missed the mark on my 2022 stock market prediction. When you looked at all the data and financial activity, it was pretty clear to me and most analysts that the market would be up in 2022. The analysts and I just assumed that we would have normal economic activity in 2022, which would lead to higher prices later. I guess Casey Stengel said it best, “Never make predictions, especially about the future.”

I forecasted the year-end for 2022 at roughly 5,200. The actual ending number was 3839.5. As you can see, there is quite a gap between my prediction and reality. However, many people were on the same wavelength as me. As an example, Merrill Lynch forecasted 4600, Barclays forecasted 4800, Citi Bank forecasted 4900, Credit Suisse forecasted 5200, and Oppenheimer forecasted 5330. I guess we were all taken by surprise by the economy and stock market’s performance.

I have many subjects that I want to talk about in this posting, including things that people probably have not read about or fully understand. However, virtually all of them are positive with respect to the economy. I have interesting thoughts on the disruptive natural gas supply in Europe, oil prices in the United States in the coming years, the revolution in building microchips in America, and why all the so-called layoffs of employees is actually not the bad news the media would like you to think.

Pals Judge Jerry Baxter and Liz Mercure out for a hike in NC

We are in a period of time where good news is bad news, and bad news is good news. I know that the average observer of the stock market does not understand that mentality, but that is where we are today. Any good news whatsoever makes the market go down since that would presume that interest rates would be higher and, therefore, negative for stocks. Only when you have bad news does the market go up. I know it does not seem logical, but that is the mentality on Wall Street today.

Before I get into those terribly interesting topics, I need to report on the absolute bloodbath that was the financial markets in 2022. I was looking at the list of approximately 150 separate mutual funds at Fidelity. Of those 150 funds, less than 10 had positive returns in 2022 and virtually all of those were oil stocks or oil-related securities. Even the more conservative bond funds lost money in 2022 and the so-called famous 60/40 portfolio mix lost 16.1% for the year. That means if you had a portfolio during 2022 that was represented by 60% bonds and 40% stock funds, you would have lost 16% as compared to the S&P which lost 18.1%. There was truly nowhere to hide during 2022.

The Schultz Family
It’s not what’s under the Christmas tree that matters,
it’s who is around it.

The Standard and Poor’s 500 Index was down 18.1% during the year, but the good news is that it was up 7.6% during the final quarter of 2022. The NASDAQ Composite was even worse as it was down 32.5% for the year 2022 and 0.8% for the last quarter of the year. The Dow Jones Industrial Average was down 6.9% for the year 2022 but was up nicely 16% in the final quarter. Just for a basis of comparison, the Bloomberg Barclays Aggregate bond index was down 13% in 2022 and up 1.7% during the final quarter of 2022.

Although the numbers above were truly bad, you have to realize that this was the first significant loss year of the S&P 500 since 2008. We have enjoyed 14 years of excellent growth in the above indexes. Even with these large losses in 2022 the 10-year average on these indexes is still quite excellent. The 10-year average return on the S&P 500 is 12.6%, the NASDAQ Composite is 14.5%, and the Dow Jones Industrial Average is 12.3%. Even with the huge losses in 2022 year, these three indexes have annual gains in the double digits for the last 10 years.

Ava and CiCi taking turns opening presents

There are a great many things that happened in 2022 that were clearly unexpected which affected the market. One of the first things that happened was the Russian invasion of Ukraine which caused the price of oil to go up to roughly $125 a barrel in March. Given that the price of a barrel of oil today is roughly $72, you can see the dramatic change that has occurred in that inflation-rich factor. I guess we can all thank President Putin for that price increase. I had originally thought that the Russian/Ukraine War would be swift to complete but due to the heroic efforts of the Ukrainian military, they have done substantial damage to the Russian army and have provided a favor to all western countries in demilitarizing the Russian army.

After ten months of military conflict, it appears to be a stalemate or maybe Ukraine has somewhat of an advantage. But the longer the war goes on, the clarity is that Russia does not have the military capability to attack a NATO-bordering country. Back when the war broke out in February of 2022, historical forecasters were predicting that Russia would take Ukraine and then attack Poland. As I wrote in these pages, that assertion was ridiculous, given that NATO has roughly ten times the number of soldiers that Russia maintains.

Cameron visiting a newcomer in isolation at the
Tacugama Chimpanzee Sanctuary in Sierra Leone

We were also surprised by China’s heavy-handed Covid-19 crackdown. For much of the year 2022, China was going around shutting down factories and cities over even minute Covid-19 cases. By the end of the year they had abandoned that, but the result is that China is roughly two years behind the United States in spreading group immunity. During the year 2022, these massive crackdowns led to supply chain issues which slowed down the economy in the United States and certainly hurt shipments coming out of Asia. However, as we sit here today, the supply chain has caught up and now you are seeing not only reasonable prices but reasonable delivery dates on products coming out of China to the U.S.

However, the most disruptive news during 2022 was that the Federal Reserve hiked interest rates by 4.25% in just nine months. It has been rare in American finance history that interest rates have been driven up by the Federal Reserve so quickly over such a short period of time. The enormous volatility in the financial markets was a result of these huge increases. Of course, the real reason for these increases was to slow down the economy and create a period of time where inflation could actually catch up to the Federal Reserve’s goal of 2% annually.

The year 2022 will also be looked at under the spectrum of the Federal Reserve trying to slow the economy while the Federal Government was flooding the economy with money. We had the unusual situation where the U.S. Government continued to provide funding for numerous programs, thus funding the U.S. economy and inflation as the Federal Reserve was attempting to slow down the economy and inflation. You would think they would have at least attempted to work together to slow it down in concert.

Bundle of Joy
Client Mike Battle bonding with his first grandchild

Did you realize that during the year 2022, there was an increase in employment every single month in the U.S. economy? The U.S. economy added 4.5 million jobs and there was not a single month that there was a decrease in jobs. The year 2022 was the second-best year for job creation since 1940. If you recall, 1940 was the year preceding the ramp-up of the U.S. economy for WWII. The first was in the Covid-19 year of 2020.

So, was the Federal Reserve successful in slowing the economy during 2022? At the beginning of the year, the unemployment rate was 3.9% and at the end of 2022, the unemployment rate was 3.5%. As you can see, contrary to the desire of the Federal Reserve, as the year progressed, the economy actually got better. You may recall that there was much handwringing in the first two quarters of 2022 by the so-called experts that we would clearly have recession in 2022. What was interesting is that the GDP in the United States actually rose higher as the year went along. In the first quarter GDP was -1.6% and in the second quarter of 2022, GDP was -0.6%. Virtually to everyone’s surprise during the third quarter of 2022, the GDP bounced higher to 3.2%. The Atlanta Federal Reserve is forecasting that the GDP for the fourth quarter of 2022 will be an outstanding 3.8%. In fact, if the forecasters are correct in that assumption, rather than the U.S. economy falling into recession, it will have actually increased in GDP as the year went along.

Caroline + Reid
“May you never be too grown up to search the skies on Christmas Eve.”

While certainly, it is not easy to forecast 2023, it is satisfying that the Federal Reserve itself is not forecasting recession. While clearly there may be a slowdown, I too do not believe that we will fall into recession in 2023 since there are just too many positive economic events going on for that recession to come true. Just for the record and for those that ask me often about job openings, as of late November, there are 10,458,000 job openings and only 5,722,000 unemployed Americans.

One of the great mysteries that we will look back on in 2022, is why on earth do we have twice as many job openings as we have unemployed people. The unemployment rate today at 3.5% is one of the lowest unemployed percentages ever in the history of American finance. To this very day, employers are struggling to hire any employees whatsoever. It is just hard to conceive that recession could be coming in the near future given the absolute strength of employment in the United States.

We heard so many projections in 2022 that have failed to be realized. One of the projections was that due to Russia turning off the oil and gas supplies to Europe, the entire continent would suffer frigid winter months. Here we are halfway through winter already, and Europe has announced that they have solved their natural gas issue and have adequate natural gas to heat Europe through the winter. All that was required was for the U.S. and other countries to provide Europe with liquified natural gas which they could store in the summertime and have available for winter. It was announced over the weekend that Germany’s natural gas storage is above a 90% level. So much for the dire predictions that Germany would freeze during the winter months.

Catch anything?
Ziming Yu and a friend checking out the
Georgia Aquarium over the holidays

One of the main reasons why the economy has been so strong during 2022 is the generous funding of numerous plans by the federal government despite no tax revenue to cover those expenditures. In fact, the government wanted to spend a whole lot more money, but due to the split in congress they were not able to fund the various welfare plans that they had hoped to. Unfortunately, while it is not a problem today, it will be a problem in the future due to the deficits in the economy exploding during 2022.

Virtually all the money spent for these favored programs was deficit money with no specific revenues to cover them. Due to the stock market doing so poor in 2022, there will not be any capital gains revenue to offset these deficits. In 2021, the treasury generated almost a trillion dollars in capital gains taxes. In 2022, it is highly likely that it will generate none.

"Grandchildren are the dots that connect the lines
from generation to generation." — Lois Wyse
Harper and Lucy got to spend time with
both grandmothers over Christmas

I could write a whole posting on deficit spending and how it helps the economy and whether there really is a problem creating deficits. At the end of the day, deficits are not a real problem. Any time you have the ability to print your own money and the money is not guaranteed by any asset, and as long as there is a willing partner who will accept that printed money, deficits are not an issue. However, in recent years the federal government has gone crazy and has run up our national debt close to $30 trillion. The interest on that debt alone will become more challenging as we go forward. Once again not a problem for today, but certainly a problem for the future.

It is very interesting that in 2022 the automobile industry in particular was held back by the fact that they could not get microchips for their cars. What was so confusing to many investors is that every chip manufacturer was sold out and could produce no more chips for the next year yet their stocks were all down 50%. Much of the automobile manufacturing in the United States was held up for lack of these chips. Only recently have chip deliveries started to catch up for the auto industry.

However, there is really good news on this subject. Due to the money given to chip manufacturers by the U.S., they are building huge manufacturing plants in the United States. Intel Corp. is building a huge facility in Ohio and Taiwan Semiconductors Manufacturing Co. Ltd. is building a comparable plant in Arizona. If ever we had a national defense problem, it would be in chip manufacturing. If in a time of war we were cut off from chip manufacturers in Asia, we would be virtually handcuffed from building military armaments. The fact that we are building these plants in the United States at the current time is extraordinarily bullish for the future of America.

Ava and Joe watching the game. I wonder who Ava was cheering for?

Almost everyday you read some article in the financial press about big tech companies laying off employees. When Amazon announced that they were laying off 18,000 employees, it was the leading headline all day long. They rolled out a number of so-called “experts” to explain how serious the financial situation was with Amazon in that they had to layoff 18,000 office workers.

Obviously, people who get hysterical regarding that information do not bother to look at the facts. Yes, there are layoffs occurring in beg tech at the current time, but there needs to be. Just to give you an example of the growth in that sector, look at the actual number of employees, both pre-Covid and post. In 2019 Amazon had 798,000 employees, in the third quarter of 2022 they had 1,544,000 employees. Therefore, when they announced that they were laying off 18,000 employees, it was just a little over 1% of their employee base.

The same can be said for virtually all of tech. Alphabet Inc. had 118,899 employees in 2019 and 186,779 employees in 2022. Meta Platforms which is the old Facebook had 44,942 employees in 2019 and in the third quarter of 2022 they had 87,314 employees. As you can see, virtually all of these have grown their employee base over the last couple of years by 100%. It would be irresponsible for them not to consider layoffs at the current time given their bloated employee situation at work.

Happy Pawlidays from CiCi

Another thing that has come up lately is that the productivity of workers has fallen in the United States. This is the first year in many where productivity has actually inched down. Many experts believe that is due to the work-from-home concept, but I think it has more to do with the fact that we have too many employees trying to do the job. Down through time we have found that if an employee is not pushed to produce, productivity fades away. I rather suspect that is the real reason in the fall of productivity, rather than the work-from-home concept.

A few people realize the effect of currencies in corporate earnings. When the United States started increasing interest rates in March of 2022, that made the U.S. more attractive to foreign currencies. As people rushed to move money to the United States, it forced the value of the dollar up. A higher dollar is actually a negative for corporate earnings. That makes U.S. based products more expensive internationally and makes international products less expensive here in the United States. During the second and third quarters of 2022, this huge increase in the dollar dramatically reduced earnings of U.S. corporations.

During the fourth quarter of 2022, foreign central banks caught up with the trend and started to increase their interest rates which forced the value of the dollar down. The dollar has fallen dramaticlly over the last several weeks and months and now should be a net positive for corporate America. This fact alone should increase earning in 2023 as a net positive as compared to the net negative that it was in 2022. I know these points are technical in nature, but they are very meaningful to understanding corporate profits in international commerce.

Cecilia Cmeyla and her Aunt Brisa over the holidays,
leaving no doubt that they’re related

So, I would like to give you some predictions you can hold me accountable to this time next year. It is interesting what is going on in the oil industry. As I mentioned above, the price of oil has gone from $125 a barrel down to roughly $72 a barrel at the current time. What you do not realize is that rotary drilling operating in the United States is up almost 32% over the last year. This time last year, there were 727 rigs working and now there are 961. It seems that the oil industry has caught on to the higher prices and is beginning to produce at a higher level. I think what will happen is what has happened so often in the past. Due to a shortage of oil in the United States, we are working our way back to a glut of oil here at home. This is a very good thing.

It has taken roughly two years to overcome the restrictions on drilling oil that the new President installed. I personally believe it was his clear desire to get the oil prices up, and by restricting their permitting he was able to accomplish that. A great deal of that help can be attributed to Putin beginning a war that nobody wanted in Ukraine. But all of a sudden American oil is gearing up for higher production.

It is my projection that before the next President is installed in office, the U.S. will once again be energy independent. We reached energy independence during the Trump Administration but due to the restrictions on new drilling, we lost that advantage several years later. If oil production in the U.S. continues at the current level, we will not care about the price of oil produced in the Middle East or Russia.

The economic effects of the war in Ukraine and the sanctions on Russia are crushing the Russian economy. I would hate to think of the pressure that the Russian government is undergoing now due to the bad news coming out of Ukraine. The one aspect of any war that affects people’s feelings is the reality that sets in when they send back deceased soldiers to their families. When you have a death of a son or daughter, a brother or sister, or a father or mother, it has a huge emotional impact on a country.

Evan Bentley and Alexis Chambers under the lights
at Truist Park for Evan’s company party

Even though they are not allowed to express their outrage in Russia, it is clear that the population is beginning to suffer due to this war that no one wants or really needs. The Ukrainians have done the U.S. a great favor in demilitarizing the Russian government and therefore will reduce the cost of building military armaments for decades to come. It is also clear that a winding down of the Ukrainian war will have to occur due to depleted military supplies by both sides.

From an economic standpoint, inflation is starting to fall and the November numbers were very encouraging. November was the fifth consecutive month of declines suggesting that inflation has clearly peaked. The next big number that all of us we will have to watch out for is what corporate earnings are going to do with the upcoming projected recession. During the fourth quarter of 2022, it was thought that corporate earnings would be up 5.1%. So if corporate profits are higher in the fourth quarter 2022, what will they project in 2023 based upon the so-called upcoming recession?

This gets us into the meat of the question as to what we expect in 2023. Based on my reading of the economic tea leaves, I do not think we will have recession in 2023. We might have a slowdown, but definitely not recession. One of the beauties of investing is that the stock market projects far before the economy bottoms. Most people believe that the stock market will rally six to eight months prior to the economy bottoming out. Based on this information it would seem that the first half of 2023 should be rocky and volatility will continue to capture the market. It looks to me like the second half of 2023 should be excellent in almost every respect.

Finally, now stock prices are at a level that seems to be more than reasonable. At the current time, the S&P P/E ratio of 19.1 is well in line with the long-term averages. Over time this index has averaged a P/E ratio of 19.8. In late 2020 that same ratio was 30 times earnings. So, the correction in 2022 dramatically reduced the fair value of the stock market.

Fake it till you make it!
Elizabeth Flores’ dog, Rico, convincing Santa to add him to the “Nice List”

We are seeing inflation fall fairly dramatically and even by the Federal Reserve’s projection, inflation at the end of 2023 should be at 3.5%. All the economic forecasters that I review indicate that we are very close to a bottom and the fact that the fourth quarter of 2022 yielded positive financial results should indicate that 2023 should be quite satisfactory.

Based on that information, I forecast that we should see gains in the financial markets in 2023 of roughly 20%. While that amount will not completely recover the losses of 2022, it will build a strong foundation for many profits in the future.

If you have an interest in coming down to visit with us, we look forward to seeing you. We are moving into tax season for our Firm and will have the time to sit down and review your portfolio, taxes, or anything else you might be interested in.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

Happy Holidays!

2022-12-21T11:15:00.002-05:00

In celebration of the Christmas holiday, Rollins Financial Advisors, LLC will be closed from Thursday, December 22nd to Monday, December 26th. Our regular office hours will resume on Tuesday, December 27th.

AND, in celebration of the New Year holiday, our offices will be closed on Monday, January 2nd. We will resume normal office hours on Tuesday, January 3rd.

If you have any pressing matters that require immediate attention on any day that we are closed, please do not hesitate to contact any of our staff.

All of the Partners and Team Members wish you Happy Holidays and a Healthy and Happy New Year!

Stock Market Rally – A Conundrum Between What You Hear From the Media and What You See in Real Life

2022-12-08T18:02:00.000-05:00

From the Desk of Joe Rollins

For the last two months, the Standard and Poor’s 500 Stock Index was up 14.1% yet you do not read much about that rally in the financial press. At the end of September 2022, the S&P 500 was down 23.9%, clearly in bear market territory. At the end of November 2022, that same index was down 13.1%, increasing nicely over the past two months. Yet, as you and I watch the financial news daily, all we hear is negative financial information based on this so-called upcoming recession that everyone seems to be predicting.

I want to cover some of those facts for you in this posting and some other subjects I find of interest. The U.S. posted another strong employment report on Friday, but the big question is, where have all the workers gone? Particularly, the younger male employees seem to be nowhere in sight in the employment report. I also want to focus on why consumers are accumulating so much cash but are spending their savings to either stay out of work or reduce their working hours. I also want to try to explain the absolute absurdity of the financial press and its emphasis on layoffs; the numbers are meaningless in the grand scheme of things. Also, I want to focus on the increase in GDP that has occurred this year, contrary to any reports you might hear of the economy slowing. Lastly, I must once again take a shot at the traders who are confusing investors with irrelevant information. I want our clients to focus on investing and ignore the hype the traders are publishing in the local press.

Lucy and Harper Wilcox up to a little hocus-pocus
in Salem, Massachusetts

Before I report on all that interesting information, I need to report on the month of November 2022. For the month of November 2022, the S&P 500 Stock Index was up a very healthy 5.6% yet is down 13.1% for the year 2022. Just as a comparison, the 10-year average, including this down year, is 13.3% annually. The NASDAQ Composite Stock Index was up 4.5% for the month of November 2022 and is down 26.2% for the year 2022. The 10-year average on this index is up 15.6% annually. You would expect an index that is more volatile than the others to be down more in a down market and up more over time. As you can see, it has had the highest double-digit increases over the last ten years.

The Dow Jones Industrials Average Stock Index was up 6% for the month of November 2022 and is only down 2.9% for the year 2022. Its 10-year average is 12.9%. In comparison, the Bloomberg Barclays Aggregate Bond Index was up 3.8% for the month of November 2022 but still down 12.5% for the year 2022. Its 10-year average is a measly 1.1% over the last ten years. It pays to note that the bond index is down almost as much as the S&P 500 Stock Index, at 12.5% to 13.1%. It is highly unusual that both stocks and bonds are down in the same year. In fact, this has not happened since 1969.

We had a very strong unemployment report last Friday, with the United States adding 263,000 new jobs. It was surprising to the traders that the unemployment report remained at 3.7%. Going into this quarter there was an assumption by the financial press that due to the higher interest rates, the Federal Reserve has been applying to the economy. Unemployment should be going up. At some point, it will affect jobs causing the unemployment report to go higher. However, during 2022, even though the higher rates of interest has been moving higher, the number of people unemployed has either fallen or stayed stable throughout 2022.

Snowbirds - The Rollins Family headed south for Thanksgiving

Some of you may not remember, but in 2019 we thought that we had a super strong economy, and that it could do no wrong given its overall strength. However, the job growth in 2019 had a monthly average of 164,000 jobs per month. Compare that with the job growth now over the last three months, and it has grown to over 272,000 jobs per month. As you can see the job growth in 2022 is actually faster than in 2019.

One of the issues the Federal Reserve continues to cite is that if employment is strong, they will have to continue to increase interest rates to slow the economy. However, there is tons of information that will illustrate that employment is not out of control. Today, in the United States, there are 158 million workers currently employed out of a civilian workforce of 164 million. Obviously, the two indicate that there are roughly six million Americans unemployed, which is down from the 6.8 million 2021 average. Basically, the number of unemployed over the last year has been reduced by roughly 800,000 Americans.

Danielle Van Lear and Robby Schultz
May your days be merry + bright!

What continues to be the conundrum of employment is there are currently 10 million job openings and only six million unemployed people. As you can see, there are almost two job openings per every unemployed American. It is clear that if you are unemployed and want a job, there are plenty of jobs available.

When interest rates started going up in the spring of 2022, the so-called experts projected that the U.S. would fall into recession in 2022 and the GDP would fall off the chart. As a matter of fact, in September, many of the largest brokerage houses forecasted that there would be another drop off in stocks of 25% before the end of the year. As mentioned above, the S&P rallied 14.1% in October and November 2022, which I guess made their projections somewhat moot.

“Chur!” Martha and Lee Nemeth on a speed boat adventure
near Queensland, New Zealand

The one fact that continues to astound me is the call on the Gross Domestic Product of the United States. You would expect, with all the negative news, that the GDP would be crashing and burning during this particular time. In the first two quarters of the year 2022, the GDP was down 1.6% and 0.6%, forecasting a potential recession with two negative GDP quarters in a row. However, those two quarters came following the very strong 2021 GDP of 5.7%, which bled over to the year 2022.

Astoundingly, the GDP for the third quarter was recently revised upward to 2.9% by the Commerce Department. This GDP surprised most all viewers of the economy since they were expecting negative not positive numbers. Currently, the Federal Reserve of Atlanta is forecasting GDP growth in the fourth quarter of 2022 to be 2.8%. If we in fact hit that percentage for the year 2022, the entire year will be a positive GDP growth, making the economic picture even more confusing to those looking at it from the outside. When does the recession start, surely not in 2022?

Of course, the financial press says that they were not wrong about GDP growth, it is just delayed until 2023. In fact, due to the strong GDP growth, this would push the Federal Reserve to increase interest rates even higher and longer. However, the evidence would indicate something different as I will illustrate later.

Ken & Una Dooley’s grandkids -
“The best gift is the presence of family wrapped in love!”

One of the things that continues to baffle me is why the stock market reacts to an announcement that a company is going to lay off workers. The company Amazon recently announced that they were going to lay off 10,000 workers and the market drove the stock down 4% based on the news. However, obviously, the people that traded on that news do not understand the employment history of Amazon.

In 2019, Amazon had 1.3 million workers. From 2018 to 2019, they increased their workforce by 62%. In 2020, Amazon had 1.6 million workers, which was an increase of 23% year over year. As you can tell, 10,000 workers being laid off is a small percentage of their total workforce and is certainly meaningless. I would bet on a day-to-day basis, based on 1.6 million workers, they probably hire and fire more than 10,000 employees each and every workday.

Eddie and Lucy Wilcox at Harvard - getting an early start on college visits

With the economic news it only makes sense that they would pare back some of the employment that they have accelerated throughout the years. Likewise, you are reading about layoffs of workers in the tech sector. Once again, the tech sector has been aggressively hiring employees for the last four to five years due to the pandemic. A reduction in hiring or laying off excess employees only makes good business sense and when they make those announcements, the stocks should go up rather than down.

I want to remind you that with all this so-called negative news related to employment, there are still 10 million job openings for people to take a job. It has recently been announced that the people laid off, particularly in the retail sectors, had quickly found jobs in other industries that are short employees.

In the most recent unemployment report, something shocking is appearing. Not only are the number of workers in the United States declining due to retirement and other reasons, but the participation by the most productive group in the employment pool, males ages 25 to 54, has dropped from 89.3% to 88.4%, which is a significant number in any one age group. Since this age group is the most qualified in most segments of the economy, it is hard to understand why this group is dropping out of the workforce altogether.

Josh and Ava – Sensei and Grasshopper or Grasshopper and Sensei?

In males aged 20 to 24, participation has dropped 1.7% from January 2020 versus 0.5% for those aged 45 to 54. As you can see the number of workers in the United States is falling in virtually every category of young males. No one can seem to explain why these jobs are no longer filled by them. It may just be that these employees have accumulated too much money during the pandemic and just do not desire to go back to work. Once again, this very strange conundrum of the amount of money Americans hold as compared to the amount of young males working raises additional questions about whether these employees will return anytime soon to the workforce.

Take as an example; a recent Federal Reserve report estimated that U.S. households, as of mid-2022, were sitting on $1.7 trillion in excess savings. Make sure you understand that I am not talking about millions, I am talking about trillions of dollars. It is further interesting that during the most recent year, the personal savings rate for Americans had dropped from a high last year during this month at 7.3% to an October low of this year of 2.3%. I think it is pretty clear what you are seeing. So many workers that were in the workforce are now electing to spend their savings rather than go back to work. With the significant reduction in the savings rate, it should be fairly obvious to everyone that these workers no longer need a job because they are spending their savings earned during the pandemic.

Murray and Susan Van Lear rockin’ around the Christmas tree

One of the questions always addressed to me is, how did Americans accumulate $1.7 trillion in excess savings? Much of it can be directly linked to the government subsidy during the pandemic. As you recall, unemployment payments during that time were greatly expanded in order to cover the people currently out of work. But there have been numerous other government handouts that have increased the amount of cash held by Americans. As you recall, even though the President proclaimed that the pandemic was over, there was a major increase in food stamp payments implemented during the pandemic as a humanitarian help for people out of work. However, those food stamp beneficiary payments have not stopped. Currently, the average food stamp monthly benefit is $227 per month, which is nearly twice as much as before the pandemic.

If you look at the political football, which is student loan payments, you will note, once again, even though the pandemic is proclaimed over, the payment holiday on those payments has been extended to June 2023. It is assumed by the Federal Reserve that the average savings due to these loan payments being postponed saves an average debtor of roughly $12,800 a year.

“Small cheer and great welcome make a merry feast.”
- William Shakespeare (not pictured)

As you can see, there are many monthly subsidies that are going into the hands of workers that are no longer willing to work and be employed. As long as the government continues to subsidize these workers, they are comfortable spending their savings in order to maintain a lifestyle that does not require them to work on a daily basis. Also, with the higher interest rates passed to the public by the Federal Reserve, now the savings of these workers is earning more. Last year at this time interest rates on money market accounts were paying virtually a zero-interest rate for the year. Today, those same accounts are earning for savers roughly 3.5% per year. This substantial increase in earnings on these savings accounts further insulates workers from having to go back to work anytime soon.

You probably didn’t notice since most people do not actually look at interest rates daily, but long-term interest rates have fallen dramatically for the last several months. Not only has the stock market rallied, but so have the interest rates. Most recently the 10-year treasury was quoted at 4.25% annually, but today that rate has dropped to 3.5% as of this week. That is a huge drop in only a few weeks. What is very interesting about this drop is that clearly interest rates affect long-term mortgages. With this dramatic drop in 10-year treasuries, it is very likely that mortgage rates will fall from 6% to in the 5% area.

Psst, over here! Elon Musk as guest speaker at the Baron Conference

Once again, this is very bullish for home purchasing and lower mortgage rates. One of the items that I am often confronted with is a young couple indicating that they would postpone purchasing a new home for another year because of the increase in interest rates. I find that philosophy to be flawed. If you think about it for a second, if you have to pay 3% higher on your mortgage than you would have six months ago, while uncomfortable, it may be what you need to do to get the house. It is very likely that home values will continue to increase by at least the inflation rate of 2% to 3% per year. If you wait a year and you lose 2% appreciation on the value of the house but pay a 3% higher rate, you have lost 1% of the value of the house. However, the alternative is if you rent for one more year, and you are paying $2,000 a month for rent, you have completely lost $24,000. Homeownership continues to be much more desirable for young couples than renting.

The decrease in long-term interest rates is important for another reason. The Federal Reserve has pretty good control over short-term rates. They can move rates higher very quickly, which affects short-term interest rates such as the 1, 2 or 3-year treasury bonds. However, they have virtually no control over the long-term rates. So, what you are seeing in the actual world is that while the Federal Reserve continues to push up short-term rates the long-term rates that are affected by the investors are falling.

Caroline Schultz – 8th year in a row on Santa’s nice list!

I think it is fairly clear from the movement in the interest rate that the markets are betting that shortly after the Federal Reserve increases rates again, they will begin cutting them after the first of the year. Also, the reduction in the long-term rates tells you that there is a pronounced decline in inflation, or these rates would not be falling. We see the price of lumber going down dramatically due to lower home starts and we see the price of gasoline falling dramatically due to the perceived state of the economy. I think as the Federal Reserve contemplates increasing interest rates now, they will have to consider the reduction in inflation.

The Chairman of the Federal Reserve, Jerome Powell, has already announced that during the December Federal Reserve meeting, the interest rate increase will be 0.5% rather than his customary 0.75%. I think the Federal Reserve is finally seeing, and maybe it is from the pressure of the public, that taking the country into recession would be a mistake for both the Federal Reserve and the country as a whole. I do not believe for a second Federal Chairman Jerome Powell wants to put the country into severe recession. Given the falling interest rates and the clear movement in reduced inflation, it does not look to me that he will be required to do so.

Cecilia Cmeyla and Anam Syed striking a pose at the Omni Hotel

As you would expect the financial specialists do not agree. A Bloomberg survey of economists released last week found that three-quarters believe that the Fed will act too aggressively, eventually triggering a global recession. I cannot explain why this group would be so negative on the ability of the Federal Reserve given their public pronouncements that no one has the desire to put the country into recession.

I guess it has to do with the cycle that we went through in the late 1970s with Federal Chairman Paul Volcker. At the time when Chairman Volcker took over the Federal Reserve inflation rate was 12%, mainly due to the Arab oil embargo against the United States. To bring down inflation, Chairman Volcker immediately forced the country into recession by driving up interest rates to more than 22% and mortgage rates to nearly 17% in the process. Not only did he increase interest rates, but he also restricted the money supply forcing a severe recession in the economy. Unemployment during that time stood at 10% and peaked at 10.8% in 1982.

Reid Schultz showing that he’s strong enough
to batten down the hatches!

Recall that the unemployment report today is 3.7% in the United States. There is no question that the Chairman of the Federal Reserve has the capacity and ability to put the country into recession. The question is why they would want to do so given the already declining inflation picture. As I mentioned in the last posting, I do not believe that this Chairman has the desire to put 10 million Americans out of work today. Remember that Chairman Powell is not a trained economist. In fact, he is an attorney by trade, and I think he is very cognizant of the public pressure to not overshoot this very important interest rate cycle.

My only hope for my clients is that they do not watch too much television related to the financial markets and they do not overreact to things they see on TV. I want to give you an example of how the data is so misinterpreted. Last week all the financial press could talk about was the fact that the Covid-19 shutdown in China was restricting the production of iPhones for Apple products. China is taking a very aggressive approach on Covid-19 protection and has basically shut down many cities for only a few cases. However, one of the major manufacturers of iPhones is in that shutdown area and has had to reduce their working hours because of the Covid-19 restrictions.

Elizabeth Flores and Jose Reyes Ventura.
Dream big, shine more, and sparkle bright!

The financial media went crazy last week discussing the issue that Apple would not be able to produce the number of iPhones they had predicted during the current quarter. Due to production delays, it would be impossible to meet their production projections going into Christmas. As a result of the comments, Apple stock fell roughly 5% during the time in which this discussion was ongoing. Understanding that these are traders making these types of trades and not investors, I hope you see through the controversy.

Yes, it is true that Apple may not be able to meet their production quotas due to their Covid-19 restrictions, but basically so what? They will meet those quotas in the coming weeks and months even though it may not be before Christmas. This event, while it influences the short period of time between now and Christmas, should never have any negative effects on the strength of Apple. Therefore, let the traders sell for the two weeks and buy back, and long-term investors should sit tight.

Once again it brings me to a conundrum that I cannot fully explain. The S&P 500 Index is up 14.1% for the months of October and November 2022 which is good news for long-term investors. It is also fairly clear that the U.S. economy’s GDP has moved higher after being negative for the first two quarters of 2022 and is looking to be positive for the last two quarters of 2022. Also, we know now that the supply constraints are virtually eliminated, and I was recently told that freight rates out of China, which were $53,000 earlier this spring, have now dropped to $1,200 per container. When you see that type of change in the marketplace, you know that whatever constraints there were now have been basically resolved.

It’s a boy!!!
Congratulations to Drew and Nicholle Malone!

We also know that employment is extraordinarily strong with an almost all-time low unemployment record in America. The more people that are working, the more people are spending money and the more people that are building the economy. In a recent trip to Florida, you could not get reservations at any restaurants and traffic from Atlanta to Tampa was bumper-to-bumper the entire way. If you go out to a mall during this time, you will note that they are almost at capacity levels. It was recently announced that over Black Friday, cyber retail sales were up 9.4%, which was a record. Normal brick-and-mortar retailers reported an increase in sales of 2.7%. You are just not seeing any level of softness in the current economy. If we had these economic numbers in 2019, we would have believed that we were in a record-strong economy. We had those numbers in 2022 but the perception is exactly the opposite.

While it has been an extraordinarily disappointing year financially, I have great hopes for the future. I think the ridiculous selloff of big tech is going to end soon and you are going to see a massive rally in those stocks that are down 20% to 30% this year. They are the most important companies in America and certainly, nothing that we have seen so far should limit their growth. Therefore, I see this as a major buying opportunity for young people and people that are willing to wait for the stock market to turn back up.

As we go into 2023, I believe we are going to see smaller interest rate increases by the Federal Reserve and if the economy continues as strong as it is today, earnings by major corporations will be higher in 2023 than they were in 2019, further pushing the stock market higher. I know it is frustrating to sit here and watch the stock market go down. But when you have a performance where in the last 20 years, the market has been up 16 times, you have to expect one year to be a negative return. If you have 16 up years and four down years, that is a win rate of 80%.

CiCi sends you holiday joy from the beach in Florida!

I expect 2023 to be better, and if you have excess cash you should invest today or at least do your IRAs early in the year so you get the benefit of the reduced value of stocks that currently exist. Since it is not likely you are going to have major capital gains this year from the mutual funds, it might be an opportune time to make a conversion. If this is something you are considering, reach out to us as soon as possible and we can do a quick calculation and tell you the tax consequences of converting.

If you have an interest in coming down to visit with us, we look forward to seeing you. We are moving into a slower period for our Firm and will have the time to sit down and review your portfolio, taxes, or anything else you might be interested in.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

Do you believe Powell will eliminate 10 million American jobs? I don’t!

2022-11-16T17:33:00.000-05:00

From the Desk of Joe Rollins

I have been overwhelmed with questions regarding the economy and what has been going on with the stock market over the last month and I am beginning to believe that the public is being overwhelmed with fake news. I read an article the other day that said the vast majority of Americans believe we are already in recession; they fear for their jobs and the ability to support their families. However, the evidence is so far removed from those statements that it must be bewildering to someone who actually reads the facts.

I hope I can give you some information in this posting regarding the excellent month of October we enjoyed, but more importantly, explain to you why the economy is not in recession. If you believe the lines they give you on TV, you need to do your own homework. I also want to explain employment which seems to have gotten confused with the economy since people do not understand that layoffs do not necessarily create a recession. Lastly, I want to go through my reflections on meeting with Elon Musk in New York and hearing his coherent statements regarding virtually anything as compared to politicians. Of course, I will touch on the elections and the reasons why they were important for further stock market increases.

Ava Rollins and her friends having a roaring good time on Halloween

If anybody tells you they can forecast a bottom to the stock market, they are just born liars. No one has ever been able to do so, and if anyone could do so, they would certainly keep it to themselves. What we do know, historically speaking, every sizable stock market decline has represented a sure-fire buying opportunity for long-term investors. I know it is hard, you just have to hold your nose and buy on the dips. Did you realize that over the last 70 years the stock market has declined by over 10% on 39 separate occasions? You probably did not realize that market corrections were as common as those facts tell you. Yet, in every one of those 39 declines of 10% or more (except for the current one) a bull market rally eventually recoups all that was lost. Given that it is a 100% recuperation of all losses indicates this too at some point will pass. A really good time to invest.

Before I cover all those interesting topics, I need to report on the very excellent month we had in October. The Standard and Poor's Index of 500 Stocks was up 8.1% for the month of October, but yet is still down 17.7% for the year 2022. Once again, I point out the 10-year returns on this index, even with this very down year, average 12.8%. The Dow Jones Industrial Average was up 14.1% for the month of October yet is still down -8.4% for the year 2022. The 10-year average on this index is 12.2%. The NASDAQ Composite was up 4% for the month of October but is still down significantly at 29.3% for the year 2022. The 10-year average on this index, due to its more volatile nature, is also the highest at 15.2%.

Ava out for a graceful spin around Central Park

For the month of October, the Bloomberg Barclays Aggregate Bond Index was down 1.4%. For the year, bonds are down 15.6% and for the 10-year they average at 0.7%. This is the first time on record that bonds have taken such a large decline and the combination of both stocks and bonds being down is almost unheard of in American finance. Maybe this leads to some of the conspiracy theories I will discuss later in this posting.

As mentioned in the prologue, I find it incredible that most Americans believe that we are already in recession. If you recall back in January and February all these so-called experts were beating the table and explaining that recession was unavoidable in 2022, and that in 2023 we would likely see bread lines, foreclosures, and huge bad debts by the banks. I am not sure exactly where those Pundits get their information from, but it is certainly not supported by the facts. You must wonder whether there is a broad conspiracy going around that is convincing the public of something very negative, when in fact, we are in just a normal slowdown in the economy.

Shelley Fietsam’s son, Cameron, dressed to impress for HOCO 2022

I guess the Pundits were shocked when the government reported that the GDP for the third quarter was at 2.6%. While it is true that during the first and second quarters of 2022, the GDP was marginally negative. So, the increase of 2.6% for the third quarter must have been a sure shock to those Pundits that were beating the table and explaining how recession was just around the corner. However, if you want really shocking news, check out the website for the Atlanta Federal Reserve. As I have pointed out on numerous postings before, these preliminary calls on GDP by the Atlanta Federal Reserve have been closer than any other projections. If we were going to have a recession in 2022, the fourth quarter would have to be a large negative number to wipe out the 2.6% earned in the third quarter. However, as strange as it may seem, the Atlanta Federal Reserve is forecasting fourth quarter GDP at a stunning 4% increase. If in fact they are close to that percentage increase for the fourth quarter of 2022, the entire 2022 will be quite satisfactorily higher on a GDP basis.

What confuses me, and I guess most investors, is why these so-called experts are forecasting severe recession when the government itself is forecasting real growth in the current quarter.

I have been on a lot of airplanes lately and I can tell you from personal observation that every seat is full and there is a standby line on every flight I have boarded. Airports are completely run over with people; and as everyone knows, it is almost impossible to get reservations at a good restaurant. I was in New York City over the weekend and most of the hotel rooms were sold out and the city was covered up with tourists. In fact, I began to believe that no one spoke English in New York after the few days there since there were so many tourists from foreign countries. That fact alone should convince you that the world is not in recession, given that whole families were willing to travel from Italy, France, and the Far East to come to New York on vacation.

Client Chris Barg with Braves’ Dansby Swanson
at the Gold Glove Awards in NYC

I have a hard time convincing my own clients to read the facts. I get client telling me that when Facebook starts laying off employees, it must mean we have recession. In recent news, all the major tech companies reported that they would slow down hiring or start laying off people in the coming months. Unlike the explanation of the upcoming recession, this more properly reflects that corporate America is downsizing to a slower economy. That is only good common sense and exactly what they should do if they thought their business would be slower going forward. Absolutely nothing in those statements would be an indication of an upcoming recession.

Also recall, that if you lay off a couple thousand employees by a major employer, as of today, there are still 10.7 million job openings in the U.S. that are not filled. So, if these newly laid-off employees desire to find new employment, they have vast opportunity to do so. As I said often said before, for anybody in America that wants a job, there are plenty available. If someone is without a job, it is most likely that they do not desire to work again.

This gets me back to the title of this posting. If the U.S. is really going to go into recession, the Federal Reserve will have to orchestrate laying off and eliminating over 10 million American jobs. Take that into perspective when you consider employers today cannot find enough workers and especially low-paying jobs that are going unfilled because no one is willing to work for those wages. Will the government now take that situation and aggravate the economy by laying off 10 million additional workers to reduce inflation and slow the economy. I am betting there is no chance in the world that any governmental agency in an election year would eliminate that many jobs and endanger that many families' livelihoods over something as obscure as the inflation rate.

Ken Higgins finished his 38th Peachtree Road Race – Way to Go, Ken!

So maybe the Pundits are saying that we are going to see severe recession in 2023 due to the actions of the Federal Reserve and we have just not felt the effects of higher interest rates. There is no question that higher interest rates have slowed the housing industry by pushing long-term housing mortgage rates up above 7%. I do not know if you have noticed but those rates are falling and are now below 7%. Truth be told, most people really do not care what houses cost, they only care what the monthly payments are. With the huge increase in interest rates over the last six months, many young buyers are suffering “sticker shock” with new home pricing. However, I have many clients on the other side of the housing industry, and I can tell you that housing prices are not going to fall if commodity prices for those houses continue to rise. Sure, there will be a slowdown in housing but frankly, there needs to be.

We got a little bit ahead of ourselves in the spring when lumber prices doubled, and supply chain issues made building houses come almost to a standstill. Now that lumber prices are back to normal and the supply chains have opened; efficiency in home building will improve, but it will take some time. So, it is perfectly fine that the economy slowed down some to allow housing to catch up with current demand. The people who write for the financial news and talk about “crashing” home prices and the desperation felt in home building obviously have no clue as to what they are reporting. While last month housing prices declined by 1.5%, given that they have increased by 20% over the last year seems to be a most normal reflection of softer pricing.

Bob and Margaret Cash preparing for a bike ride
through Burgundy, France – À tout à l’heure!

The difference that so many of the people writing the financial blogs cannot seem to understand is that we do not have an undersupply of product, we have an oversupply of demand. Coming out of the Covid shutdown for several years, suddenly people wanted to use the money that they had accumulated since they had not been able to do anything in two years and they began to travel and spend money on capital items. We had too few new cars to buy, we had too few used cars to sell, lumber was at exorbitant prices and every airline seat was filled. That is what happens when you have demand in excess of supply. But all of that is slowly receding and supply and demand are more closely aligned today than they were several months ago.

So, when we have more aligned supply and demand, we will start to control inflation. For the month of October inflation was down to 7.7% year over year from 8.2% in September. Remember that I explained that inflation is valuated based on an annual increase this month over same month last year. As we go into the end of the year, we will have much more favorable months to compare, and I fully expect inflation to continue to fall as previously mentioned.

Long-time client Claude Hoopes shares the beauty of Maine!

At the very first sign of a significant reduction in inflation, you will see that the Federal Reserve will have to back off this desire to increase interest rates in this economy. It is a fine line to increase interest rates to slow the economy, but under no circumstances would you want to do so to the point where interest rates throw the economy into severe recession. I think the Federal Reserve is very cognizant of this fact and that when they meet in December, the increases in interest rates will be less than the 0.75 that they have been increasing for most of 2022.
So, I talked about the economy, and I talked about what I think the Federal Reserve is going to do, but what really affects stock prices are earnings. With all the talk about the potential of recession, most people have failed to see the reality of what is going on in corporate America. It is amazing to me that bank stocks are not rallying significantly with these higher interest rates. As you know, every time they increase interest rates, the banks make more money, yet bank stocks have been down virtually all year and even flat lately. The Pundits have convinced the public that the reason why bank stocks cannot rise is because with the upcoming recession, the banks will have overwhelming debts and companies that cannot pay their loans. I find that position so preposterous it is even hard to repeat. The banks today are in the most healthy and well capitalized position they have ever been in American finance.

If the Pundits were so correct regarding their projections of inflation and recession in 2022, you would have expected that earnings would fall dramatically. It now looks like that for 2022 in corporate America, net income will go up by 7.5% for the year 2022. What is incredibly coincidental is that is the exact same percentage that they went up in 2021. So, we have no declining employment and no declining earnings by major corporations. Why are the most major stock funds in the world down 30%-40% in the year 2022 and the S&P 500 down 18%?

Proud moment - Randy and Kathy Wittman
introducing their 3rd grandchild!

While I was in New York I had the opportunity to talk to a lot of the fund managers and their reflection on this year was quite surprising. They all indicated that nothing had really changed and that they were evaluating stocks as they had always done. The exclamations seen in the financial press of recession, depression and hyperinflation were to be ignored given that there was no financial support for those positions. While we all recognize and appreciate the slowdown in the economy, there is no indication of a major fallout from corporate America. Therefore, even though their performance this year has been uncharacteristically bad, their position is that you still value stocks the same way and all this hyper talk in the press is probably designed to support a position that the traders have that the invested public does not.

People ask me all the time what my reflection of the recent election was and my thoughts about it going forward. I am quite pleased that the elections appeared to be an even split between the two major parties. I am also very glad that neither party won substantial positions in any of the major house and senate races. I am a firm believer that government works best when it does nothing. It is the old joke Ronald Reagan used to paraphrase all the time, “I am from the government, and I am here to help.” As Ronald Reagan said, anytime the government shows up to help you may rest assured that industry will be worse for that help. Therefore, virtually an even split in Congress and in the Senate should lead to two really good years of the government doing absolutely nothing. As long as the government continues to debate, argue and make excuses and not pass any substantial legislation, we as investors will be much better off.

Ava and Dakota Rollins in the Big Apple

One of the principal speakers at the seminar I attended was Elon Musk, President of Tesla Motors and various other companies. It was very enlightening to hear his comments. I found this guy brilliant beyond belief. Not only did he start PayPal from scratch, but he also started the very first fully electric car manufacturer, Tesla, SpaceX, Solar City, and Starlink. No one in the history of world had been successful in the building of electric cars before Elon Musk came along. When I listened to him speak, I was so impressed by his intellect. I just wish we had politicians that had above-average intelligence.

One of the things that he said seemed to make a lot of sense. He said that while studying space geography as part of SpaceX, he discovered that there might be as many as one million planets with the same atmospheric conditions as Earth. The difference is that those planets do not have people on them. Maybe at one-point, multiple generations ago they actually had people but they either killed each other in war, a virus wiped out the whole planet or environmental effects got to them. What was interesting about his comments is that he related them to the same effect on the Earth. Here you have one madman in Russia attacking a neighboring country for no good reason and wiping out hundreds of thousands young men. What if someone like him could start a nuclear war and basically eliminate all the people on earth? At least we now know that Elon Musk is certainly thinking about it.

One last pit stop before heading home...

What was fascinating about this conversation was that the very next day when I picked up my phone and looked on the internet, every other article I read was a negative article written about Elon Musk. You would think that if there were anyone to be the darling of the progressives, it would be him. No one before him was able to build an electric car cutting car emissions. Many have tried, but all have failed. Even today, the major car manufacturers are so far behind Tesla that the race is not even fair. Yet the progressives for some reason hate Elon Musk beyond belief. Maybe it is because he is the richest man in the world, or he has become remarkably successful.

Another thing he said that impressed me was that he indicated that the President of the United States should never be more than 15 years older than the average American. If the average American is 38.1 years old, that will make the President’s age around 53. Think about that just for a second when you have Biden and Trump running for political office again at age 80. They are so far removed from the average American’s beliefs and daily activities; I am not sure how they can properly govern a country. Hopefully, in this next Presidential election, we will have some young people willing to run.

If you have an interest in coming down to visit with us, we look forward to seeing you. We are moving into a slower period for our Firm and will have the time to sit down and review your portfolio, taxes, or anything else you might be interested in.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

The Weirdest Diversions of Economic Reality vs. Market Performance of All Time

2022-10-19T16:11:00.002-04:00

From the Desk of Joe Rollins

I know it is unbearably painful to watch the stock market negatively perform most days. However, for the 50 years that I have been invested, you can always rely on the fact that earnings and the economic environment will eventually return to the performance of the markets. That is where I feel we are today, and I want to point out some of those facts to you. In addition, I want to better explain the role of the Federal Reserve and the effect it is having on the current market. Lastly, I want to explain the extraordinary market performance we have had over the last 20 years and why pessimism at this level is certainly not warranted.

Before I go on to those more interesting subjects, I must report the performance of the markets for the month of September. It is unbelievable how bad the stock market performance was during that month. Not only were stocks down, but so were bonds, internationals, real estate, and virtually every other asset class you can name. What was interesting was that Fidelity’s lineup of sixty equity funds, which included some conservative funds, some midcap funds, and some aggressive funds, on average were down 9.2% for the month of September. By any standards, in any definition, it was an extraordinarily difficult move down for any one month. What was even worse for that quarter was all these funds were down 4.3% and the sixty equity funds were down 23.8% year-to-date. It just goes to show that there is nowhere to hide in this relentless selloff which is not supported by economic data.

The Standard and Poor’s Index of 500 Stocks was down 9.2% for the month of September and for the year down 23.9%. The 10-year performance on this index, including this down year, is 11.7%. The NASDAQ Composite Index was down 10.4% for September, down 32% for the 2022 year, and its 10-year performance is 14.2%. The Dow Jones Industrial Average was down 8.8% for the month of September and year-to-date is down 19.7%, but its 10-year performance is 10.4% annually. Just as a comparison, Bloomberg Barclays Aggregate Bond Index was down a stunning 4.3% for the month of September, is down 14.6% for the 2022 year, and its 10-year performance is 0.9% per year.

JRR sitting in JFK’s rocking chair

It is extraordinarily unusual when both stocks and bonds go down at the same time. If you had employed the 60/40 asset allocation, you would have suffered heavy losses so far in 2022. I am not trying to make a commentary on general performance, but it is quite unusual when virtually every asset class and every type of stock fund are all down during the same month. I am just not a believer that the millions of people that invest money suddenly decided that cash was better for the month of September.

The Federal Reserve was established to accomplish two major goals in the U.S. economy. The first was to maintain a stable economy which, by their definition, means inflation should be 2% not 8.5% as it is today. Their second mandate was to maintain full employment during good times and bad times. Neither of those mandates are more important than the other. Even though you have full employment and outrageous inflation, you are going to have an unstable economy. At 3.5% unemployment, we are in a very strong labor market. However, with 8.5% inflation, the Federal Reserve feels that it needs to take precautionary actions to reduce inflation.

The Federal Reserve of Atlanta has done a particularly good job in forecasting GDP going back over time. After reading all the negative commentaries in the news, you would assume that GDP would be a huge negative number for the third quarter of 2022. In reading the Yahoo headlines, virtually every other article was negative on the U.S. economy and how bad things are and how people cannot meet their monthly debts. The general sentiment from reading most of the editorial comments on the finances of Americans assumes that millions are out of work and underpaid and cannot meet their monthly household budget. Bread lines are surely next.

37-year client Allen Davidson & friends enjoying that
fresh NC mountain air

However, if you actually read the data, nothing like that exists. The Federal Reserve of Atlanta is now forecasting GDP growth for the third quarter at 2.8%. Remember that the first two quarters of 2022 were marginally negative. This forecast assumes a major positive turn in the economy. Do you remember all the so-called experts forecasting recession in 2022? I guess they will have to wait another year.

Basically, if these estimates are correct, the U.S. is growing 2.8% in the third quarter with a 3.5% unemployment rate. Any country in the world would do handstands to have such excellent financial numbers, and yet we are facing a market that is down 23.9% year-to-date.

As for the unemployed, currently there are still two job openings for every one person that is unemployed in this country. There is absolutely no reason why anyone cannot get a job if they want one, since there are massive job openings. In addition, those workers that do have jobs have enjoyed a 5% increase in pay over the last year which, of course, adds to the inflation problem but allows those employees to meet their monthly obligations more easily.

Client Janis Whitehead out on the town with husband John Jergel

The major question now confronting the Federal Reserve is whether they have gone up too far too fast and have not given the economy an opportunity to absorb the rate increases. There is no question that the higher interest rates will start to affect housing prices at some point. However, let’s not put it out of context. In most housing markets in the United States, house values have gone up between 20% and 30% in the last few years. If these housing costs incurred a decline of a couple of percentage points, that hardly seems unreasonable given the sharp upturn. Higher interest rates obviously affect credit cards, car loans, and other types of financing vehicles. Once again, the incurring of credit card debt, new car loans, and other financing is optional to the average citizen and certainly avoidable if they desire to reduce spending.

The major obstacle in bringing down inflation will be reducing the cost of oil. Any number of rate increases will not reduce the price of oil but rather move the political needle more than interest rates. The formation of these large inflation increases began with the current Administration’s pledge to reduce oil production in the United States.

During the prior Administration, we enjoyed energy independence, but we are currently dependent on foreign oil which, in my opinion, is a huge mistake. By reducing drilling in the United States and regulatory overburden to the industry, basically the ripples of higher inflation were created at the beginning of 2021. At this point, overregulation and lack of permits has reduced drilling over the last couple of years, and exportation has taken a back seat. At the current time, there is absolutely no way to reduce the price of oil short of a change in regulatory authority out of Washington.

Cecilia Cmeyla calling out of work from Disney World

You can see the effect that it is having on the rest of the world. Recently, the Administration tried to lobby Saudi Arabia and the Middle Eastern countries not to cut production of current oil supplies. It was reported that they decided to cut production by one million barrels a day to increase prices. After strong arm negotiations by the United States Administration, Saudi Arabia, Kuwait, and the United Arab Emirates decided not to cut the production of one million barrels a day, but rather cut two million barrels a day. Oh well – so much for U.S. influence.

The Administration warned the Saudis that a decrease in production would impact the long-term future of the United States and the Middle Eastern countries. Clearly, their decision proves that the United States has less influence over the Middle East than Russia does. Obviously, the higher prices will allow Russia to sell oil at a higher price and therefore support their ongoing atrocious war.

The sad part about all this pain that we are suffering with inflation and higher interest rates all could be reversed tomorrow by the signing of a new bill. If the White House would call off this political and regulatory campaign against American oil and oil production, the price of oil would start to fall immediately. We would see an explosion in the exportation and production of oil, which would get us back to the energy independence we saw only 18 months ago.

“Ava Rollins, do you have any homework?”

It is difficult to explain why the equity markets have been so decimated in 2022 given the strong economic numbers that we have enjoyed. Plus, we have an extraordinarily long record of positive performance, and we now know that every single bear market has grown into a bull market in every downturn. Ever since 1928, the S&P 500 has fallen 20% or more on 21 separate occasions. That does not include the 2022 performance since it is not over yet. That means that on average, there is a bear market every 4.5 years. Yet, it has not only recovered from every single one of those slumps, but it has gone on to see positive returns and more.

Think about this for a second. In the last 19 years of the stock market performance, there have only been two negative years. Of course, we had the extraordinarily big loss in 2008 and the other loss was only marginally negative. If you were a gambling person and I gave you money to go to Las Vegas and I told you that if you bet 19 times, you would win 17 of those times, you would take that chance every single time. The odds of a major correction going forward seem absolutely and totally remote.

Let us look at the current performance. Based on the information we currently have available to us now and the forecast by the Federal Reserve of Atlanta, the GDP for the quarter ending September 30th should be pretty positive.

Ziming Yu – Don’t make him angry!

We know that there are more people working now than ever, and therefore, there are more people to spend in the economy and make it stronger. Think about this for a second; going into this quarter it is projected that the earnings will be 2.9% higher than the previous years' earnings. In my way of thinking, that makes these companies 2.9% more valuable than they were on January 1, 2022. If the companies are more valuable because the earnings are higher, why is the performance down 23.9%? Once again, I focus on the fact that there seems to be a coalition of traders who are determined not to allow this market to trade up. I have noticed that over the last 60 days that the last trade of the day, on any given day, is a highly negative one. Therefore, if the market does trade up a few percentage points during the day, those gains are essentially wiped out by one large block trade making it negative.

An example of an extreme swing in the market was when they announced the Consumer Price Index for the month of September on October 12, 2022. At 8:30 in the morning, the inflation report was published and was one-tenth of one percent higher than expected. Immediately the futures went from 300 up to 500 down. The market opened down 500 or 600 points almost immediately, but throughout the course of the day those losses turned into huge gains. The Dow Jones Industrial Average Index ended up over 800 points that day when it started out negative 500. So basically, the S&P 500 Index on that day fell 2.4% before finishing up 2.6%, a five-point percentage swing. This type of inner-day action has only happened nine times since 1983, according to Bespoke Investment Group data. Do you really think that the average investor is sitting there by their computer, trading a market with wild fluctuations on a given Wednesday? Do you understand how much money it would take to move the market by 1,500 points? Of course, as you would expect, later in the week, the market sold off, basically to neutralize that large swing. This type of trading is not for investors.

Mia and her dad Muzzie (95) spending some
father-daughter time at the game!

Everyone is raising the question of whether the Federal Reserve is moving too quickly. I am a strong believer that the people in charge of the Federal Reserve are very well-educated and do see all the data. It has always been believed that if you have a rate increase, it will take as long as six to nine months before that rate increase takes effect in the economy. During 2022 alone, the Federal Reserve has already raised rates five times. The last three raises were more punishing increases of 75 basis points each. It is also forecasted now that they will increase interest rates by .75% in November and .5% in December. All of this is designed to get the Federal Funds Rate above 4% prior to the end of the year. The real mystery is that with all these increases within the last six months, have they been too much for the economy to absorb all at the same time?

I am one that would recommend that the Federal Reserve slow down and actually see whether these increases have actually done their work. I am in the camp of economist Dr. Jeremy Siegel who is now pronouncing that “the Federal Reserve has slammed the brakes way too far.” He is of the opinion that already the components leading to major inflation have been put in place. He is afraid, as am I, that the Federal Reserve is moving too quickly and not giving time to evaluate those increases. As he says, “most of the inflation is behind us, and the biggest threat is a recession, not inflation today.” He is arguing that the Federal Reserve might be doing more damage to the economy than good by raising rates and potentially forcing the economy into recession. No one knows exactly what the answer to that question is, but it certainly raises a legitimate concern.

Patiently waiting for the market to rally…

I often think to myself, is it the work of the government to destroy a strong economy? If we had this great economy back in 2019 prior to the Covid-19 downturn, all of us would feel good and happy and the Federal Reserve would be content on allowing the good times to continue. However, today, with an extraordinarily good economy and virtually full employment, there is a really bad attitude among American populists. I suspect more so than ever that this sentiment is leading to many of the strong negative feelings on Wall Street. Assuming that the Federal Reserve carries out its tasks and truly moves the economy from a 2.8% increase to a negative GDP, the net effect can only be that they will have to put 10 million people in America out of work. The only way we are going to get inflation under control is to reduce employment and reduce the profitability of businesses. Is it fair for the government to say to these families that they will no longer get a wage or health insurance or be able to meet their monthly bills? At the end of the day, which is worse, having some inflation or having 10 million people out of work in the U.S.?

My opinion is that we certainly want to reduce inflation going forward, but it is not as devastating to the economy as politicians seem to be making it. What would be devastating to me would be to force all these people out of work for no reason. Therefore, I join Dr. Siegel in saying that maybe it is time for the Federal Reserve to back off and slow down their increases until we have time to see how those increases will actually affect the economy.

Joe, Drew, Mia and Shelley enjoying the Braves’ one win of the series!

So, all the above was written under the full understanding that so far, the downturn in the stock market has been extraordinarily bad given the positive economic evidence. I cannot explain that downturn based on any reasonable market valuation. As previously mentioned, we have more people working in America than ever today. Do you think for a second that they will cut back on their iPhone usage? Do you think that going forward we will have less use of the internet and therefore affect Google’s earnings? If you own Microsoft, Microsoft is basically a monopoly around the world. Everything you touch has Microsoft’s name on it.

With more people working than ever and a 5% increase in salaries over the last year, do you really think fewer people will be using Microsoft? All of those assumptions are ridiculous. Could in fact the Ukrainian War get more out of hand and create harm to the American economy? Of course, that possibility exists. However, it looks like Ukraine is well along the way to shutting down the Russian military and negotiating a settlement to the war before the end of December 2022. The question is, are we going into a recession in 2023 due to the actions of the Federal Reserve?

I don’t believe that the Federal Reserve would ever purposely destroy the economy in an effort to reduce inflation. Remember, we are also in a political environment where the next Presidential election is only two years away. There is a high likelihood that Washington will turn over during the midterm elections, which I think would be a positive for the markets going forward. The markets seem to do best when the government does less.

Long-time client Sookie Mitchem looking trés chic!

So, my projection of the increase in stock prices depends on the actions of the Federal Reserve and the traders. If the Federal Reserve would announce some sort of cutback or slow down on interest rate increases, you would see remarkably increased stock prices. We now know from all economic evidence, there is no reasonable reason that the market has fallen 23.9% year-to-date. But I also know that all these numbers could turn on a dime if the Federal Reserve were to indicate a moderation. What we know from prior bear markets are that they can all literally change overnight without any warning. If you are not invested, you will not enjoy that increase.

We also know from prior experience that this is the buying opportunity of a lifetime for people not needing the money for 10 years or so. Stocks are trading at huge discounts and if you are a young investor not needing your money for 20 to 30 years, you should take this opportunity to up your investment for the future. For people near retirement, the biggest misconception is that they believe they will need all of their money on day one. As an example, if you retire at age 65 and you have a life expectancy of 25 years, why do you want 100% of your investment money to be conservative? If in 19 years you will only have two negative years, and if you keep a couple of years of cash reserves to pay distributions, the rest of the money should be invested. I am not sure when exactly the traders will change their minds.

Drew Malone and his brother, Brock, lending a hand at the Falcons game!

You may have recently noticed that the major brokerage houses were fined close to $1.8 billion for traders using their own personal phones during working hours. As you well know, the SEC closely scrutinizes phone calls and emails regarding investing. They have no authority over text messages. It came out that all the major brokerage houses were allowing their traders to text during working hours. I rather suspect that is just the first start of this coalition of traders trying to manipulate the market. They all move in one direction at a time. But that one direction can change immediately with communication. There will be a day shortly where those traders decide that it is time to buy and the move up will be significant and rapid. I do not know when that day is, but I do know that if you are not invested, you will not participate.

I fully recognize that this has been a difficult year and selling to cash would be the easiest thing that I could do. It would take 100% of the stress off of me and 100% of the stress off of you. The problem with that action is that as every financial book will tell you, you never try to time the market. If we go to cash, which is a simple action, to get reinvested is a difficult reaction. I would rather take the risk that we suffer some short-term losses in order to participate in long-term opportunities. I know it has been difficult, but you have to believe that the economics overrides the performance of the traders, and this year will eventually work out fine.

If you have an interest in coming down to visit with us, we look forward to seeing you. We are moving into a slower period for our Firm and will have the time to sit down and review your portfolio, taxes, or anything else you might be interested in.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.

The market continues to trend down While the economy trends up… “It’s a conundrum.” With apologies to Dr. Alan Greenspan

2022-09-09T16:47:00.000-04:00

From the Desk of Joe Rollins

I know it is very frustrating for you as an investor to sit back and watch the market trend down week after week and get nothing but more bad news from the financial press. This is not my first “rodeo” as I have been through many of these downturns in the past. You really have to separate an investing period created by a bad economy from one created by overzealous traders and hedge funds. Today we have that exact situation where investors are losing money and oftentimes making bad investment decisions just because the market is acting in a manner that does not reflect its economic underpinnings. I will try to explain all of this throughout the post.

I also want to look into what is happening in the international markets with China taking a hard line on Covid-19 and the serious problems affecting Europe and their energy crisis. Finally, I want to express my opinion on the phrase you read everywhere in the financial press nowadays, which is “demand for goods and services is slowing throughout the economy.” Hopefully, I can explain that phrase better.

Long-time family client, Anand Nallathambi and his beautiful bride Sara Kate Somers – congratulations!

After a very excellent month of July which was up 9.2%, once again all the indexes were down during the month of August. It has been a whiplash one-up, one-down month for almost a year. However, we must accept the volatility in order to be positioned in a way to benefit when the upturn occurs.

For the month of August, the Standard and Poor’s 500 Index was down 4.1%. For the year, it is down 16.1%, but on a brighter note, over the ten years, this index has averaged a gain of 13.1% per year. During the month of August, the NASDAQ Composite Index was down 4.5% and continues to be down 24.1% for the year 2022. The 10-year average on this index is positive 15.7% per year. The Dow Jones Industrial Average was down 3.7% during the month of August and is down 12% for the year 2022. The 10-year average on this index is positive 11.8% annually.

If you thought you would be more conservative and invest in bonds, you certainly got hurt during August. For the month of August, the Bloomberg Aggregate Bond Index was down 2.8% and is now down 10.7% for the 2022 year. As a comparison to all the indexes above, which have had double-digit gains over the years, the bond index only has a positive return of 1.3% for the 10-year average.

Over 30-year client Jennie Woodlee with her adorable new housemate

I often get calls or emails from clients after a huge drop in the market. I thought I would give you an illustration of why this occurs and why you should ignore it for most investing purposes. On August 26, 2022, the Chairman of the Federal Reserve, Jerome Powell, was to give a speech at the Economic Conference in Montana. The market had just reported excellent labor news and there was a certain amount of euphoria when trading started. However, after Chairman Powell gave his 10-minute speech, where he reemphasized again that the Federal Reserve would have to work hard to keep inflation down, the market immediately turned negative and finished the day with the Dow down over 1,000 points.

Clients really do not seem to understand why these types of trading events occur since they are not in tune with the day-to-day volatility that comes with trading. I wonder how many investors were actually sitting in front of their computers at 10:00 a.m. on Friday, August 26th, to punch the sell button on their securities. As this clearly demonstrates, this selloff occurred because the traders took a negative position due to Chairman Powell’s comments about more interest rate increases.

Size matters – Cici showing Josie how it’s done. 2 pounds vs 80 pounds

Another way you can always spot this type of irrelevant trading is to look at the percentage downturn on each of the indexes. You will note that on a day like this, all the major market indexes were down almost the same percentage. What could have possibly been so wrong that major stocks such as Apple, Microsoft, Amazon, and Google were all down multiple percentages for the day? When you short the market indexes, you must short the good stocks along with the bad stocks. You are not picking a specific stock to short, but you are shorting the entire index in one trade. When you short an index that means you are placing a sell position on the index, whether you own the index or not, the brokerage house will allow you to bet that the index will go down rather than up.

Even though those stocks mentioned above have excellent records and continue to report record profits, they are trending down because they are also the largest component of each of the indexes. So, when you see an index selloff with such a sharp inter-day reversal, you can rest assured that it is not investors who are taking those losses, but traders and hedge funds.

Partner Eddie Wilcox enjoying time with wife Jennifer and daughters Harper + Lucy in Bellevue, Iowa

The same thing happened on September 2, 2022. The unemployment report came out, which was excellent and strong for the economy, and the market, as it should, rallied with the news. Around lunchtime, the Dow Jones was up close to 300 points and there seemed to be a strong buying effort on the part of investors. However, right after lunch, Russia announced that they would no longer provide natural gas to Germany, and they would shut down the pipeline until further notice. Immediately the markets turned around from up 300 points to down 300 points in a matter of minutes. Who exactly was sitting at their terminal watching the markets that day that could move the market more than 600 points in a relatively short amount of time? The traders of course.

Another reality that must be remembered during this time of year is that there are very few traders actually working during this vacation time of year. The volume on the markets have been low recently and it is much easier for a trader to manipulate the market when there is such low volume. Once again, the average investors look down at their portfolio that is losing percentages, meanwhile, this is all artificial trading to benefit traders and hedge funds to the detriment of the average investor.

All these swings in the market should not be construed to believe that the market is bad. The underlying strength of the market continues to be high employment and high corporate earnings. Neither of those appear to me to be winning over the hedge funds and traders. On Friday, September 2nd the Labor Department reported that 315,000 new employees were hired for the month of August. While certainly, this was an excellent number and a great many employees went back to work, it was less than the 526,000 jobs that were reported during the month of July. Maybe this is showing a sign of a decrease in employment, but I highly doubt it.

Aw, they grow up so fast… Ava Rollins at age 2 and age 11

The evidence is everywhere that businesses are seeking employees for all positions. There have been some reported high-profile situations where employers are laying off employees for various corporate reasons, but the Labor Department is reporting that these people who are losing their jobs are quickly finding new ones. Once again, during the month of August, we had an increase in employment in the U.S. and we continue to have twice as many job openings as we have unemployed people in America. If there is an unemployed person today with over 11 million job openings in the U.S., you may rest assured that they are not employed due to their own will. It should not be long before they will run out of money and seek employment.

People are also confused as to why the jobless rate rose to 3.7% in August from the 3.5% low in the previous month. These are statistical numbers that confuse people when they do not read all the details. Even though there was an increase in employment of 315,000, there was a marked increase in the number of people that are in the job market. Market participation is extraordinarily important. Since the pandemic, many people have elected not to work, and the participation rate has only been 60% of the workforce in a given month. This month we saw a rush of new employees back into the employment market, which is an extraordinarily good thing for future employers. With this increase in the number of people willing to work, the percentage of unemployment goes up since the number of people employed divided by the available number of employees creates this average. For all practical purposes, this employment report was a “goldilocks” report. It shows that the economy continues to expand with new employees, but not so hot that it needed immediate reaction by the Federal Reserve in the way of higher rates.

They sure do! Josh Rollins at age 3 (not “fore”) and age 27

Everyone seems to be unsure if inflation is continuing to go up or starting to fall off. A true indicator of the potential for rising inflation is the M2 Money Supply. The M2 Money Supply measures all of the financial assets of households such as savings accounts, time deposits, and balances in retail and money market funds. Basically, it represents the overall savings of American households. This money supply grew dramatically during the pandemic due to the excess government money given to each household. However, recently this index has stalled and has not been growing. With the money supply in excess of $21 trillion, which is still quite high but not growing, many believe this indicates that inflation is slowing. Many economists now believe that inflation has already peaked and is falling and by the first of the year, this so-called fear of inflation should be roughly in line with the Federal Reserve’s target rate of 2% in early 2023.

What is interesting to me is that all of these so-called inflation indicators have not properly forecasted inflation. At one time we were led to believe that gold was the ultimate representation and protection against inflation. However, for the year 2022, gold is down roughly 6.8% – so no help there from gold.

During the peak of the selloffs in 2022, I received many calls from clients that wanted to buy inflation-protected bonds. At that time, the bonds were paying a rate equal to the inflation rate and many thought that this rate was only going to go up. However, if you look at the inflation-protected index represented by Fidelity Investments, you will note that it is down 7.6% for the year and is actually down 6.1% for the 12 months ending August 31, 2022. These very well-known indicators of inflation have not supported the case of higher costs into the future. All of this I believe to be very encouraging information for stock investors. If in fact we have a shift in inflation over the next two or three months, maybe this long grueling selloff will finally turn around.

CPA Erik Kramschuster with wife Carly – cheers!

I rarely get into the details of economic forecasting, but sometimes it’s necessary to make sense of what is going on. One of the most quoted and most important indexes for analyzing the U.S. economy is GDP. Basically, GDP defines the gross sales in an economy. However, there is another important aspect to be considered. For every dollar an individual spends to buy some goods or service (a restaurant meal, a car, a doctor’s visit, or another individual dollar of income for someone to deliver the goods and services), GDP captures the spending size of these transactions. Gross Domestic Income is the other side of the transaction where some earn an income when one spends a dollar. It is the payment for goods and services.

In theory, Gross Domestic Income should equal Gross Domestic Product. That is just common sense. If someone is spending a dollar, someone should be earning a dollar. However, in recent months there has been a wide divergence between Gross Domestic Product and Gross Domestic Income. During the first half of the year, GDP contracted at a 1.1% annual rate that was adjusted for inflation. At the same time, GDI, made up of a measure of corporate profits, wages and benefits, self-employment income, and interest in rent, expanded at a 1.6% annual rate. Maybe, as I have emphasized repeatedly, the economy may not be contracting as much as you are led to believe in the financial press. The traders and hedge funds want you to believe that everything is bad for their benefit.

Alexis Chambers with boyfriend Evan Bentley - Let’s go Braves!

This month we were advised that the GDP had been changed from the second quarter reporting at 0.9% negative to 0.6% negative. So, it could be said that the average in these two quarters was only marginally negative. As I reported in the previous posting, a large amount of this was due to the undercounting of inventory, which clearly had a major effect on GDP in the first quarter of 2022. Now we get the news that the Federal Reserve of Atlanta has posted its projection for the third quarter of GDP at 1.4% (September 7, 2022). If the Atlanta Federal Reserve is correct, they are expecting a major turnaround in GDP in the third quarter from basically a breakeven level in the second quarter to a hearty increase of 1.4% in the third quarter. If the Federal Reserve is forecasting such a large increase and their historic record for predicting these GDP levels has been excellent, why is the financial press so negative? You know for their benefit.

One of the major reasons why people misunderstand the Inflation Index is that they do not understand how it is calculated. Let us assume that on January 1st a product cost $2, but on January 1st of the following year, that product has gone up to $4. Easy arithmetic would allow you to calculate that the inflation rate is 100%. But let us just say for instance that on the following first day of the year that product continues to be priced at $4. In this case the inflation rate is zero given that year over year it has not increased. You as a consumer still feel this price is elevated, but from an economic standpoint it is the same.

DeNay Gonzales not only believes, she knows!

That is the situation that we are now coming into as we roll into the Fall. Much of the increase in inflation was realized at the end of 2021 where the M2 money supply grew dramatically due to government handouts. As we get into the Fall in 2022, we will be comparing inflation reports against each other that do not reflect such a large increase. Therefore, my prediction is that at the beginning of 2023 you should see dramatic declines in inflation, but much of that is due to comparisons with a period of time where inflation was out of control.

We all realize that a large portion of inflation is due to the higher gas prices. But even that is starting to wane. In the West, gas prices remain elevated, but in the South, gas prices have started to decline. In fact, gas prices have declined over the last three months, although only marginally. However, as prices declined, it is noticed by all consumers using energy. All facets of the U.S. economy are driven by gasoline prices. You have farmers using gasoline, and trucks delivering products to the grocery stores and therefore this price is built into the cost of food. As prices of gasoline decline do not expect the price of food to decline, but rather stay constant. The one thing that affects consumers is when they buy an item one day and come back a month later and the price is higher. If we had stable food prices then you would not have the high volatility associated with going up on a monthly basis. We are getting closer to that day.

Big smiles from Dr. Willie Cochran and his lovely wife Rebecca
Clients for over 15 years

I promised I would make reference to the energy shortage going on in Europe. It is a very interesting time for them since the German economy decided that they would stop all forms of energy production in their country and rely solely on the environmentally friendly natural gas. They made a plan to shut down and close all of their coal-generated electric plants. In addition, they phased out all of their nuclear energy producing plants in the county. Their solution to this issue was very simple. They would buy virtually all of their energy needs from Russia.

They entered an agreement with Russia to build an extraordinarily expensive gas pipeline so natural gas could be easily transferred from Russia, where it is in oversupply to Germany which has no supply. It is now believed that at the first of this year, Germany was buying over 80% of their fuel needs directly from Russia. What is interesting is that other countries in the European Union went in the other direction. Virtually all the energy in France is powered by nuclear plants. It was somewhat confusing to investors to watch Germany deactivate all their nuclear plants while France continued to build theirs throughout the countryside. The European Union is not a very tight union.

Power couple Dr. Seenu Gorjala and Dr. Pramoda Gorjala
Clients for 25 years

Now we have come to a time where Russia is using the natural gas as a political weapon against Germany. As of Friday, they announced that the pipeline would be shut for an indefinite time for maintenance. Germany is facing a huge burden in order to provide energy for their upcoming winter. How will a country like Germany get enough natural gas and other forms of energy to keep the country warm during the winter? Most importantly, many industries in Germany use natural gas to provide for their manufacturing facilities. Obviously, these companies will be phased back or deprived of any natural gas, hurting the GDP of Germany.

I vividly remember when then President Donald Trump told Chancellor Angela Merkel that she was endangering their country for relying on Russia for her country’s natural gas, and it seems that prediction has clearly come true. While other countries are trying to fill this void, it would be virtually impossible to provide the amount of natural gas that was being purchased from Russia. In the United States, natural gas is about $7.8 per thousand cubic feet, while natural gas in Germany and Europe is roughly 10 times that amount. The U.S. cannot help this time.

Partner Robby Schultz at Sea Island with a
“baby shark doo doo doo doo doo doo…”

The U.S. is quickly trying to increase its exportation of liquified natural gas. However, the U.S. just does not have enough facilities or capacity to export the amount needed in Germany. Almost assuredly the energy crisis in Europe will reduce the GDP of the countries involved and will almost assuredly create economic hardship for the people that live there.

China is undergoing some major changes that have certainly affected their economy. First, their shut down for COVID seems to be grossly overdone. It was recently announced that they would shut down a city in China with over 21 million residents. You would think based on the news release that this would constitute a severe outbreak of the Covid-19 virus. Come to find out that this shutdown was a result of only 700 known Covid-19 cases. What is interesting about China is that they never adopted the vaccines from the West and due to the massive shutdowns, there are not as many people in China, percentagewise, that have had Covid-19 as in the U.S. The odd thinking on this is that if you shut down a city of 21 million people, whatever virus is there is not likely to spread but the loss of productivity and GDP because of the shutdown would be economically devastating.

Glen and Anita Butler - Clients of 35 years – lookin’ good!

While the U.S. now continues to struggle through and put workers back to work due to the reduction in COVID cases, the Chinese have a zero COVID policy and are willing to shut down productivity and manufacturing in many of their cities. This leads to the conclusion that China is taking a step back from growth in its GDP. If they are willing to suffer a major shutdown in productivity due to such few cases, you must think that their GDP will be greatly reduced for several years to come.

Every day I am asked whether it is good time to invest. As a long-term investor, it really does not bother me what is happening on a day-to-day or week-to-week basis. The only reason I would be concerned is if the economy was falling off a cliff towards a major recession. The traders and hedge funds have a theory that the U.S. could not avoid recession at this point as the Federal Reserve increases interest rates. I think they might just be wrong. Take as an example, we have now more workers than ever in the U.S. earning salaries. Each of those salaries allows for them to go to the grocery store, buy a new car, pay a mortgage on a house, etc. But it is also true that we need to slow the economy.

Lauren Lukowicz, new to our Client Support Team, with Mac – say cheese!

During 2021, we allowed the economy to get out of hand and grow too fast without any direction. Now the economy has slowed in the first two quarters of 2022, but if the Atlanta Federal Reserve is right, it may begin to grow in the third quarter. Certainly, after reflecting on the corporate earnings for the second quarter, Corporate America is really doing very nicely. However, stocks have still been crushed. Right now, 20% of the companies within the S&P 500 have a P/E ratio of less than 10. Given that the historic percentage of price earnings is roughly 17, the fact that so many of them are selling for less than 10 reflects how cheap the market really is. What is even further interesting is that 5% of the S&P 500 have a price earnings ratio of less than 10 and a dividend rate in excess of treasuries. There are many stocks now that are selling at historic low levels without explanation.

For years we have talked about the shortage of computer chips to manufacture cars, computers, televisions, and everything else. Most chip manufacturers today have already sold out of next year’s supply of chips. In fact, I am reading that some major chip manufacturers are selling against 2024 inventories rather than even 2023 inventories. If that were the case, that a manufacturer can sell everything they can possibly make, why are chip stocks down 30%–40% so far in 2022?

People ask me all the time where I get my confidence that the market will come roaring back. First and most importantly, it has never not come back from a downturn. There is a 100% success rate in the market recovering all its losses.

Client Sheryl Matton celebrating her birthday with
daughter Caroline in Florida

What gives me the most confidence is that the best fund managers anywhere in the world are actually performing at a level below what the S&P 500 Index is performing. These are the very best stock pickers in the world and these guys make millions and millions of dollars a year managing stock funds. However, if you look at their portfolios, they are actually losing at a level greater than what the S&P 500 Index is losing. If you analyze their portfolios, you will notice that they are holding the same stocks that everyone on the financial news deems to be toxic. If we are aligned with the best stock pickers in the world, how could we not be in line with a rebound sooner rather than later?

Everywhere around you see economic prosperity. Just go to the airport and wait in line and see if you can get on a flight. I fly often and every seat in every airline is full. I even had to reflect on the future of U.S. citizens as I noted a line all the way down the terminal waiting to get into a Popeye’s Chicken. Americans have money and they want to spend it. With each new employment report, we put more people to work which will generate GDP for the economy. While it is true that higher interest rates will slow various segments of the economy, those segments needed to slow down anyway. Certainly, housing needs to slow down so that we can bring the supply chain back in line with the demand.

I am so amused when I talk to prospective homebuyers, and they quote a 5% rate for a current mortgage. A 5% rate when I was buying my first house would be considered a bargain. The 2% rate that we had for a while was unheard of ever in the history of American finance. What I predict will still happen is that people wanting homes will buy them anyway.

Clients Patty & Jim Radney - A day without laughter is a day wasted!

It is clear the economy has slowed down from 2021, but that is a good thing. It looks to me that the Federal Reserve is taking all the right actions. They are slowing the economy, but they are not dumping it into recession. The unfortunate part of killing inflation is that a large portion of inflation is wages. The only way to dramatically reduce wages is unemployment. I do not think that there is a chance in this world that this government or the Federal Reserve would enjoy seeing fewer people working just to reduce inflation. Therefore, it is my projection that we will see tamer inflation going forward and we will see higher interest rates by the Federal Reserve, but not raises so much as to damage employment. As I have said often in these postings, I still believe we will make money in 2022 and all the volatility and wild moves by the traders and hedge fund managers will be only a bad memory come early 2023.

Almost every day you hear on the financial news that the demand for goods and services is slowing down, but that is actually a good thing because it will slow down the economy. The economy needs to slow down before inflation can be under control. I think this may be one of those phrases that The President uses all the time that lack support. I believe in his mind that if he says it often enough and stern enough people will start to believe that it is the truth. We all know we cannot build enough cars quickly enough and we do not have the microchips to assemble the cars with chip manufacturing backed up for at least two years. The demand for employees creates the problem that the companies cannot produce enough since they do not have enough employees to deliver the services. The problem is not demand; the problem is supply. If we had the capacity to supply the economy with all of the goods and services that it wants, there would not be an excess demand issue. There, of course, would not have been an excess demand issue if consumers did not have excess money. If we were in recession the consumers would not have excess money.

If you have an interest in coming down to visit with us, we look forward to seeing you. We are moving into a slower period for our Firm and will have the time to sit down and review your portfolio, taxes or anything else you might be interested in.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.