Bob’s Journal for 2/11/21

Some Notable Events That Grabbed My Attention This Week

We had another successful teleconference with our subscribers yesterday afternoon.

Many questions were submitted in advance via email, and there was a long queue of callers with questions during the event. We could deal with only a fraction of the questions during the call, so I’m answering others in this week’s Bob’s Journal and probably will address additional questions next week and the week after.

What’s the outlook for inflation, the dollar and inflation hedges?

I have been saying for a couple of years now that the Federal Reserve is more concerned with avoiding deflation than inflation. The Fed has made that crystal clear since the early days of the pandemic and has emphasized it recently. The Fed and other global central banks won’t start tightening the money supply until after inflation has been above 2% for a sustained period.

The Fed is going to coordinate its monetary policy with fiscal policy. Essentially, the Fed is going to buy all the debt the federal government wants to issue until inflation is a problem. This is a repeat of the policy that was in effect during World War II, and it led to inflation in the 1950s. I explained this in detail in past issues of Retirement Watch and in my Spotlight Series presentations of April, May and June of 2020.

The dollar already declined in value significantly during 2020 and early 2021. I expect a steady depreciation of the dollar against gold and many currencies. The dollar won’t decline against all currencies, because expansive monetary policies are being pursued by some other central banks. But the Fed’s policy will cause the dollar to weaken against gold and other hard assets.

This is why we want some inflation hedges in our portfolios. I have been recommending gold through iShares Gold Trust (IAU) and Treasury Inflation-Protected Securities (TIPS) through the SPDR Portfolio TIPS (SPIP) exchange-traded fund (ETF).

I think carefully selected real estate investments through real estate investment trusts (REITs) also will be good inflation hedges. But because the pandemic and its long-term effects are likely to reduce the demand for some types of commercial real estate, the REITs must be selected carefully. I recommend investing through Cohen & Steers Realty Shares (CSRSX).

What should I do with traditional IRAs and 401(k)s?

Congress has made it clear that it wants to increase or accelerate taxes on the trillions of dollars that have accumulated in traditional IRAs and 401(k)s. One of the first actions along that line was the elimination of the Stretch IRA in the SECURE Act in 2019.

In the coming years, other changes are likely to be made. Among the likely changes are initiating required minimum distributions from non-inherited Roth IRAs, including Roth distributions in modified adjusted gross income for computing Stealth Taxes (such as the Medicare premium surtax), capping the amount that can be accumulated in IRAs and 401(k)s and limiting the benefits of deductions for contributions to the accounts.

Income tax rate increases are another way to increase taxes on retirement distributions. You contribute money at today’s low tax rates and pay taxes at higher rates in the future when distributions are taken.

I’ve presented a series of strategies that can avoid or reduce the damage from these and other attacks on retirement accounts.

For example, you could simply empty an IRA early. Pay the taxes at today’s rates instead of higher rates in the future.

Or you could convert part of your traditional IRA or 401(k) to a Roth IRA. Again, you pay taxes at today’s rates and take tax free or mostly tax-free distributions in the future of the investment returns generated over the years.

You also can consider restructuring your IRA money. One strategy is to take a distribution from the IRA and use the after-tax amount to fund a charitable remainder trust. Other strategies involve using the after-tax IRA distributions to pay for life insurance.

All these strategies are discussed in detail in the April and May 2020 issues of Retirement Watch and also are in the book, “The New American Retirement Plan,” that is on the members’ website for all subscribers under the “Special Reports” tab.

Where Should I Invest Now?

A number of listeners were concerned about the investment markets and uncertain about where to put their money.

Longtime readers know I always recommend that you have balance and diversification in your portfolio. You also should have a margin of safety in your investments.

No matter how smart and well-informed an investor is, no one successfully predicts the markets. In the decades I have served as Chairman of the Board of Trustees of the Fairfax County Employees’ Retirement System, I’ve reviewed the records of the best institutional investors in the world. Most of them track each trade their firms make and record whether or not it made money. They develop what’s called their batting average.

Even the investors with the best long-term records make profits on only about 60% to 66% percent of their trades. And they go through extended periods when they make profitable trades less than 50% of the time.

That’s why you want diversification and balance. When you’re concerned that your retirement goals won’t be met if there’s another extended bear market in stocks, that’s a strong sign that too much of your portfolio is in stocks. Or maybe it isn’t diversified among enough sectors of the markets or among the global markets.

Take a look at my recommended portfolios and decide which best meets your goals and risk tolerance.

Many subscribers follow more than one of my recommended portfolios. They might put about half their nest egg in my True Diversification portfolio and another 40% in either the Sector, Balanced, Income Growth, or Retirement Paycheck portfolios. Some also have some “mad money” with which they like to be aggressive. This could be in my Invest with the Winners portfolio.

When you’re balanced and diversified and have a margin of safety in your investments, you spend a lot less time fretting about the markets, listening to television’s talking heads and following the daily swings.

The Data

New unemployment claims declined by 19,000 in the latest week to a total of 793,000 claims. But that was lower than the consensus of economists’ forecasts by about 33,000.

Continuing claims declined by 145,000 to 4.54 million.

The total Americans receiving some kind of unemployment compensation increased by about 2.7 million to 20.44 million. The increase was from a surge in people filing for claims under the special pandemic assistance programs.

The Consumer Price Index (CPI) continues its slow increase. The CPI rose 0.3% in January and 1.4% over 12 months. Excluding food and energy, the CPI was unchanged in January and increased 1.4% over 12 months. That indicates most of the January increase was due to advancing gasoline prices.

Last Friday’s Employment Situation reports had mixed results.

The number of jobs increased but much less than expected. There were 49,000 new jobs. Economists were forecasting about 105,000 new jobs. Yet, the unemployment rate fell sharply to 6.3% from 6.7%.

A sign of weakness is that average hourly earnings increased only 0.2% for the month, which was less than expectations. Yet, the average workweek rose to 35 hours, its highest level in years.

Overall, it appears that those who are working are doing well. Many are seeing pay increases and their jobs seem secure. But the growth of new jobs is slowing. It appears the labor market bounce back from the lows of the recession has stalled. Job growth is likely to be very slow until vaccines against COVID-19 are widely administered.

The JOLTS (Job Openings and Labor Turnover Survey) report is more detailed than the Employment Situation reports but is a month behind. The JOLTS report for December showed very little change in the labor market during the month. There were only small changes in hiring, separations and the number of employees quitting.

The Small Business Optimism Index from NFIB decreased only a little in January to 95.0 from 95.9 in December. But economists were expecting an increase after a sharp six-point decline in December, and the January level is the lowest in eight months. The average since 1973 is 98.

Looking deeper into the survey, the National Federation of Independent Business (NFIB) indicates that manufacturing and construction businesses are doing very well. They can’t hire enough employees to handle all the work they have. But other types of businesses, especially restaurants and retailers, are struggling and remain very uncertain about the future.

Consumers put away their credit cards in December. In the Consumer Credit report revolving, or credit card, debt declined 3.6%. Nonrevolving credit, which is mostly student loans and auto loans, increased 4.8% for the month. In all of 2020, revolving credit decreased 11.2% and nonrevolving credit increased 3.9%.

The Markets

The S&P 500 rose 2.16% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 2.36%. The Russell 2000 increased 5.89%. The All-Country World Index (excluding U.S. stocks) added 2.02%. Emerging market equities jumped 2.51%.

Long-term treasuries rose 0.07% for the week. Investment-grade bonds increased 0.42%. Treasury Inflation-Protected Securities (TIPS) added 0.14%. High-yield bonds gained 0.45%.

In the currency arena, the U.S. dollar fell 0.73%.

Energy-based commodities increased 2.85%. Broader-based commodities rose 2.64%, while gold gained 0.63%.

Bob’s News & Updates

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