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Bob’s Journal for 5/13/21

Published on: May 13 2021

Some Notable Events That Grabbed My Attention This Week

The MoneyShow is back in person in Orlando, and I’ll be there.

The Orlando MoneyShow will be at Championsgate Resort, June 10-12. Aside from me, speakers will include Larry Kudlow, Mark Skousen, Hilary Kramer, Jon Najarian, Jeffrey Saut, Jeff Hirsch and Louis Navellier. Click here to register or call 1-800-970-4355 and mention priority code 052691 to attend free.

Is the Dollar Past Its Peak?

The U.S. dollar has been the world’s reserve currency for many decades. But like the other reserve currencies before it, the dollar’s reign is likely to end at some point.

The reserve currency is the one used in most international transactions. It is the currency that is used to price many goods and services. Many governments and central banks also stockpile the reserve currency to shore up their own currencies and economies when needed.

Well-known investor Stanley Druckenmiller said on CNBC this week that the Federal Reserve’s current easy-money policies are endangering the long-term value of the dollar and could cause it to lose its status as the world’s reserve currency within 15 years. Others have made the same argument.

The International Monetary Fund recently reported that, as of the end of 2020, the dollar’s share of global reserves declined to its lowest level since 1995. The dollar was only 59% of global reserves. The dollar’s share of reserves declined by 1.5 percentage points in the last quarter of 2020.

Russia recently announced that it would reduce the holdings of the U.S. dollar in its reserves. China has been aggressively promoting its currency as the future reserve currency.

There are advantages to being a reserve currency. The United States can run budget deficits and sell a lot of treasury debt, because other countries want or need to own dollars and dollar-based bonds.

People and businesses also own a reserve currency because it is used in international business. People demand it as payment for goods and services.

The advantages of being the reserve currency spurred the development of modern monetary theory. Simplified, the theory is the U.S. government doesn’t have to worry about federal budget deficits or debt, because there always will be a demand for dollars due to its status as the reserve currency.

Other countries must worry about their fiscal condition, because their currencies will plummet in value if they don’t. But that doesn’t happen to a reserve currency.

The problem is a currency is a reserve currency only if people have confidence in it and are willing to accept it as the reserve currency. When there is too much of that currency floating around the world, people can lose confidence in its stability. Then, they seek another currency to use.

I have been expecting the U.S. dollar’s value and purchasing power to decline for the last couple of years. That is why I have been recommending gold, commodities, real estate investment trusts and Treasury Inflation-Protected Securities (TIPS).

But I do not think the end of the dollar’s reign as the reserve currency is imminent. It takes a long period of bad policies for a reserve currency to lose its status.

The dollar’s share of reserves in the last quarter of 2020 was due solely to a decline in the dollar’s value relative to other currencies that quarter. It wasn’t the result of governments and central banks reducing dollar holdings. The currency’s value fluctuates regularly without affecting its reserve status.

In fact, a decline in the dollar’s value is likely to cause some central banks and governments to buy more dollars at the lower price to add to their reserves.

Also, the U.S. economy still is the world’s most dominant, and that increases demand for dollars. While the dollar’s value is likely to decline against hard assets and many currencies for a while, that doesn’t mean it is rapidly losing reserve status.

But as China remains aggressive and changes its policies to make its currency and markets more appealing to global investors, it could become the world’s reserve currency in the future or share that status with the dollar.

But in the latest International Monetary Fund (IMF) report, it is the euro and the Japanese yen that increased their share of the world’s reserves. I don’t think anyone anticipates either of those currencies succeeding the dollar as the world’s reserve.

SECURE Act 2.0 Moves Forward in Congress

Last Wednesday, the House Ways and Means Committee approved by voice vote the Securing a Strong Retirement Act of 2021 (SECURE Act 2.0).

Passage by a voice vote means there was little or no disagreement in the committee about the bill. Next, the full House of Representatives will vote on the bill. A date has not been scheduled. Then, the Senate will take up the bill.

The bill would increase the beginning age for required minimum distributions (RMDs) to 75 in stages. It would be 73 on January 1, 2022, 74 on January 1, 2029, and 75 on January 1, 2032.

Individuals who have less than $100,000 in IRAs would be exempt from RMDs. Employers would be required to automatically enroll employees in 401(k) and 403(b) plans. Employees may opt out of coverage.

The initial contribution rate for automatically enrolled employees would have to be at least 3% and no more than 10%. If the initial contribution rate is less than 10%, it must automatically increase by one percentage point each year until it reaches 10%.

The catch-up contribution amount for IRAs would be indexed for inflation beginning in 2023.

Also, the catch-up contribution limit for employer retirement plans would be increased for employees at ages 62, 63 and 64 and would be indexed for inflation. Another provision would allow an employer to make matching contributions under a 401(k) or similar plan based on an employee’s student loan payments, even if the worker isn’t able to make 401(k) contributions.

Small businesses would be encouraged to start retirement plans by an increase in the tax credit allowed for the costs of launching a retirement plan. The employers would be able to take a credit equal to 100% of the plan’s start-up costs, and higher credits would be available for setting up 401(k) plans.

These provisions are in addition to those I reviewed in last week’s Bob’s Journal. There are dozens of provisions in the law. For those interested, the bill number is H.R. 2954.

The SPACs Fad is Fading

Special Purpose Acquisition Companies (SPACs) were all the rage for a few months this year.

A SPAC basically is a blind investment fund in which the managers have full discretion to do whatever they want with the money in the fund and investors have little or no idea how the fund might be invested.

Usually, the managers set a goal of buying one or two companies, and sometimes they identify one or more sectors in which they will seek companies. A SPAC often is a way to take a company public quickly and inexpensively.

The SPAC is set up as a publicly traded company. When it buys a company, the SPAC absorbs it, and the company is publicly traded as the only asset of the SPAC.

SPACs can be a way to acquire an interest in a hot, young company, though you will not know which company your SPAC acquires until after you invest, perhaps weeks or months later.

A large number of SPACs were initiated in 2021 and made headlines by acquiring companies. Some of the SPACs also generated high returns in a short period.

But the SPAC surge appears to be ending. Fewer SPACs are going public and returns for SPACs are fading.

Take a look at the returns in two exchange-traded funds (ETFs) that buy a number of SPACS.

The Defiance Next Gen SPAC Derived (SPAK) ETF is down 7.34% in the last week, 12.09% in the last four weeks, 30.90% in the last three months and 17.99% for the year to date. The inception date of the fund is September 30, 2020, and its return since inception is negative 6.87%.

The Morgan Creek Exos SPAC Originated (SPXZ) ETF began trading on January 25, 2021. In the last week, the fund is down 8.20%. It also is down 13.68% over three months and 32.10% for the year to date. Since inception, it is down 27.04%.

SPAK recently owned 238 securities while SPXZ owned 92 securities.

The history of SPACs is that founders and initial investors who get in before shares are issued to the public can make a lot of money. But public investors aren’t doing well and are unlikely to do well.

The Data

The Consumer Price Index (CPI) increased 0.8% in April and 4.2% over 12 months. That’s the highest 12-month increase since the summer of 2008.

Excluding food and energy, the CPI increased 0.9% in April and 3.0% over 12 months.

Used car prices rose 10% in April from their March level, their highest monthly increase on record and accounted for about one-third of April’s total CPI increase.

Fed officials continue to state that the increase in the CPI is caused by temporary factors that will recede as the year goes on.

A record of 8.1 million job openings existed at the end of March, according to the JOLTS (Job Opening and Labor Turnover Survey) report. The previous record was in November 2018.

The number of available jobs increased by 600,000 for the month. Openings increased by 5.3% in March. This was a record monthly increase for the JOLTS report, which dates back to 2000.

Confidence among small business owners continues to creep higher.

The Small Business Optimism Index in April was 99.8, up from 98.2 in March.

A record 44% of owners reported they had job openings that can’t be filled. Finding qualified workers is the biggest challenge reported by owners and is restraining growth despite increases in sales.

Consumer credit use in March increased sharply for the second consecutive month. Total credit rose at an annual rate of 7.4%, following a 7.5% annualized increase in February.

Revolving credit, which is primarily credit card use, increased at an annualized 7.9% in March, which follows an annualized 10.4% increase in February.

New unemployment claims declined below 500,000 for the first time since the pandemic began. Claims in the latest week were 498,000, compared to 590,000 the previous week. But the previous week’s new claims were revised higher from the 553,000 new claims initially reported.

Continuing claims increased by 37,000 to just under 3.7 million.

The total number of people receiving some form of unemployment benefits declined by 404,509 to 16.16 million. The recent decline in new unemployment claims wasn’t matched by a surge in employment.

Last Friday’s Employment Situation reports said payrolls increased in April by only 266,000. Most economists were anticipating payrolls would increase by at least one million.

In addition, the unemployment rate increased to 6.1%. Plus, the 916,000 new jobs that initially were reported for March were revised down to 770,000.

Manufacturing payrolls declined by 18,000 despite reports of robust growth in manufacturing.

Average hourly earnings increased by 0.7% in April, bringing the 12-month increase to only 0.3%.

Productivity in the fourth quarter increased by 5.4%, which was above expectations of a 4.5% jump. That helped unit labor costs decline by 0.3%, but economists were expecting a 1% decline in unit labor costs.

The Markets

The S&P 500 lost 0.34% for the week ended with Tuesday’s close. The Dow Jones Industrial Average rose 0.42%. The Russell 2000 declined 1.94%, while the All-Country World Index (excluding U.S. stocks) added 1.17%. Emerging market equities are 0.36% higher.

Long-term treasuries lost 1.74% for the week. Investment-grade bonds declined 0.56%. Treasury Inflation-Protected Securities (TIPS) added 0.32%. High-yield bonds fell 0.10%.

On the currency front, the U.S. dollar declined 1.34%.

Energy-based commodities increased 1.43%. Broader-based commodities rose 3.08% and gold gained 3.42%.

Bob’s News & Updates

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Seriesclick here.

A recent five-star review of my book on amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

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