InSight

Market InSights:

Rudolph with Your Nose So Bright

Investing 2021

If you don’t recall the most famous reindeer of all, Rudolph, the Montgomery Ward creation possesses the special characteristic to guide Santa’s sleigh among a fog that would have otherwise canceled Christmas. Like Rudolph’s nose, I’m going to highlight a couple of macroeconomics bright spots that we like right now, that will surely support markets and guide us through the fog of 2021. Enjoy the holiday season and may you have a prosperous new year. 

Unemployment – I think it’s fair to say that the spike in unemployment (fastest spike ever) and the subsequent drop in unemployment (fastest drop ever) have given politicians the hyperbole they need, but the rate getting back to 6.7% means a couple of good things going forward. Firstly, the “easy to lose” and “easy to return” jobs were flushed out in the spike, and the jobs that could easily return have. This means that while each percentage point from here on out is going to be harder and harder, the headline risk of massive jobless swings has likely settled for now. Unemployment in the +6’s has been the recent peaks for prior negative economic swings. In 2003, we peaked at 6.3%, 1992 7.7% even the economic crisis in 2009 only saw a peak of 9.9%. So at least the unemployment figures have gotten back to “normal bad” and not “historically bad”. But here is the good news for 2021, from this point forward we will get positive headlines for employment. I think we have crested, the liquidity in the markets has helped, and near term the unemployment outlook is stable. This pandemic is different than a cyclical recession, this can be resolved as quickly as the damage was done, and for between 4-8 quarters we can see a routine and constructive print for joblessness. This will be a supportive series of headlines for markets. 

Inflation – Inflation will be a headwind for bonds and cash but will be constructive for some assets. Those invested in equities will see an increase in capital chasing the same number of assets. This inflation will be constructive for stocks and other hard assets from 2021 but will cut into the expectations for the buying power of dollars going forward. Expect long term dollar weakness. Additionally, we’re not alone, this pandemic is global and I anticipate every central bank to prefer adding liquidity to their economies over the risk of inflation. Expect countries that emerge from the pandemic quickly to see a major tailwind from global inflation, those whose course is slower and shutdowns longer to be hampered by it.  

Debt – Record low borrowing costs should tee up leveraged companies for success. This is absolutely a situation where “zombie” companies will be created, so investors should be aware of the health of companies they are buying, but long term, allowing companies that have been historically highly leveraged to restructure at amazing rates, or even granting companies that have healthy balance sheets more cheap capital to take on more cap-ex projects for the at least a decade or more will be supportive for the market on the whole. As I write this, the 2-10 spread is .8%, in my opinion giving corporate CFO’s carte blanche to begin issuing new debt and extending all maturities on existing debt. Seeing these companies become so tenacious in the debt market normally would spook investors, but it’s hard to imagine a more supportive environment for borrowers than sub-2% borrowing costs for AAA companies and sub-4% for high yield borrowers. Debt was low for the recovery after 2009 and is now bargain-basement prices. These are rates that are likely to persist through 2021 and with Janet Yellen (Dovish) at the treasury, and no change in the attitude of the Fed I’m not seeing a change in sight. This will likely mean yields will be below inflation for some time as central banks try to juice the recovery at the expense of inflation. 

Earnings – Companies have broadly been able to understate their earnings projections through the pandemic. The science of slow-rolling their debts, and lowering the expectations of analysts has been fantastic. Companies across sectors have been able to step over the lowered bar without major disruption this year. Now while, for the most part, the pandemic has given them top cover to have earnings below their historic figures, the companies in the S&P 500 have done a fantastic job this year of collectively using this window to reset the expectations of investors without sounding alarms. Managing expectations lower, then beating them has been a theme in 2020, that in 2021 will look like a great trajectory for earnings as we emerge from COVID-19. This is going to be a fantastic and virtuous atmosphere of rising earnings. The usual suspects for this earning improvement cycle will show up, banks, technology, and consumer discretionary investors will like this reset in the cycle and the aforementioned upswing in earnings these groups are poised for.

More related articles:

Articles
Carly Powers

Student Loan Borrowing Caps: Before vs. After the One Big Beautiful Bill

The One Big Beautiful Bill Act (OBBB), signed in 2025 and effective for most new loans on July 1, 2026, represents the most significant overhaul of federal student lending in decades. While undergraduate borrowing limits remain unchanged, graduate and parental loans will face far stricter caps, reshaping how families and students finance higher education. Borrowing Caps Before OBBB Under the pre-OBBB system, federal borrowing limits varied by loan type and educational level: Undergraduate students could take out Direct Subsidized and Unsubsidized loans with annual limits ranging from $5,500 to $12,500, depending on class year and dependency status. Lifetime caps were $31,000 for dependent students and $57,500 for independent students. These loans were the foundation of federal aid for most undergraduates. Graduate students faced an annual limit of $20,500 in Direct Unsubsidized loans, but could supplement this with Graduate PLUS loans up to the school’s cost of attendance (COA) minus other aid. In practice, this meant graduate and professional borrowers could finance nearly the full price of attendance, including living expenses, with no fixed annual or lifetime cap. Parent PLUS loans, used by parents of dependent undergraduates, offered similarly generous terms. Parents could borrow up to the student’s COA minus other aid each year, again with no annual or lifetime cap. This flexibility allowed many families to fill large funding gaps but also contributed to rising parental debt burdens. Lifetime borrowing limits across undergraduate and graduate loans typically reached $138,500 for many students, with certain medical or professional programs allowing even higher totals, sometimes exceeding $224,000. This framework gave graduate students and parents substantial flexibility, but it also enabled very high federal debt levels, which OBBB seeks to curb. Borrowing Caps After OBBB (New Loans Starting July 1, 2026) OBBB keeps undergraduate loan limits unchanged, preserving the existing annual and aggregate maximums for Subsidized and Unsubsidized loans. However, it sharply reduces graduate and parental borrowing power: Parent PLUS loans will be capped at $20,000 per academic year per student, with a $65,000 lifetime maximum. Parents will no longer be able to borrow up to the full COA. Graduate PLUS loans will be eliminated for new borrowers. Graduate students will rely solely on Direct Unsubsidized loans, which retain the $20,500 annual limit but now carry a $100,000 lifetime cap. Professional degree programs—including law, medicine, and other high-cost fields—receive a separate ceiling of $50,000 per year and $200,000 lifetime. A new $257,500 universal lifetime cap applies across all federal student loans (excluding Parent PLUS). This replaces the previous system of program-specific aggregate limits. Borrowers with existing Grad PLUS or Parent PLUS loans are grandfathered: they may continue borrowing under old rules for up to three academic years or until their current program ends, whichever comes first. Implications for Students and Families The OBBB Act preserves access for undergraduates but tightens graduate and parental borrowing dramatically. Parents will no longer be able to cover unlimited gaps between aid and the COA, and graduate students will lose the ability to finance the full cost of high-priced programs with federal loans. Medical and law students, who often relied on Grad PLUS to pay tuition and living expenses, may face funding gaps that require scholarships, institutional aid, or private loans. While these changes aim to limit runaway federal lending and encourage cost control, they also shift more responsibility onto families and institutions to bridge the gap between tuition and available federal aid. Additional Resources U.S. Department of Education. “Subsidized and Unsubsidized Loans.” Studentaid.gov The Institute for College Access & Success. “Federal Student Loan Amounts and Terms.” TICAS.org National Association of Independent Colleges and Universities (NAICU). “Frequently Asked Questions about the One Big Beautiful Bill Act.” NAICU University of California Law San Francisco. “Important Federal Student Loan Changes Effective July 1, 2026.” UCLA Law

Read More »
Boulder Financial Planners and Real Estate Experts
Articles
Kevin Taylor

How to “use” Depreciation and why it’s in your K-1?

How to “use” Depreciation: Basic Definition: Depreciation is a method used to allocate the cost of a tangible asset (like a building, machine, or vehicle) over its useful life. Since assets wear out or become obsolete over time, they lose value. Depreciation is a way to recognize this decrease in value on financial statements and for tax purposes. Simple Analogy: Imagine you buy a car for $20,000, and you expect it to last for 10 years. Each year, the car loses a bit of its value. So, instead of deducting the entire $20,000 from your income in the year you buy the car, you deduct a portion of it each year over the 10 years. This annual deduction is the depreciation expense. Depreciation in your K-1: What’s a K-1?: Schedule K-1 is a tax form used in the U.S. for partnerships, S corporations, and certain trusts. It represents an individual’s share of income, deductions, credits, etc., from these entities. If you invest in one of these entities, you receive a K-1 detailing your portion of the income or loss. Why Depreciation is Relevant: When a partnership (or similar entity) owns tangible assets like real estate or equipment, those assets get depreciated. This depreciation provides a tax deduction for the entity, thereby reducing its taxable income. If you’re an investor in that entity, your share of that depreciation appears on your K-1. On your personal tax return, this can offset other income, potentially reducing the amount of tax you owe. In simpler terms, depreciation on a K-1 represents your piece of a tax benefit stemming from the tangible assets the business entity owns and uses. This benefit can reduce your taxable income, which could potentially lower the amount of taxes you need to pay.   These are Typical Sources of Depreciation in the expenses of an investment: Furnishing and Fixtures Definition: These are movable furniture, fittings, or other equipment that are used in a business or home but are not integral to the building. Depreciation: Typically, these are depreciated over a 5 to 7-year period using the Modified Accelerated Cost Recovery System (MACRS) for U.S. tax purposes. Laundry Equipment: Definition: Equipment specifically designed for cleaning fabrics, such as washing machines, dryers, and ironing machines. Depreciation: Often depreciated over a 5 to 7-year life using MACRS. Computers: Definition: Electronic devices used to process data and perform tasks. Depreciation: Typically, computers are depreciated over a 5-year period using MACRS. Automobiles: Definition: Vehicles primarily designed for on-road use. Depreciation: Generally depreciated over a 5-year period using MACRS, but there are specific rules and limits, especially for passenger vehicles. Personal Property: Definition: This can refer to items that aren’t permanently attached to or part of the real estate. It could include machinery, tools, or other movable properties. Depreciation**: The period varies but often falls in the 3 to 7-year range, depending on the specific type of property and its use. Capital Improvements: Definition: Upgrades made to enhance the value of a property or extend its lifespan. This might include things like a new roof or an added wing to a building. Depreciation: The depreciation schedule depends on the nature of the improvement and what it’s related to. For example, if it’s an improvement to a building, it might be depreciated over 27.5 years (for residential property) or 39 years (for commercial property). Buildings: Definition: Structures like houses, office complexes, or warehouses. Depreciation: In the U.S., residential rental property is depreciated over 27.5 years, while commercial property is depreciated over 39 years using the straight-line method. Land Improvements: Definition: Enhancements to a piece of land, such as landscaping, driveways, walkways, fences, and parking lots. Depreciation: These are generally depreciated over a 15-year period using MACRS.    

Read More »
boulder financial planning experts with 1031 tax mitigation experience
Articles
Kevin Taylor

Adding a Real Estate Investment

Why Real Estate: Time travel – several of the projects and existing real estate ideas we have access to formed early last year. As a result, they have locked in lending rates in the mid to low 3%s. Well below the rates, we expect to see in the near future. This is a great opportunity to adjoin those projects at lending rates from a time that makes the project more lucrative than the same project financed today. This brief opportunity to piggyback on projects from last year is shrinking right now – but presents a good spot for investors looking to add real estate to do so under the financial conditions of 2021. Cash flow – the conditions for investments in the stock market for the last decade have been great for unlimited growth but are causing stocks to be priced at high P/E ratios. We think there could be a pretty impressive stylistic shift from the desire for growth, to the desire for current cash flow. Why Real Estate Right now: Inflation – it’s in every headline now, but we are of the mind that this inflation correction is decades overdue.  We are in the camp where some elements of inflation have been long suppressed and recent policy actions are allowing that inflation to flow through to the broader economy. Not just the result of the trade war with China, government spending during covid, supply chain constriction, and tax cuts, but the result of decades of accommodative policy for lending has caused inflation to start in equity (real estate markets and stock markets have been on a two-decade-long march higher with record low volatility). Underbuilding – despite the decades of low borrowing costs, the U.S. is still 7.5 million housing units underbuilt. The news this month from both Toll Brothers and Richmond will be slowing the pace of new home construction will only accelerate the widening of that gap. The rising borrowing costs will also remove several buys from the market and leave them paying rent for now. Volatility – We expect a tightening of monetary policy well into 2023/24 with maybe the first “Rate cut” coming in the back half of 2023. This means that markets could return to historically choppy conditions (things have been uncharacteristically smooth for stock markets from 2008 – 2020) as the result of monetary easing and bond buying from the Fed. This means that investors will be looking for the lower volatility that accompanies non-traded cash flow generating investments – this means rents. Why NOT Real Estate: Liquidity – The best real estate ideas we are looking at have major limitations in liquidity. Investors will receive monthly income from the investment, but the ability to exit the investment early is hard. Investors need to be comfortable with the income and liquidity for at least 5-7 years, and if the investment goes to 10 years this could also be a reality. The lack of liquidity keeps out less sophisticated investors, lowers the loss investors take from redemptions, and means that investments have better tax treatments. Taxes – The result of making money is taxed, always.  But getting money from real estate investments means paying income tax (the least favorable tax condition) and for many, this can mean that the total return of the investment is greatly limited. So the best investors in this asset are those who will see their effective tax rate decline in the years to come or are already planning to pay a lower income tax rate. Pre-retirees and retirees are a group that fits well in this space. Not only does it create a new source of current income, to live on, but it also pushes much of the tax ramifications off into the retirement window when taxes are usually lower. Additionally, those who value a higher current income in their InSight-Full® plan – entrepreneurs and investors whose income is more volatile and tax rates are controllable can see some more value in a dedicated real estate portfolio. Income Return Capital Return 5.00% 3.15% 7.00% Fed Tax Rate Tax Loss After-Tax Income Tax Loss After-Tax Income Total Return 37% 1.85% 3.15% 1.17% 1.98% 10.15% 35% 1.75% 3.25% 1.10% 2.05% 10.25% 32% 1.60% 3.40% 1.01% 2.14% 10.40% 24% 1.20% 3.80% 0.76% 2.39% 10.80% 22% 1.10% 3.90% 0.69% 2.46% 10.90% 12% 0.60% 4.40% 0.38% 2.77% 11.40% 10% 0.50% 4.50% 0.32% 2.84% 11.50% The Complete Playbook

Read More »

Pin It on Pinterest