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.

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The Second Wave of Making Money from AI: How Companies Will Leverage AI to Create Product Stickiness

As artificial intelligence (AI) continues to transform industries, some of the world’s largest and most successful enterprise software companies—Microsoft, Adobe, and Salesforce—are taking a particularly effective approach to AI integration. Rather than launching entirely new products built around AI, these firms are embedding AI within their existing software suites. This subtle but far-reaching strategy promises to increase customer reliance on their platforms while gradually allowing for price increases without risking customer attrition. AI as a Value-Add, Not a Standalone Product Microsoft, Adobe, and Salesforce are positioning themselves well by embedding AI into their platforms as a value-add rather than as a separate product. For example, Microsoft has woven AI deeply into its Office 365 suite, using tools like Copilot to assist users with tasks in Word, Excel, and PowerPoint. Rather than presenting AI as a separate offering, Microsoft’s approach subtly builds AI functionality directly into the tools that users already know and rely on. This “value-add” method means that companies adopting these tools get AI functionality seamlessly integrated into their daily workflows, making it a natural part of the user experience. Similarly, Adobe has integrated AI into its Creative Cloud platform with Adobe Sensei, offering intelligent features such as content-aware fill in Photoshop and predictive analytics in Adobe Analytics. Salesforce has taken a similar path with its AI-driven Einstein, enhancing CRM workflows with predictive modeling and automation within the familiar Salesforce ecosystem. By positioning AI in this way, these companies are making it an invisible but indispensable part of their products. The AI-enhanced versions of these tools are not marketed as new products but as the next evolution of the platforms that businesses already depend on. This approach allows them to raise prices in the future with minimal resistance. Customers won’t be paying for AI as a novelty—they’ll be paying for a more efficient version of the products they’ve already been using. The Closer Integration with AI, the Harder It Is to Leave The gradual integration of AI into existing platforms serves another purpose: it increases customer dependency. As AI capabilities become part of a user’s everyday workflow, they make it difficult for businesses to switch to competitors or revert to older processes. The more ingrained AI becomes in daily tasks, the more difficult it is for users to live without it—creating a level of stickiness that is difficult to match. For example, as Microsoft’s Copilot becomes smarter and more embedded in Office workflows, users become less capable of working without AI. The same is true for Adobe and Salesforce. The introduction of AI that automates design tasks or customer relationship management processes effectively rewires the way work is done. Over time, workers will become incapable—or simply unwilling—to return to doing things manually or in “the old way.” A Subtle but Transformative Shift This transformation will be far more clandestine than many might realize. Rather than AI becoming a new category of product, it will quietly become a core part of existing tools. This evolution will happen long before businesses offer AI as their own distinct solution. Instead, AI will be the foundation for enhanced versions of software that users already rely on. The shift will feel less like a disruptive innovation and more like a natural evolution. In essence, the future of enterprise AI is not about selling AI as a separate product—it’s about making AI indispensable within current offerings. The subtlety of this transformation will make it more palatable for businesses and easier to absorb into existing budgets. As AI gradually replaces more manual tasks, workers will become dependent on these enhancements, making it almost impossible to go back. The Future of Work: AI Dependency The key to this strategy’s success lies in how seamlessly AI is integrated into existing workflows. As documents, spreadsheets, and presentations become infused with AI-driven features, users will adapt to this new normal. Just as most workers can no longer imagine creating a report without Excel or a presentation without PowerPoint, the workforce of the future will be unable to operate without AI-driven enhancements. This increasing reliance on AI will extend beyond individual workers. Entire businesses will reshape their processes around AI-driven efficiency. From forecasting financial models in spreadsheets to automating customer outreach in CRM systems, AI will become a key component in maintaining competitiveness. As this transformation deepens, customers will be reluctant to abandon these AI-powered tools, which further solidifies the position of companies like Microsoft, Adobe, and Salesforce. AI as the Future Backbone of Enterprise Software In the long term, enterprise companies like Microsoft, Adobe, and Salesforce are perfectly positioned to lead in AI. Their strategy of embedding AI into existing platforms allows them to lock customers into their ecosystems while providing increasingly indispensable tools. By making AI an integrated, invisible part of their offerings, these companies ensure that customers won’t just pay more for AI—they’ll need it to function in their day-to-day operations. In the end, this isn’t about selling AI as a new product. It’s about creating a dependency that makes replacing these tools not just unappealing but impractical. And much like the workers who can no longer imagine a world before spreadsheets and presentations, tomorrow’s workforce will be equally incapable of functioning without the AI that quietly powers their work.

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boulder financial planning experts with 1031 tax mitigation experience
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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

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Kevin Taylor

The Ethical Implications of AI Investing

Artificial intelligence (AI) is revolutionizing the way we live and work, and as a result, there has been a surge of interest in AI investing. While AI has the potential to create significant value for investors and society as a whole, there are also ethical implications that must be considered. As AI technology continues to develop, there are growing concerns about its impact on privacy, employment, and overall societal well-being. In this blog post, we will explore some of these concerns and suggest ways that we can use AI in a responsible manner. Privacy Concerns One of the primary ethical concerns related to AI is privacy. As AI becomes more prevalent, it has the potential to collect and analyze vast amounts of data about individuals, raising questions about who has access to this data and how it is being used. AI algorithms can also inadvertently perpetuate bias, particularly if they are trained on biased data sets. To mitigate these concerns, AI investors can take steps to ensure that the companies they invest in are committed to privacy and transparency. This could include conducting due diligence on companies’ data collection practices, advocating for responsible data governance, and supporting the development of ethical AI frameworks. Conflict with Environmental, Social, and Governance (ESG) Environmental, Social, and Governance (ESG) investing has gained significant popularity in recent years as investors increasingly consider the social and environmental impact of their investments. However, there is a growing conflict between ESG investing and the new push into AI. On the one hand, AI has the potential to significantly reduce carbon emissions and improve sustainability by optimizing energy consumption, reducing waste, and improving supply chain management. For example, AI can be used to optimize building energy usage, reducing energy consumption and lowering carbon emissions. AI can also help companies optimize their supply chains, reducing waste and improving the efficiency of logistics. However, there are also concerns about the ethical and social implications of AI. AI systems can inadvertently perpetuate bias, and there are concerns about the potential for AI to be used for surveillance or manipulation. There are also concerns about the impact of AI on employment, particularly in industries that are heavily reliant on low-skilled labor. These concerns pose a significant challenge for ESG investors, who must balance the potential environmental benefits of AI with its ethical and social implications. To address this challenge, ESG investors can advocate for greater transparency and accountability in the development and deployment of AI technologies. They can also support the development of ethical AI frameworks and regulations that guide the responsible use of AI. In addition, ESG investors can support the development of AI technologies that are aligned with ESG principles, such as those focused on improving sustainability, reducing carbon emissions, and improving social outcomes. This could include investing in companies that are focused on developing renewable energy solutions, or that are developing AI systems that can help improve access to healthcare or education. Societal Well-being Concerns Finally, there are concerns about the broader societal impact of AI. As AI technology becomes more ubiquitous, there are concerns about its potential to exacerbate existing social inequalities, perpetuate bias, or even be used to manipulate individuals or governments. To address these concerns, AI investors can support the development of AI technologies that are aligned with societal goals, such as improving access to healthcare or reducing carbon emissions. They can also advocate for greater transparency and accountability in the development and deployment of AI technologies, and support the development of ethical frameworks and regulations that guide the responsible use of AI. Conclusion AI investing offers significant potential for investors, but it also comes with ethical considerations that cannot be ignored. By advocating for responsible AI development and supporting companies that are committed to transparency, accountability, and ethical governance, we can help ensure that AI is used in a way that benefits society as a whole. Ultimately, it is up to us as investors to take an active role in shaping the development and deployment of AI technologies so that they are aligned with our values and priorities.

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