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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 U.S. Energy Transition: Why Hydrogen and Nuclear Power Are Leading the Charge

The demand for electric energy in the U.S. has been largely flat since the 1980s but as we now grapple with skyrocketing electricity needs driven by artificial intelligence (AI), data storage, and renewable energy integration, the nation’s energy landscape is undergoing a seismic shift. This transformation is not merely a response to increasing demand but also a concerted effort to reduce carbon emissions, ensure energy reliability, and stabilize costs in a rapidly evolving market. Utilities and tech companies alike are turning to cleaner and more sustainable energy sources, and hydrogen and nuclear power are emerging as pivotal players in this transition, answering the pressing question: “Where will the power come from?” The convergence of several trends is pushing electricity consumption to unprecedented levels. AI applications and machine learning models demand massive computing power, resulting in energy-intensive data centers. These centers, the backbone of a digitized economy, already account for significant global electricity usage and are poised to consume even more as AI adoption accelerates. Simultaneously, the widespread adoption of renewable energy, such as wind and solar, introduces variability into the grid, requiring reliable, on-demand power to balance supply. Moreover, the electrification of transportation and the increasing integration of battery storage solutions further stress existing grid systems. Hydrogen: A Non-Grid Energy Solution Hydrogen is quickly becoming a key player in the clean energy transition due to its versatility and scalability. It can serve as a fuel for transportation, a storage medium for excess renewable energy, and a direct source of electricity through fuel cells. With the introduction of the Section 45V Clean Hydrogen Production Tax Credit under the Inflation Reduction Act, the U.S. government has set clear incentives for hydrogen producers to meet stringent greenhouse gas (GHG) emission standards, encouraging investment in low-carbon hydrogen production. Tech giants like Amazon Web Services (AWS) and Microsoft have already recognized hydrogen’s potential, exploring its use in data centers and as a clean backup power source. Hydrogen’s ability to integrate with existing infrastructure and complement renewable energy systems makes it an attractive option for decarbonizing industries beyond electricity generation. Nuclear Power: A Reliable, Scalable, and Clean Grid Solution Nuclear power, which currently provides nearly 20% of the U.S. electricity supply and more than half of its carbon-free electricity, is experiencing a renaissance. Advanced nuclear reactors, such as the Natrium reactor and small modular reactors (SMRs), offer significant advantages over traditional designs, including greater safety, lower costs, and increased flexibility. These reactors can operate continuously, providing a steady base load of power, or scale output to match demand, making them ideal for grid stabilization alongside renewables. Moreover, the newly operational Vogtle Units 3 and 4 in Georgia symbolize a renewed commitment to nuclear energy, despite decades of stalled development. The Inflation Reduction Act and state-level initiatives like zero-emission credits (ZECs) are further ensuring that existing plants remain viable and that new projects attract investment. The Intersection of Technology and Energy Tech companies, driven by sustainability goals and the operational demands of AI and cloud computing, are becoming significant players in energy strategy. Companies like Microsoft and AWS are partnering with energy providers to secure long-term power purchase agreements (PPAs) for nuclear and hydrogen-based energy, showcasing how private sector innovation can accelerate the clean energy transition. The intersection of technology and energy is also reshaping public perception. Nuclear power, once seen as controversial, is gaining renewed acceptance as concerns about climate change grow. Similarly, the clean hydrogen economy is being heralded as a pathway to decarbonizing hard-to-abate sectors, including aviation, shipping, and heavy industry. Hydrogen and Nuclear rise to meet the Challenge While hydrogen and nuclear power are not without challenges—such as the need for investment in infrastructure, public acceptance, and regulatory hurdles—both are positioned to play central roles in the future energy mix. Hydrogen offers flexibility and storage solutions, while nuclear ensures reliability and base-load power, creating a complementary relationship that addresses the weaknesses of renewables. In the decade to come, these energy sources are not only answers to the question of “where will the power come from?” but also key drivers of a cleaner, more resilient energy system. Together, they represent the bridge between the energy demands of the present and the sustainable future we are striving for. The Role of Nuclear Power in U.S. Energy Nuclear power has been a cornerstone of U.S. energy generation for decades, accounting for 18% of total electricity output and over 55% of carbon-free energy in 2022. With the Inflation Reduction Act of 2022 offering incentives for advanced reactors and hydrogen production, the stage is set for a nuclear resurgence. Recent Developments Vogtle Units 3 and 4: These reactors came online in 2023 and 2024, marking the first new nuclear reactors in the U.S. in decades. Economic Viability: Nuclear generation costs have plummeted by 40% since 2012 due to advancements in fuel efficiency and operational costs. Advanced Reactors: Technologies like the Natrium reactor, combining liquid sodium cooling and molten salt storage, promise enhanced safety, flexibility, and cost efficiency. Addressing Challenges Despite these advancements, nuclear energy faces hurdles, including competition from natural gas and subsidized renewables. However, the stability and reliability of nuclear power make it indispensable for achieving a low-carbon future. Hydrogen: The Clean Fuel Revolution Hydrogen is rapidly gaining traction as a clean energy alternative, capable of decarbonizing sectors that are difficult to electrify, such as heavy industry and transportation. The U.S. Department of Energy’s Regional Clean Hydrogen Hubs program and the Section 45V tax credit are pivotal in accelerating hydrogen adoption. Key Drivers Green Hydrogen: Produced through electrolysis using renewable or nuclear energy, green hydrogen represents a zero-emission solution. Infrastructure Growth: Investment in hydrogen production, storage, and distribution is scaling rapidly, bolstered by federal support and private partnerships. Synergies with Nuclear: Nuclear power plants are uniquely positioned to produce hydrogen through high-temperature electrolysis, enhancing their economic viability. Why Tech Companies are Joining the Transition Tech giants like Microsoft and AWS are committing to nuclear power to meet their data centers’ growing energy demands. For instance: Microsoft

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Tax Mitigation Playbook: Who can use 1031 Exchanges?

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Insurance Settlers of Catan: A Story of Risk Management

In April, our family welcomed a new member—a delightful, energetic, and mischievous puppy named Catan. From the moment he arrived, Catan has brought immense joy and laughter into our home, quickly becoming a cherished part of our lives. Little did we know, that this adorable bundle of fur would soon teach us a profound lesson about risk management. As a professional money and risk manager, you’d think I’d have all bases covered. However, even experts have their blind spots, and for us, it was pet insurance. Like many new pet owners, we didn’t prioritize it, thinking we had time to sort it out. That was until a routine procedure went awry, turning our lives upside down. Catan’s journey began with a botched neutering procedure, leading to complications that landed him in the hospital. The veterinarian responsible for the error promptly filed an insurance claim, covering the costs. However, the expenses were staggering. What started as a simple procedure quickly escalated into a $10,000 vet bill (as of this writing), with the possibility of additional surgery pushing the total to over $20,000. This financial hit, while not catastrophic, was a significant and unexpected out-of-pocket expense. It was a wake-up call for Susan and me, highlighting a glaring gap in our risk management strategy. It wasn’t just about the money; it was about the peace of mind that comes with being prepared for life’s uncertainties. Catan’s ordeal underscored the importance of constantly reassessing and updating our risk management plans. Our lives are ever-changing, with new responsibilities and challenges emerging at every turn. From homeownership and business ventures to healthcare and family dynamics, the risks we face evolve, requiring ongoing vigilance and adaptation. Our experience with Catan is a vivid reminder that risk management isn’t a one-time task but a continuous process. It’s about smart, observation-based assessments and proactive measures to mitigate potential setbacks. The $20,000 financial setback we narrowly avoided with Catan could have been a nightmare had we not had some safety nets in place. That amount of money is a great vacation, a year of college, or a down payment on a car, and we get to keep that in our financial plan.  This journey with our beloved puppy has taught us that while risk management might seem like a chore, it’s essential for protecting what we hold dear. Whether it’s our finances, our health, or our family’s well-being, being prepared for the unexpected is crucial. In the end, Catan’s story is more than just a cautionary tale about pet insurance. It’s a broader lesson in staying vigilant and adaptable, ensuring that as our lives evolve, so does our approach to managing risks. Catan may have come into our lives as a playful puppy, but he leaves a lasting impact as a teacher, reminding us of the importance of being prepared for whatever life throws our way. So, as you navigate your own life’s changes, remember the tale of Catan. Embrace the lessons learned, and make sure you’re ready to manage the risks that come with the joys and challenges of life. After all, being prepared is the key to maintaining peace of mind and protecting the ones we love.

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