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 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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Kevin Taylor

Using a Delaware Statutory Trusts (DST) with 1031 Exchange Investments

Delaware Statutory Trusts (DSTs) are extremely popular with 1031 exchange investors. In addition to the tax mitigation aspects of the 1031 itself, they allow investors to diversify the make-up of an investment portfolio, access new buildings and investment types, and easily scale up or down the size of their real estate portfolio. 1031 exchange investors favor DSTs due to the fact that it can be difficult to identify a replacement property within 45 days and in most cases, the DST can accept the exact balance investors are looking to replace a part of the 1031 Exchange. What is a Delaware Statutory Trust? The name will usually confuse new investors. The “Delaware” in Delaware Statutory Trusts is simply a component of the law being initially conceived and developed in Delaware. A common state for incorporation and legal standing. The use of the DST structure helps keep the title clean in connection with ownership by many co-investors. It separates the investor holding title individually into a holding in a new trust where the investor is the beneficial owner. The trustee of the trust can take actions on behalf of the trust beneficiaries (i.e. the DST investors/owners) which does not require agreement by all. Why invest in a DST? Few investors have the requisite net worth to own a 30-story office complex and keep the real estate exposure for their portfolio in line with their risk expectations. That is where the use of DSTs comes into play. A DST is attractive to an investor who desires access to a single property or portfolio of high-value, high-quality real estate asset(s) that may not otherwise be available to them due to size or service constraints. A DST puts the management and ownership of a real estate venture into a manageable box for most investor types. Collecting income, managing taxes, and maintaining the risk are all far easier in the real estate space through the DST structure. The investor receives a deeded fractional ownership in the property in a percentage based upon the equity invested. Is a DST like a REIT? It has some characteristics of a REIT or Real Estate Investment Trust but is different, including the fact that it is often, but not always, just a single property. In addition, the owner of REIT shares holds a partnership interest in the underlying real estate investment. Partnership investments do not qualify for 1031 exchange investments, even if the underlying asset consists of real estate. How does the DST provide income? Similar to the other real estate investments, DSTs generally pay monthly or quarterly an amount based on the excess rent over the property expenses. This includes any mortgage payments so as the debt service is paid, the equity ownership of the investor shifts as well. The Return on Equity (RoE) varies from deal to deal based on the specifics of the property, the building type, and financing goals. With most deals, the sponsor knows the net rent that can be expected and can give the investor the anticipated return for the term of the investment. How long does the DST operate? Most DSTs have a well-defined expectation for liquidation of the asset. The asset’s holding period varies and is prescribed in the beginning, but most have an intermediate time frame. Usually, 3-7 years and the investor shares in the same percentage basis the appreciation in value upon sale of the property. How does the liquidation work? This final stage of a DST is a complete liquidation of the Real Estate assets. This is also part of the investor’s stake in the holding. This can increase the overall annualized return by a couple of percentage points and is paid out in cash upon liquidation. While most investors seek out real estate for the prospect of a current and predictable income – tax mitigated capital appreciation as part of the real estate investment is typically the larger portion of the total return of the investment. Who can buy into a DST? The manner in which DSTs are marketed to the public has a lot of characteristics of sales of securities. Over time, the SEC decided to regulate them as actual sales of securities. So, although a DST interest retains the nature of real estate ownership, with some exceptions, they are regulated. They are typically brought to market for syndication by large well-known sponsors, although they have to be acquired through a Broker, Registered Investment Advisor, or a licensed Financial Advisor. The DST structure usually, if not always, requires the investor meets the Accredited Investor standard as the offerings are listed through the Reg D issuing process. Typically, the broker or advisor will vet all offerings of the sponsors with whom they have an agreement and that level of due diligence is a benefit to the investor who is unlikely to have the wherewithal to review the investment as closely.

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Kevin Taylor

Divorce Playbook: Avoiding Financial Victimhood

The most common mistake person going through a divorce can make, is being uninformed about their joint finances before agreeing to divorce. If your spouse has always handled all of the financial decisions in your household; you may find don’t have any information about you and your spouse’s income and assets your spouse will have an unfair advantage over you when it comes time to settle the financial issues in your divorce. If you suspect your spouse is planning a divorce, get as much information as you can now. This means you should make copies of important financial records such as account statements (eg., savings, brokerage, and retirement), become hyper-aware of your budget and expenses, and all other data that relates to your marital lifestyle (eg., checking accounts, charge card statements, tax returns). If you believe your spouse may liquidate (sell or transfer to cash) assets or retitle marital assets without your consent, notify the holder of the asset or property in writing and get a restraining order from the court. Watch out for any cash held in joint checking and brokerage accounts, and the cash value of life insurance policies. If your spouse uses or moves assets without your knowledge, you may have to hire legal and forensic accounting experts to help you locate and value the assets. The Complete Playbook

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