InSight

Financial Planning Dentist

InSight
Finacial
Planners

Menu

Market InSights:

There Is Too Much Money

You read that right, there is simply too much cash in the capital markets to not see a handful of effects that could impact your investments and plan. The supply of money floating around is massive right now. There is a lot of risk, COVID has us concerned about the economics of the coming year, but it’s getting harder and harder to ignore how much cash has been made available.

Even relative to itself, it’s a volume of cash in the money supply that will take at least a decade to settle into long term investments, or be recaptured by the Fed. At the beginning of the year there was roughly $15T in circulation held in cash and cash equivalents. We are in December and the number is closer to $19T of more highly liquid cash in the world. This $4T expansion in only 12 months is remarkable.

Here’s some history on money supply. It took until 1997 to reach the first $4T in circulation, the decade from 2009 to 2019 saw that supply double from $8T to almost $16T (the fastest doubling ever), resulting in a major part of the expansion of the stock market for that decade. Now, in twelve months we have seen a flood of almost 27% more money in the supply than there was at the beginning of the COVID-19 pandemic. 

One of the best leading indicators for where capital markets are headed, can be found in how much money, especially highly liquid money like cash, is available in the system. This is a reflection of how big the pie is. Usually in investments we are focused on cash flow, and a companies market share – or how effective a company is at capturing cash flow from a given size of market. That’s becoming less relevant as the sheer volume of cash has exploded. The pie is so big right now that there will have to be a a few notable adjustments to make:

Inflation – While I have heard that Jerome Powell has not registered an increase in inflation yet, it is hard to believe that as the newly introduced money will not have an expansive effect on the costs of goods and services. Many mark the inflation rate off the CPI, grievances with that benchmark aside, it would be irresponsible to assume that the basket of securities they mark to market does not see an above average increase as more money finds its way into the same number of consumer goods. Additionally, elements like rents will see a disproportionate increase in the coming decade because while supply of say consumer goods will increase quickly to capture this cash, construction of rental properties is a less reactive market and a slower roll out to correct the market. In the meantime expect rental costs and revenues to see above average inflation figures. 

Interest Rates – Permanently impaired. As I write this the current observation, the 10 year US Treasury is paying 0.9%, a third of where it was even 2 years ago. It is heard to believe that such a robust introduction of cash doesn’t become a permanent downward pressure on fixed income assets for the foreseeable future. Unless there is a formal and aggressive contraction of the money supply, it will take decades for the amount of cash in circulation to let up that downward pressure on bonds. Interest rates in short term assets will be particularly affected as the demand has become less appetizing in contrast to long term debt, and the supply of cash is chasing too small of demand. 

Equities – The real benefactor here. It is hard not to believe that over the course of the coming decade, this cash infusion doesn’t trickle its way up and into the stock market and other asset values. Generally the most “risky” part of the market is the historically the benefactor of excesses in cash. Companies will do what they do best and capture this supply of cash through normal operations, this will expand their revenues and ultimately the bottom line. Additionally, the compressed borrowing costs from low interest rates will lower their operating costs. Compound the poor risk reward ratio in bonds and you will see more of those investments seek out stocks, real estate, and other capital assets. This sector will see a virtuous combination of more revenue, and more demand for shares. Expect permanently elevated P/E reads for the time being. 

 

More related articles:
Articles
Peter Locke

President Biden’s 2022 Budget Request will change the way you plan

The three takeaways in this article: What you can expect regarding the Increase Capital Gains Rate How Estate Planning & Gifting will change next year How to use Tax Credits for parents and children While I was out to lunch with Sue, a small business owner in the Event Planning space, she asked me about Biden’s proposed tax increases and if she should be doing anything about it. Given that Sue is nearing retirement and her business is very profitable it was important to discuss how the proposed budget would impact her and the business.   Sue was hoping to work for 3-5 more years and then sell her business when she reaches 65 for Medicare purposes. While this is very much still an option, Sue and I decided to review her situation in more detail so she could make the most educated decision moving forward. Since selling a business and retiring is a massive decision in itself, if the new proposed tax law changes would help make her decision easier then it was my job to let her know.  The Capital Gains Rate is expected to increase from 20% to 39.6% on income in excess of $1 million Proposal: Increase the top capital gains rate (raising the capital gains tax is an alternative to raising the estate tax exemption) currently at 20% to 39.6% before application of the 3.8% net investment income tax for income in excess of $1 million (possibly retroactively – Yes, this can be done due to Article I, Section 9 of the United States Constitution) Ex: In 1993, the top ordinary income tax rate was increased on both ordinary income as well as the estate and gift tax retroactively to the beginning of the year (even though it was enacted in August).  What can Sue do: It may be worthwhile to accelerate the sale of her company in order to capture gains at today’s current top capital gain tax rate. Additionally, those that have appreciated land, real estate, stocks, collectibles, etc should look to do the same.  Ex: Sue (60) owns a company that she is looking to sell in the next 3-5 years as she is nearing retirement. Her income is typically $300,000 and the value of her business is $3 million. If she sells her business this year she will pay 20% instead of 39.6% (plus the 3.8% medicare surtax) on any income above $1 million. So, $460,000 (20% x $2.3 mill) vs. $910,800 (39.6% x $2.3 mill). The difference being $450,800 which if you invested at a 6% rate of return over the next 30 years (Sue at age 90) would be $2.58 million dollars.  Sue’s Options: Keep the business until she is ready to sell, sell the business now, or sell the business and consult the acquiring company for a set number of years for a lower sale price.  Our Guidance: Sell the business and consult the new company. This will enable her to bridge the gap between now and Medicare when paying for health insurance out of pocket is extremely expensive, capitalize on a low capital gain tax rate, and provide her the peace of mind that her clients will be taken care of while she collects an income.  Estate Planning & Gifting Death itself would become a capital gains realization event (1 million exemption) Gifting is now a realization event (so if you’re looking to gift an appreciated asset soon it may be worthwhile to accelerate that into this year)  Ex: If you gift an asset that has a basis of $100k and it is now worth $1mill then $900k would be taxed immediately. Previously, the recipient of the gift would not realize a taxable event until the asset is sold.  Tax Credits for Parents and their children are increasing Child and Dependent Care Tax Credit refundable credit up to 50% of up to $8,000 in expenses for one child/disabled dependent ($16k for more than one child/disabled dependent) with a phaseout and an exclusion of up to $10,500 in employer assistance/contributions for dependent care.  *Child Tax Credit extends the ARP child tax credit through 2025, including a maximum of $3,600 for children under 6 and $3,000 for children 6 through 17. Half of a taxpayer’s total allowable credit would be received as monthly advance payments and half would be paid when households file their taxes; any discrepancies would be reconciled on tax returns. Notably, by proposing that only half of the credit be paid out monthly, the resulting maximum monthly payments would be $150/$125 per child for 2022 through 2025, with the rest received at tax time, compared to maximum monthly payments of $300/$250 under the current ARP child tax credit in 2021. Full refundability, regardless of earned income, would become permanent. *Source – Biden Proposed Child Tax Credit Here are some additional facts and what you should know: The QBI (Qualified Business Income) deduction is here to stay – QBI Deduction – IRS 1031 exchanges, if you’re a married couple then Biden is proposing a 1 million per year cap on 1031 exchange exemption (500k for single filers) – 1031 Exchange – IRS Proposed 3.8% surtax to S-Corps distributions There have been talks about getting rid of  “Zeroed Out Grats” and rolling GRATs  What should you be doing now?  Think about your goals and objectives for your life, employment, gifting plans in order to prioritize the next steps If your income is less than 1 million then proposed tax increases don’t affect you Plan now and prepare while you have time. Planning on selling a business, piece of land, or real estate in December is not feasible. Sit down with your tax professional and CERTIFIED FINANCIAL PLANNER™ to plan the next steps

Read More »
June 21, 2021 No Comments
Parenting, Boulder, Money, Saving Learning Money Habits
Articles
Kevin Taylor

The Tangible Lessons of Money: Why Kids Should Start with Physical Cash Before Going Digital

In an era where digital transactions and virtual currencies dominate the financial landscape, the value of understanding physical money should not be underestimated, especially for children.  The transition from earning, saving, and spending physical cash before delving into more modern financial methods offers a wealth of indispensable lessons that build a strong foundation for financial literacy. This article explores why it’s crucial for kids to grasp the tangible aspects of money before embracing the virtual alternatives and why the painful lessons of losing or misplacing cash hold invaluable teachings. Hands-On Learning Physical cash serves as an excellent teaching tool for introducing kids to the concept of money. Tangible currency provides a sensory experience that engages sight, touch, and even sound. Children can hold, count, and visually differentiate between various denominations. This tactile interaction fosters a deeper understanding of the value of money compared to merely viewing numbers on a screen. Real-World Connection Money is an abstract concept for young minds. Like distances or time children may find it hard to construct a framework for learning these ideas. Unlike other abstract ideas, money has a physical representation in the form of currency. Physical currency bridges the gap between this abstraction and the real world. Kids can connect chores, allowances, and monetary rewards with the physical notes and coins they receive. This connection lays the groundwork for comprehending the value of work, patience, and the trade-offs associated with spending choices. Delayed Gratification Physical cash creates the proper “challenge of delayed gratification.” When children can visually witness their money pile up, and have it in their possession they are challenged with the impulse to spend it. My mom always said it was “Burning a hole in my pocket.” If children are never confronted with that impulse, that sense of urgency, they will rarely overcome it. Conflict is an important part of our development of Good money habits. The act of saving becomes more tangible when they see their funds grow over time. This valuable lesson in patience and discipline paves the way for healthier financial habits in the future. Understanding Loss and Consequences One of the most profound lessons that physical money imparts is the experience of loss. While parents naturally shield their children from the pain of losing or misplacing money, this very pain provides an essential life lesson. The emotional impact of losing a few dollars due to carelessness can be a powerful incentive for kids to be more responsible with their possessions and money. This is definitely a point of conflict I reach with other parents, who chose to insulate their children from this pain – though I would rather my child experience the devastation their carelessness has from the loss of say $20, then $20,000.   These losses, though small, teach resilience, accountability, and problem-solving skills that virtual transactions often lack. I know this might seem like a “willful” intent to have my children experience pain…and it is…but I think it’s an earned lesson that we ought not to rob our children of.  Lessons in Budgeting Physical cash inherently imposes limits on spending. Kids can visually see when their wallet is getting emptier, which prompts them to make choices about what they want versus what they need. This limitation introduces them to the concept of budgeting, a skill that becomes increasingly important as they navigate more complex financial scenarios in the digital world. DON’T PAY THE SALES TAXES OR SHIPPING COSTS!!! Another essential lesson that physical cash transactions can teach kids is the concept of sales taxes. I see many parents paying the sales tax or shipping costs of purchased items. Just Don’t; this is a huge opportunity to teach a lesson about where taxes come from and the effect it has on buying power. While these taxes might not be explicitly stated on price tags, they are a part of many purchases. When kids pay with physical money, they often hand over more than the price of the item due to sales tax. This provides a valuable opportunity to discuss the role of taxes in society, as well as the importance of understanding the total cost of an item. By engaging with these real-world examples, children gain insight into how governments fund public services and the broader economic landscape. I have had to see my child walk out of a toy store in tears because he had to put an item back as the result of sales tax…this lesson is priceless! He wasn’t mad at me, he was mad at taxes. In the digital age, it’s easy to browse online marketplaces and make purchases with a few clicks. However, the true cost of an item might not be immediately apparent. Shipping fees can significantly increase the total expense, especially for items ordered from different locations. When kids use physical cash for purchases, they have a chance to experience the cost of this convenience firsthand. Whether it’s buying a gift online or ordering a favorite book, involving children in the payment process allows them to witness the final price and the added shipping cost. This lesson highlights the importance of considering all expenses before making a purchase, promoting critical thinking and wise decision-making. A Concrete Value of Money In the digital realm, the value of money can feel elusive, as transactions are reduced to numbers on a screen. Physical cash, on the other hand, provides a concrete representation of that value. Kids can witness the exchange of goods or services for money firsthand. This real-time experience helps them understand that money is earned through effort and must be spent wisely. Embracing Technology Later The transition from physical cash to digital transactions becomes more seamless when kids have a solid foundation in understanding money’s tangible aspects. Armed with lessons in earning, saving, spending, loss, and budgeting, children can approach the digital world of finance with a more critical mindset. They are better equipped to navigate the complexities of online banking, digital wallets, and virtual currencies, making informed decisions that align

Read More »
July 22, 2023 No Comments
Boulder Colorado investment advisor and certified financial planners
Articles
Kevin Taylor

The Anatomy of a Bank Run: Unveiling the Mechanics Behind Financial Panic

In the realm of finance, few events are as unsettling as a bank run. The mere mention of this term sends shivers down the spines of economists and bankers alike. A bank run is a phenomenon characterized by a sudden and widespread withdrawal of deposits from a financial institution, driven by a loss of confidence in its stability. This blog post aims to dissect the anatomy of a bank run, shedding light on its causes, consequences, and potential remedies. The Spark: A bank run often begins with a spark—an event that triggers fear and prompts depositors to question the safety of their funds. This spark can take various forms, such as rumors of insolvency, high-profile fraud cases, economic downturns, or a series of bank failures. Whatever the cause, it creates an atmosphere of doubt that undermines trust in the banking system. In runs in the past, the spark could have taken weeks, a slow-moving sentiment gaining some critical mass – but as the recent “runs” shows us, the entire cycle especially eh spark can happen far more quickly. Fear and Panic: Once the spark ignites, fear spreads like wildfire among depositors. Worried about losing their hard-earned money, individuals rush to the bank to withdraw their funds. The first few depositors may have genuine concerns, but their actions set off a domino effect as others join the queue, driven by the fear of being left empty-handed. Some amount of fear and panic is normal, but the runs on banks are actually self-fulfilling the fear causes the failure. Liquidity Crunch: A sudden influx of withdrawal requests places immense strain on the bank’s liquidity. Banks operate on the principle of fractional reserve banking, which means they only keep a fraction of depositors’ funds in reserve while lending out the rest. When too many depositors demand their money simultaneously, the bank struggles to meet the demand, leading to a liquidity crunch. Contagion Effect: Bank runs rarely remain confined to a single institution. As news of a bank run spreads, it instills a sense of panic in depositors of other banks as well. People start questioning the stability of other financial institutions, even if there is no concrete evidence to support their concerns. This contagion effect can quickly escalate the crisis and trigger a systemic risk to the entire banking sector. Destructive Feedback Loop: Bank runs create a destructive feedback loop. As depositors withdraw their funds, the bank’s ability to meet their demands diminishes further. This, in turn, erodes public confidence, leading to more withdrawals. The cycle continues until the bank’s reserves are depleted, and it becomes insolvent, potentially resulting in its collapse. Economic Consequences: The consequences of a bank run extend beyond the affected institution. They can have severe ramifications for the broader economy. When banks face a liquidity crunch, they curtail lending activities, causing a credit crunch. This, in turn, stifles economic growth, as individuals and businesses find it increasingly difficult to access funds for investment or day-to-day operations. Government Intervention: To mitigate the fallout of a bank run, governments often step in to restore confidence and stabilize the financial system. They may employ various measures, such as guaranteeing deposits, injecting liquidity into banks, or even bailing out troubled institutions. Government intervention aims to restore trust, prevent further runs, and minimize the potential systemic risks. A bank run is a powerful manifestation of the fragility inherent in the banking system. It demonstrates the critical role trust plays in maintaining the stability of financial institutions. Understanding the anatomy of a bank run equips us with the knowledge to identify early warning signs, implement effective regulatory measures, and establish robust safeguards to prevent such crises in the future. By nurturing trust and confidence in the banking system, we can help maintain a strong and resilient financial foundation for economies worldwide.

Read More »
March 10, 2023 No Comments

Pin It on Pinterest