I purposely waited some time, before I penned the 2021 inaugural GAZBIT, to understand the changes that were and are occurring, once the Senate results in Georgia became official on January 6th, giving Democrats de-facto control of the White House, House and Senate. Since January 20th, what have I learned..? Simply, the pendulum swings back the other way and nothing changes.
Personally, I have ‘Stimulus Fatigue’ and enough is enough. Not because I have not received a penny of the largesse produced out of thin air, but the lack of fiscal responsibility, both public and private, which leads straight to a lack of personal responsibility. This is manifested in the equity markets almost on an almost daily basis as the big concern is that of rising interest rates, derailing an economic recovery. Talk about coddled. Witness the rise in the benchmark 10-year yield from .98% to 1.51% since January 1st and the markets convulsed. Imagine if that rapid ascent continues, marching towards 2.00%, (allowing for some decent return for your fixed income investments) and beyond. It makes me believe you could think about buying a competitive Certificate of Deposit (remember those) again. But, before you get too excited about that dream, I guarantee the Federal Reserve will come in with a full blown, ‘Yield Control’ program, one that suppresses interest rates. Get the theme here: The Fed crashes interest rates to historic lows, says nothing about even thinking about raising rates, then employs another ‘tool’ to control interest rates. Thereby, the Federal Reserve is the biggest enabler of the ‘GameStop’ casino mentality and yet, this unelected cabal of people, ‘manage’ the economy, er, fiscal policy, the ways only a Socialist could love.
Whew!!! Now on to what really matters, not me on my soap box. What to look for in 2021 and not necessarily in this order: Rising Interest Rates, More ‘Stimulus’ Spending, Stock Buybacks en Masse, and a sleeper pick for 2022, Higher Capital Gain Rates.
Let’s begin with Higher Interest Rates. This is not all bad, simply because this will be the result of economic growth. The flood of cash given out and/or saved, will go somewhere, sometime with travel and leisure the biggest beneficiaries (in my opinion) with services (including Restaurants) coming up close behind. Being cooped up for over a year will do that. However, I do not think the economy will rebound as robustly, leaving a mountain range of debt, to be dealt with. One always warns about ‘The Hangover’, ala ‘The Day After’, but few are prepared for the ramifications. The simple question is: When does servicing the debt matter and how will continued higher interest rates, impact the stock market..? If recent history (the past two weeks) is any indication, hold on to your wallet. Next, let’s consider more ‘Stimulus’ spending coming out of DC in the form of ‘Infrastructure’. If ALL of the money (again out of thin air) magically goes to do just that, I’m all for it. But you know and I know, some legislators pet (name your animal) project will magically appear and the proverbial ‘Bridge to Nowhere’ will be built somewhere. If this bill gets pushed through, probably by reconciliation, then let everyone bid on contracts and not just cozy Unions. Whomever has the best (lowest) bid gets the work WITH penalty provisions, if work is not finished by a mutually agreed upon date. If you promise, you better deliver or you will suffer the consequences.
For anyone on LinkedIn, I post more often than write a more lengthy GAZBIT, so you can get my musings on some current topic. I bring this up in case you desire smaller bites (not bits) of what is good and not so good in the markets, stock, political, etc. Plus, in an early January (post-January 6th) post, I noted my favorite asset class, which is synonymous with the precursor to today’s anesthesia, namely Ether. By now, most of us, if not all, have heard of Bitcoin. Well, Ether is the #2 cryptocurrency, kinda like Avis to Hertz, but not only does it try harder, it actually has real blockchain (think architecture) value and is getting noticed, big time. All that aside, ETH started 2021 near $ 750.00, yet currently trades near $ 1,700.00 per coin, equating to a tidy 127% gain in 9 weeks. Alas, my preferred way to participate in this volatile technology is via the Grayscale Ethereum Trust ETF, ETHE. It trades like a normal ETF, (QQQ, SPY, MDY, etc.) used in your portfolios and at least for now, provides a large amount of Alpha, or added premium to a normal investment return. I have utilized this very short term trade and is not designed to be a long term investment holding. Granted, it is not suitable for everyone, so I am very selective in whom I include in implementing, because of the inherent volatility. For those that have a small amount of amply named, “risk capital”, I will continue to include you in those strategic trades, mainly in tax-deferred accounts. This is truly a “risk-on” asset, thus with interest rates rising, extreme attention is commanded.
Last, my crystal ball or sleeper thought for 2022 is Higher Capital Gains Rates. Granted, the far-left leaning DC Democrats would have wanted this years ago, but as the deficit spending continues unabated, the search for revenue (code for taxes) heats up and it will lead to low hanging fruit. Look for reversals on corporate tax rates, even higher personal income tax rates (think millionaires+). Problem is, it’s not enough. Thus, the search will, in my opinion, focus on capital gains tax rates, similar to the medical device tax and investment tax of 3.8%, stuffed into the oxymoronic Affordable Care Act of 2010. Small, yet insidious. For example, if you are sitting on long term capital gains of say, $ 100,000, if you sold, your income tax liability would be $ 15,000. If raised to 20% or higher, then that amount grows to $ 20,000 or higher. You get the picture. It will not happen this year, but rest assured, with all the blowout spending, stimulus, bailouts, whatever you call it AND one party control, this is my odds on favorite legislation of what can and will impact us common folk.
So what does this all mean for your money..? First, the debasement of our currency will continue, which means we need to keep your money in inflation-resistant/protected or at the very least, inflation-neutral investments. The Fed has stated it wants ‘inflation to run hot’ (check the price of gas, lately..?!?) so forget any discipline here, but with interest rates heading north, what will be those prudent investments with prices already bid up? From a truly long term perspective (7+ years) it’s still technology (QQQ, QQQJ), health care (XLV, JNJ) to a lesser extent and those income-producing investments, as the hunt for yield continues for a population looking to “incomeize” (new word creation, by me) their retirement years. Thus the tried and true individual preferred stocks, a few ETF’s (PGX) and maybe later in 2021 or 2022, CD’s. (but don’t hold your breath on this one) Throw in some international exposure via IOO (World’s Largest 100 Companies), staying with domestic large cap (dividends, liquidity, appreciation potential) and that’s about it.
As more vaccines are distributed and inoculations occur, life will slowly grind back to normalcy, so I will play to your comfort level, whether in-person meetings are desirable or if distance options continue for now. Your safety is my highest concern, whereas our financial dialogues can occur anytime, anywhere, anyway, anyhow. So with all that said, get those patios ready, if not already, and I look forward to 2021 seeing most, if not all of you very soon…
All The Best,