Right or wrong, depending on your view of the world, we are losing more and more rights everyday in a move towards bigger government in the United States and ultimately the bill for what that entails.  The left calls this justice, the right socialism, but the fact is that the current progression will affect you in one way or another in the future no matter your income level.

We cannot continue to print money to hand out for entitlements and not have repercussions somewhere!  The entitlements we do have, like Social Security, are already in trouble.   Adding even more entitlements, such as Universal Basic Income (UBI), as so many want, will surely win votes, but will ultimately bankrupt our fine country.
 
The greatest example of this slipper slope, we now find ourselves on as a country, is the Social Security Trust Fund, which is projected to be depleted by 2034.  If you are like me, and getting older every day, those are funds you have factored into your retirement plans.  What will we do if we no longer have a surplus from which to pay such payments to our nations retired?
 
The answer is one of three not very palatable choices: 1) cut Social Security benefits by up to 25%, 2) raise taxes, or 3) inflate away the entitlement debt and the value of the Social Security you do get.  My guess is that they will do all three when their backs are against the wall!
 
How about the current proposed $3.5 trillion Infrastructure package?  The Biden Administration has promised that this yet to be approved bill will have “zero cost.”  The fact of the matter is it will have a cost.  Nothing has a “zero cost” but instead taxes will have to be raised to offset or zero out these costs.
 
Right on que, the House Ways and Means committee just that last week announced their plan to pay for the Infrastructure Bill.   Here is their official list of possible tax increases on the table.
 
What they plan is to tax the rich and effectively close some loopholes in the tax code to pay for most of this bill.  Notice I said “most.”  They could not even figure out how to get the entire $3.5 million needed without moving to on to the Average American for the rest of the dollars.  They instead conveniently pretend the math will somehow work out!
 
Higher Taxes for Everyone
 
Let me tell you where this is going.  The House Ways and Means Committee list of tax increases gives us a big hint.  There is a tax that currently applies to net investment income (NIIT) under section 1411 of the Internal Revenue Code.  The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have adjusted gross income above $250,000 for married taxpayers filing jointly and $200,000 for single taxpayers.
 
Now this tax initially was only on net investment income such as interest, dividends, royalty income, non-qualified annuities distributed earnings, and income from businesses trading financial instruments or commodities that are passive to the shareholder.  It also includes capital gains such as the gain from the sales of stocks, mutual funds and bonds, distributions from mutual funds, the gain on the sale of investment real estate and also on the gain on the sale of partnership or corporate interests.  The tax is fairly narrow and applies mostly to investment incomes.
 
However, the House Ways and Means Committee is suggesting this tax be applied to all types of income for those about the income thresholds mentioned above.
 
Do you see what just happened?  They got us used to the tax and then expanded it.
 
What happens next year or the year after when they are forced to deal with the Social Security Trust fund depletion?  Will this tax, as an example, now apply to all income levels?
 
The Time to Plan is Now
 
So why do I mention this?  Is it to get embroiled in a political discussion?  Heck no!
 
It’s to impress upon all our loyal readers and clients the urgency with which tax planning must now be part of your annual process if it is not already.  Whether you are for the change or against it, someone has to pay for it!
 
Margaret Thatcher famously said, “the problem with Socialism is that you eventually run out of other people’s money.”  You may not agree that we are headed towards Socialism, but no one can deny that there is no such thing as a “zero cost” program.  Someone must pay and that is going to be those with the ability to do so, no matter their income level ultimately!
 
It will start with the rich, but believe me, it’s coming your way too.
 
The solution is to be tax aware and to spend more time in the future arranging your affairs to minimize it’s drag on you and your family.  This is not un-American; this is just smart planning!
 
Some Ideas to Take Away
 
As a start I want to give you three simple ideas that anyone can use to lower their tax burden:

1. Own a business.  The business allows you to deduct costs that would otherwise be non-deductible and get a partial or full deduction for them.  This must be a real business with a profit motive, but assuming it is, you can deduct the cost of computers, office supplies, internet and more in the business, thereby reducing your overall family income.
2. Use the Right Bucket.  Here is one I see all the time.  How many Reddit traders have you heard about that have made thousands of trades and did not realize at the end of the year those gains required they pay taxes.  I can think of reams of stories of such traders.  What if they instead were buying and holding in their taxable account, but trading in an IRA?  Bingo, we have tax deferral and much less in the way of current year taxes.  The right bucket is critical! Other examples might be taxable bonds in tax deferred accounts, hedge funds in private placement insurance and so on. 
3. Insurance for Tax Deferral.  Insurance has a long history in the U.S. and a strong lobby.  Where the rules around traditional tax deferral vehicles such as IRAs, Roth conversions and traditional retirement plans will continue to evolve and loopholes close related to such structures, insurance will continue to be a place to find tax deferral or, if structured properly, tax free investment build up.

Let me give you an example:  In the past I had a client who sold out of his technical school for many millions of dollars.  He contracted with an insurance company to purchase a private placement variable life solution and then used those dollars to pay a series of premiums to the insurer that included most of his funds from the sale. 

What he got for this was tax free account build up, the ability to borrow his funds back and the funds automatically pass to the next generation when he passed.  The only thing missing in his planning was it was a part of his estate for estate tax purposes, at least the portion I managed as investment advisor.  However, he would not have been able to borrow against the policy had he moved it out of his estate.

So, this client, used this policy as his piggy bank.  He borrowed from it when he needed funds and repaid policy loans when he had an excess of funds.  Because all his money was in this policy, he had limited income annually and therefore paid little in taxes (and he lived in a very high tax state).  He mitigated the single insurer risk by having more than one carrier underwrite the risk (it was shared).

I could see more of this happening in the future as loopholes close and rates start to rise.
 
The Bottom Line
 
I believe taxes in this country are going to go up substantially in the years to come.  This post is obviously not about tax evasion.  Everyone should pay their fair share!
 
However, there is also nothing wrong with arranging your affairs in such a way as to minimize what your fair share is and that is the point of this post.  It is time to start thinking about it as I believe the forces of taxes, inflation and more will make it harder and harder for average Americans to make ends meet!
 
This post is for educational purposes only.  Please consult your tax professional before using any of the ideas presenting in this post.
​

​It’s the end of summer, what can I say.  My vacation is upon me, I am tired and ready for some rest.  The result is a Miscellany of short updates where my mind would not allow me to put together a well thought out blog post.  Bad mind!  Get some rest!

​I know these to phrases no longer go together (high yields and cash).  However, in our endless search for yield for clients, we did discover that the crypto space is paying yields up to 8.8% on stable coins, their version of cash.  In today’s world that is a great yield!

​Yes, it is still a bit of the wild west, but one of my favorite Macro investors, Raoul Pal of Real Vision, believes the crypto space will increase by 500X over the next decade.  If that is the case, can you really afford to ignore the space and the higher yields?
 
We believe that the real opportunity here is for the blockchain leaders to pair with governments around the world to rollout digital versions of their currencies.  We can already see this happening and believe in ten years; this space will be looked at like the internet is today, something we all take for granted but made some very wealthy.
 
We can’t easily access crypto or the higher yields on traditional custody platforms today, but if this is something you would like to explore, let’s talk further about it?  I have already done it myself.

​If there is any indicator I can think of that is pointing to the end of the world or at least a market crash it is the Hoosier Football Indicator.  My beloved Hoosiers are ranked for the first time since 1969 in the AP pole.  I said ranked, not rank.  The latter is what they have been the last 50+ years.

If history is any guide, they will fall flat on their faces and underwhelm even their harshest critics. 

​I also believe the fact that they are ranked must be some indication of a Bizzarro world, like on Seinfeld, where good is bad and bad is good.  This can only mean negative things in my estimation for the markets and our economy.  Run for the hills!!

​I have now been managing money for 27 years!  Glad I started when I was 5 years old! 
 
The last twelve years have pretty much been like the weather here in Tampa, the same as yesterday and the day before.  Hot with a chance of afternoon thunderstorms.
 
There is a famous saying that many have uttered and that is “this time it is different.”  Usually before they can finish with the last word of that phrase, they are proven wrong and the markets, economy or just about anything prove that “no – it is not different this time.” 
 
However, this time is different.  You know why!  If you said, all the asset purchases, stimulus, and spending bills.  Give the man a dollar (now worth 1 cent in 1925 dollars due to inflation).

​As you can see from the Buffet Indicator, market wise things are very, very and very expensive by historical standards, but where the government and the Fed are essentially the market, it can go as high as other nations will allow it before we lose the right to print our own currency (i.e., the right to be the reserve currency).  We will lose this right someday, but for now roll them presses!
 
By the way, it would be easy to get nervous about the markets, hide and never make the returns you should make.  This is a great time to have an advisor as we typically have processes that keep us invested and you making money up until the bitter end when we all try to hit the exit at once.

Many of you probably did not realize that I am a farmer at heart.  That is why it excites me that the long downward commodity cycle appears to be turning up.
 
It excites me so much I started a side-hustle growing microgreens in my oldest daughters’ bedroom.  After all she is off to law school and does not plan to return except to visit!
 
Check out this new venture at www.woodlynnefarms.com.   
 
For veggie haters, microgreens contain 5 to 40 times the nutrients of their larger full-grown cousins.  This means you can eat less and still get your daily allowance of essential vitamins and nutrients.

When I am back from vacation, if you live in Tampa and want to try a sample of Microgreens, just let me know.

​Can you remember the time as a kid, or even with your kids today, that you purchased a container of bubble solution?  The idea was simple, dip the applicator into the bottle, pull it out quickly and then blow into the applicator hole and watch the bubbles appear.

​Oh, the joy of blowing bubbles and then watching them settle everywhere!
 
Unfortunately, every bubble popped!  It didn’t matter whether it was a little bubble, or the giant bubble produced by some kind of larger wand!  They all popped!
 
They either popped in air or popped hitting an object, like a blade of grass, but they all popped.  It was just a matter of when, not if!
 
The same can be said of economic bubbles, they all pop eventually.   We saw the Dot.com bubble pop in 2000.  The great recession bubble pop in 2007.  Now it is just a matter of time until this one, “the mother of all bubbles,” pops.  When it pops, watch out!
 
I have written a lot over the years about this bubble!  It has been a challenge for anyone but those willing to put their full faith in the Federal Reserve (the “Fed”) and “buy the dips.”  The scary part is this is the only market many investment managers have ever seen.  The type that goes up, never stays down, and that recovers almost instantaneously from any dips.
 
In blogger Charles Hugh Smith’s recent Zero Hedge article entitled “The Moment Wall Street Has Been Waiting For: Retail Is All In”, he makes the case that this bubble has moved to a very dangerous stage, the “All-In” stage. 
 
This according to Mr. Smith is because up to this point, “the old hands on Wall Street have been wary of being bearish for one reason, and no, it's not the Federal Reserve, the old hands have been waiting for retail, the individual investor, to go all-in stocks. After thirteen long years, this moment has finally arrived: retail is all in.”
 
He further makes the case that all you need to do is look at the investor sentiment, record margin debt levels and the Buffet Indicator (chart below) to see that we are at extremes.  He makes the case that current valuations are “so extreme that the previous extreme in the 2000 dot-com bubble now looks modest in comparison.”

Now Mr. Smith may have a point, but the critical thing about bubbles is they tend to go on much longer and go much further than most would ever imagine.  Yes, we are thirteen years into this one, but does the Federal Reserve and our happily complicit officials in Washington have a choice, but to keep this one going through new spending programs, like the $1 trillion infrastructure bill now heading to the Senate, or the asset purchase programs in place by the Fed.  In doing so, they are just blowing bigger and bigger bubbles.  Ones that when they pop will hurt all but the nimblest of investors.
 
Charles Hugh Smith lists off a number of warning signs in his article that he believes to points to a possible crossroads for this current market bubble.  Signs that are not new but happen at most tops. They include:
 

• Financial advisors abandoning bonds for FANGMAN stocks and advising their elderly clients to change their allocations.
• The hubris of inexperienced traders that are supremely confident they can’t lose.
• The total collapse of risk management as 13 years of Fed intervention has emboldened retail investors.
• The rise of meme stocks, and the social media retail investing herd.
• The secular religion that stocks never go down and that the Fed will never let the market go down.
• Market and stock fundamentals that don’t matter.  The thesis that technical analysis is a waste of time.  Just buy the dips!

 
He wraps up the article by stating that these confident investors, the Robin Hood investors, do not realize one thing, they are “the marks and bag holders.” 
 
This market saga is not new!  It happens over and over again, and Wall Street is a pro at drawing in retail investors who ultimately become overconfident, buy and hold or buy every dip, only to leave them holding the bag at the top of the market while they head for the exits.
 
My friends, I would agree with Mr. Smith that we are approaching that proverbial “fork in the road” when markets top out and buying the dips no longer works.    The question is not if, but like the bubbles you blew as a kid, when they pop!
 
So how do I put a positive spin on this gloomy forecast?  I would like to give you some simple ideas that might help you avoid holding the bag or being the bagman.  They are not earthshattering, but they are tried and true!

1. Know your time horizon!  If you are close to retirement or near the point where you need to access these funds, you need to be shifting a larger and larger percentage to safer, liquid investments, even if they don’t pay as high a return.

 

1. Have a plan.  Just like a plan is important to any business, so is it important to have a plan on how you will approach the next bear market in equities.  Will you stay put?  Will you sell and move aside in tax deferred accounts only?  Will you hire an advisor, like us, to help?  You need a plan!

 

1. Diversify.  Diversify by asset class and by the manor by which your assets are managed.  It is ok to be passive invested, but you should balance this with assets that are more actively managed.  Consider broadening your allocation into commodities, currencies, precious metals, and other non-correlated asset classes as a means of protecting assets and profiting from a changing cycle.

 

1. Look for the lay ups.  The market has been so strong that it is likely future returns will be lower as a result in a movement back to the mean for returns.  Where can you capture guaranteed returns as a result.  Could paying off or down a mortgage capture a guaranteed 4% return?  How about higher interest credit or consumer debt?  If you can save 10% or more in paying down that debt, in my mind, it is a no brainer!

 
Of course, we are here to help.  If you would like to talk, just click here or give us a call.