Wealth is a relative concept, and different people may have different opinions on what it means to be wealthy. However, one way to measure wealth is by looking at the net worth of individuals or households, which is the difference between their assets and liabilities.
 
According to the 2023 Modern Wealth Survey by Charles Schwab, the average net worth that Americans say is needed to be considered wealthy in the U.S. is $2.2 million. This is up from $1.9 million in 2020 and varies by region and city.  For example, in San Francisco, the most expensive city in the survey, respondents said they needed $4.7 million in net worth to be wealthy, while in Houston, the least expensive city, they said they needed just $2.1 million.

​What about Tampa, Florida, where many of our clients live? How does it compare to other cities and the national average? 
 
According to CNBC, Tampa residents said they needed $2.4 million in net worth to be wealthy, which is slightly higher than the national average and lower than most other major cities.
 
Tampa is one of the fastest-growing cities in the U.S., with a population of about 400,000 and a median household income of $59,893, according to the U.S. Census Bureau. The cost of living in Tampa is lower than the national average, but higher than some other cities in Florida. The median value of owner-occupied housing units in Tampa is $277,700, which is higher than the state average of $248,700.
 
Tampa residents also have different perceptions of wealth than other Americans. For instance, 52% of Tampa respondents said they feel wealthy, compared to 48% of all respondents. Moreover, 60% of Tampa respondents said they live paycheck to paycheck, compared to 53% of all respondents.
 
Additionally, Tampa residents have different priorities and goals when it comes to their finances. For example, 40% of Tampa respondents said their top financial goal is saving for retirement, compared to 35% of all respondents. Furthermore, 38% of Tampa respondents said they would use an unexpected windfall to pay off debt, compared to 29% of all respondents.
Wealth is obviously a subjective term that depends on various factors such as location, income, expenses, assets, liabilities, and personal preferences.
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The real question is do you have this kind of wealth?  The answer unfortunately is few have this kind of wealth.
The better question for many may be “do you have a good financial plan and a willingness to embrace the facts and options available to you?”

Yes, it would be simple if we were all “wealthy,” but the fact is that more than 90% of the population will never meet the definition of wealthy. 

So, what are you going to do to meet your specific goals and objectives without the ability to spend like a politician (i.e., the wealthy).

We can help with that plan!  Click here to get started.

​The Federal Reserve (“the Fed”) in each of its recent meeting releases has called the inflation we are now experiencing “transitory.”  The result of the reopening of America post Covid-19 and supply chain disruptions with everyone attempting to purchase product all at once in a “just in time” inventory system that adjusted to the lack of demand in 2020 and now is having trouble getting back up to full capacity on the re-open.
 
Our take is that the Fed is actually correct this time (as much as we hate to admit it).  If there was lasting inflation in the economy, we would see it in the velocity of M-2 money, where money is changing hands from one person to another.  As you can see in the St. Louis Fed chart below, the velocity of money is still trending lower.

If inflation was truly present, we would see rising use of credit.   However, the Wall Street Journal reported on May 11th that “Americans are paying down their credit-card debt at levels not seen in years.”

​Our Take
 
We believe the current inflationary trend is transitory.  Much of it is supply chain related and purchasing managers have been ordering double or triple their normal order sizes to get product.  Much of these orders will be cancelled when some product comes through the supply chain. 
 
We can already see Wall Street starting to move towards a slower growth and disinflationary stance in the charts as many commodity charts are now looking like they will correct (pull back) and technology and growth stocks appear to be bottoming.

For instance, this chart of the commodity CRB index shows that such prices are now at the historical downtrend line.  The price momentum has waned and it starting to roll over. 

In our portfolios, we have started to move away from pure commodity plays and back to deflationary assets, like precious metals as it is clear to us that the commodity complex will at least pull back here in a deflationary retreat.
 
We believe that growth will come in slower than anticipated over the next few quarters on a comparative quarter over quarter basis.  There will be more saber rattling about large tax increases by Washington and this will create a deflationary push back to growth stocks and away from value and commodities. 
 
Interest rates (i.e., yields) will again move sideways to down as it becomes clear that the inflation we have experienced, for the most part, was transitory.
 
We believe you could see sideways to down markets in those names now doing well.  We are not sure how far this weakness could extend, but it’s possible the whole market takes a breather.
 
Weakening growth will spur further intervention by Washington and increased asset purchases by the Fed.  This will help keep market stabilized and moving upward, but at what long-term impact?
 
The next step we believe is that Americans and developed market consumers go back to life as normal.  However, lurking out there some time down the road is the fact that consumers do become more confident and start spending.  Maybe it because they finally start to make higher wages, which is inflationary.
 
This spending begets spending and the velocity of money starts to turn upward.  It is here where the Fed and other Central Banks now need to be careful as we could see not just inflation at that time, but hyperinflation because of a stimulus and easy money now prevalent in the markets.
 
We obviously don’t know the timing of that latter phase, or if it will even happen.  However, we do know that the market will continue to have periods of inflation and then deflation as it did in prior cycles.  The easy money of the past 30-40 years is done, over.  The same old 60% stock and 40% bond portfolio is going to struggle at times in this new cycle.
 
So, let me leave you with a question?
 
Is your advisor going to be able to navigate what I just laid out without losing you money? 

If the answer is “no,” how about scheduling a time to talk about your investment assets?

Sometimes is seems the Federal Reserve and other Central Banks are running counterintelligence agencies and not reserve banks.  A perfect example of this is Federal Reserve Chairperson Janet Yellen's comments on Friday that “in light of the continued solid performance of the labor market and our outlook for economic activity and inflation,” the case for raising interest rates again has gotten pretty strong of late.

The truth is that the economy is weak and there is no way they are raising interest rates. This was evidenced by the market's fast intraday reversal of more than 100 Dow points. 

It seems the Fed's best tool at present is to talk the market into believing they are leaning towards interest rate normalization (i.e. tightening) and then find reasons not to follow through.  At least the other Central Bankers are not so nefarious with their actions.  They are out there buying equities and pumping up markets with ever increasing monetary stimulus.

So where will all this lead?

I spent a good part of the weekend trying to figure out just that.

The truth finally hit me when I watched a simple economic video that defined deflation, hyperinflation and stagflation.

According to Crash Course, hyperinflation is where inflation rises by 50% or more per month.  So with hyperinflation the velocity of money increases as people spend money as quickly as possible to avoid a decline in the value of their money.  This increased velocity of money changing hands increases inflation exponentially.

Deflation is a contraction in the supply of circulated money within an economy, and therefore the opposite of inflation results from declining or stagnate wages and falling prices.  The velocity of money falls as people wait to buy what they perceive will be less expensive in the future.  This decreased velocity of money changing hands increases deflation.

Finally stagflation is when output stagnates at the same time that inflation rises.  The end result of stagflation is price inflation, rising unemployment or stagnant wages and a disastrous economy. With stagflation the velocity of money may increase but output does not allow for significant increases as there is not the wage growth to support people spending money as quickly as it is earned.

So the key to understanding where we are headed is to examine the velocity of money which luckily for us the St. Louis Fed provides to anyone who cares to look.

​Here is the current velocity of money:

M2 is a measure of the money supply that includes all elements of M1 as well as "near money." M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits, according to Investopedia.com.

Notice how the velocity of money continues to fall off a cliff or move downward on the right edge of the chart.

Assuming this data is accurate from the St. Louis Fed, this means that we continue to battle deflation.

So as investors, what does this mean?

First, you should delay buying things where prices have generally declined over time.  The longer we wait, the lower the price (unless it is textbooks, college tuition, or healthcare).

Second, the government will not stop printing money until there is no more deflation and the velocity of money starts to rise.

This means that they will continue to try to find ways to make you feel wealthier, such as supporting equity markets.  The Fed is not doing this directly, but Japan and Switzerland sure are buying U.S. equities and rumor has it that the U.S. has a facilities line with the Swiss that they are using to buying U.S. equities on behalf of the Fed because it cannot by mandate (at least openly).

Mike Maloney of GoldSilver.com believes that first there will be deflation in the U.S. followed by all out monetary and fiscal assaults to overcome deflation and then that will be followed by hyperinflation.

If he is right, we still appear to be in the deflationary stage and more stimulus is like to be the result.  At the moment global growth is weak or in recession.  The monetary policy is barely working because of wage stagnation, weak output and recessionary pains around the globe.  All the more reason for those in power to double down!

At some point, growth will increase and inflation will take off.

So my final recommendation is use this time is to look for opportunities to buy at value today things that go up when inflation hits. These items include stocks, gold, real estate and other hard assets.   I cannot tell you the timing of when things shift, but I believe it will happen.  For all I know it may be happening now as gold has broken to new highs.  I personally am looking to use the pullback currently underway to add to my position as a hedge against inflation and further debasement of global currencies.

Last Saturday night I finally did it!  I watched the movie "The Big Short."

It was not as bad an experience as I had imagined.  My family was even impressed how many of the players in this story I knew or had dealings with prior to the Great Recession of 2007.

The most painful part was watching Dr. Michael Burry of Scion Capital LLC pony up on CDS settlements and the financial fraud on Wall Street that prevented his short investment from being fairly priced and from it making money initially.  I too lived this nightmare!

At the time, we ran a hedge fund of fund invested in a focused group of hedge fund managers.  That fund included managers who had shorted the mortgage markets, just like Scion, and they too realized early losses.  So much so that in 2007, these losses affected our overall portfolio performance so much so that our largest investor wanted out and I had to make the decision to shut down our fund.

The next year of course, the mortgage markets tanked and I was vindicated.  However, unlike Dr. Burry, I  now was without a fund to profit from the decline.  That's tough! 

So as I watched The Big Short, I couldn't help but think about the corollaries with our current stock market.  Believe it or not there are a lot of corollaries!

Here are just a few:  

• Greed has distorted one or more markets
• Politicians have either encouraged or backed away from regulating obvious bubbles
• The Central Bank policies have encouraged group think and a dangerous mania behavior
• People who shouldn't qualify for loans are receiving loans
• Lender agents are getting rich on loans to poor quality borrowers (thinks students and auto loans this time around)
• Wall Street is once again profiting with the historical precedence (new this time) that the public will bail them out if all goes bad

I am sure there are more, but these are the major themes I could come up with off the top of my head.

Let's put aside the fact that this is going to end badly again for the borrower and the lenders (assuming they are not again bailed out), but how about the unintended consequences of such rampant greed and monetary policies?

As as active investment manager, I can tell you one of the scariest unintended consequences I see is the rush to low cost, buy and hold or passive index strategies.

Now don't get me wrong, I believe in low cost and passive strategies.  However, we believe they should be combined with other ways of managing funds, such as actively managed strategies, to reduce overall portfolio risk.  We call this mix of active and passive strategies a multi-disciplined portfolio.

For us, it is not one or the other, but both!

What I see is the wholesale dumping of active managers because quite frankly they have under-performed and the markets are being move by just one thing, Central Banks.   Just look asset purchases over the most recent rolling 3 month periods since 2009:

Instead of declining, global markets slowly melted upward on low volume and widespread rumors that the Bank of Japan was going to initiate "Helicopter Money," which they have since denied as even possible under their constitution.  

By the way, markets do not usually move up on declining volume.  It is usually increasing volume that is the telltale sign of buying.

Yet here we sit at new highs with deteriorating economic fundamentals across the globe and stocks shrugging off bad news on hopes of more Quantitative Easing or even "helicopter money".

Not to sound bitter!  We have adjusted our exposure on the market breakout and I love a good bull phase as much as the next manager.  However, what I fear is the unintended consequences of this continued policy.

As I alluded to earlier with every passing day more and more investors move to passive index strategies to lower their cost of management and ride the market wave. Essentially, they are putting their complete confidence in this grand Central Bank experiment in monetary policy.  They are betting that continued money printing will prop up markets.

But what if they are wrong?

Buy and hold is just that buying and holding positions.  What if the Central Banks have lured them into the markets and into strategies that do not have built in adequate risk management, beside the always dubious diversification of assets?

What if the Central Banker's ultimate strategy is unload their portfolios on these unsuspecting roller coaster riders we call passive investors.

Who will be left holding the bag?

Let's say these investors are on top of their games and as the Central Banks start to shift to net sellers, they likewise start to sell.  Can you imagine the downward pressure that will come upon stocks globally?

I can tell you one thing, these passive investors, no matter how smart, likely do not have the tools available to them that active investors do to identify tops and adjust market exposure.  Let alone flip short (inverse) and profit from such declines. 

This will be a blood bath!

So now let me take it full circle, the movie "The Big Short" reminded me of the pain that I and other investors realized in the short-term on short positions or managers that took short positions on the mortgage markets.  

That pain however was nothing like the pain active managers (especially trend followers) have experienced over the last seven years of this Central Bank managed market.  

However, just like the big payoff in 2007-2008 for the managers who shorted the mortgage markets, the managers who can manage risk, market exposure and even profit from declining markets are going to clean up when this market finally does turn.

The difficult part of all this for most Americans is that I fear you will be left holding the bag once again.  As most of you will agree, another Great Recession and there is no way you are reaching your investment or retirement goals.

So my suggestion to you is this: Make sure you, your investment managers or your adviser are managing downside stock market risk so that you can avoid being one of the millions of Americans who could be left holding the bag in the next crisis.  You know it is coming!  We all do if we are honest with ourselves.

If we can help, please feel free to reach out to us.   

I recently started binge watching AMC's Mad Men on Netflix after finishing all of season four of House of Cards in less than a week.  Mad Men is set around the late 1950s and early 1960s and follows the rather torrid, high pressure lives of Madison Avenue advertising firms.

The shows main character, Don Draper, in season one received a raise from his firm from $30,000 per year to $45,000.

​Now being the boring financial type, my mind immediately wondered how inflation, or the increase in price levels, had affected Don's salary and what that would equate to in today's dollars.  Fortunately, I did the math for you. 

The actual average inflation rate from 1960 - 2015 was 3.85% per annum according to the Bureau of Labor Statistics (BLS).  If we assume his raise occurred in 1960, Mr. Draper's salary would be almost $360,000 in today's dollars.  Now I have been to Manhattan many times and I can tell you that $360,000 does not go very far there now.

However, my point is that inflation robs us of our purchasing power and governments love inflation and not so much its ugly cousin, deflation.  

Since governments love inflation, we must keep an eye on inflation.  Fixed income or bond investors are the most at risk as their income stream is usually discounted by inflation to determine the value of today's money in the future.

Inflation is what motivates equity investors to take risk in hope of higher returns.  Where the bond investor is mostly just trying to protect capital and stay up with inflation after taxes, the equity investor is hoping that additional risk taking translates into additional returns up and above inflation and taxes.  Of course as we have seen over the past decade or more there is no guarantee that this goal is achievable.

So the bottom line here is that although Mr. Draper's theoretical salary may have risen, I would guess that Mr. Draper would tell you his salary today just "does not buy what it used too."  

As investors, we must realize that inflation can have a very real effect on our financial dreams and goals.  We must work hard to position ourselves and our portfolios to at least stay up with the change in inflation.  

For those not yet in retirement, we must also realize that saving (or adding to our portfolios) tilts our chances of achieving those goals and dreams in our favor as depending on investment returns alone to outstrip inflation and taxes is not a game that everyone wins!

By the way, April 15th is fast approaching!  There is still time to add to your retirement savings and lower your 2015 taxes ahead of the April filing deadline.  Let us know if we can help. 
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