In today’s world where healthcare costs are always on the rise and financial planning is more crucial than ever, Health Savings Accounts (HSAs) have emerged as a valuable tool for individuals and families alike. Offering a unique blend of health and wealth benefits, HSAs provide a tax-advantaged way to save for medical expenses while also offering potential long-term investment growth. HSAs are unique in that they offer a triple tax advantage – contributions are pre-tax, thus lowering your taxable income, the dollars in the HSA grow tax-free, and future distributions come out tax-free if used for a qualifying medical expense.

Understanding Health Savings Accounts (HSAs)

At their core, HSAs are tax-advantaged savings accounts available to individuals enrolled in high-deductible health plans (HDHPs). These accounts allow you to set aside pre-tax dollars to pay for qualified medical expenses, including deductibles, copayments, and other out-of-pocket costs. Unlike Flexible Spending Accounts (FSAs), funds in an HSA roll over from year to year and are yours to keep, even if you change health plans or employers.

The Benefits of Health Savings Accounts

1. Tax Advantages: Contributions to an HSA are tax-deductible, reducing your taxable income for the year. Additionally, any interest or investment earnings within the account grow tax-free, and withdrawals used for qualified medical expenses are also tax-free. This triple tax advantage makes HSAs one of the most powerful savings vehicles available.
2. Ownership and Portability: Unlike employer-sponsored health accounts like Flexible Spending Accounts (FSAs), HSAs are owned by the individual. This means you can take your HSA with you if you change jobs or health insurance plans, providing flexibility and continuity of savings.
3. Long-Term Savings Potential: While many people use HSAs to cover immediate medical expenses, these accounts also offer a valuable opportunity for long-term savings. Once you reach a certain balance, typically around $1,000, you can invest your HSA funds in a range of investment options, such as mutual funds or stocks, allowing your savings to potentially grow over time.
4. Retirement Planning: One of the lesser-known benefits of HSAs is their potential to serve as a supplemental retirement account. After age 65, you can withdraw funds from your HSA for any purpose penalty-free (though non-medical withdrawals are subject to income tax). This makes HSAs a valuable tool for covering healthcare costs in retirement, which can be substantial for many individuals.

Maximizing Your HSA

1. Contribute Regularly: Take advantage of the tax benefits of HSAs by contributing the IRS maximum each year. For 2024, the annual contribution limit is $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution allowed for those aged 55 and older.
2. Use it Wisely: Be strategic about when you use your HSA funds. Consider paying for minor medical expenses out-of-pocket and allowing your HSA balance to grow over time. This way, you can harness the power of compounding interest and investment growth for long-term savings.
3. Invest for Growth: Once your HSA balance reaches a comfortable level (perhaps the annual deductible amount or max out of pocket amount), consider investing a portion of your funds in diversified investment options. Like any investing there is risk involved, but investing your HSA funds can potentially yield higher returns over time, helping you build wealth for the future.
4. Save for Retirement: You can treat your HSA as a supplemental retirement account by prioritizing long-term savings. If you’re able to cover current medical expenses out-of-pocket, consider leaving your HSA funds untouched and allowing them to grow tax-free until retirement.
5. Keep Track of Expenses: To ensure compliance with IRS regulations, keep detailed records of your medical expenses and HSA withdrawals. This will make it easier to substantiate any withdrawals in the event of an audit and ensure that you’re using your HSA funds appropriately.

Health Savings Accounts (HSAs) offer a unique combination of health and wealth benefits, providing individuals and families a tax-advantaged way to save for medical expenses while also offering potential long-term investment growth. By understanding how HSAs work and implementing strategic savings and investment strategies, you can maximize the value of your HSA and secure your financial future. Whether you’re using your HSA to cover current medical expenses or saving for retirement, HSAs are a valuable tool for achieving both health and wealth goals. As always, every situation is different, and we are happy to discuss the utilization of HSAs as part of your overall financial plan.

Tax season is once again upon us! We wanted to share a quick update for any tax documents that you may receive from Pershing.

Your Form 1099 & 1099-R will be sent through Pershing’s electronic delivery unless you are set to receive hard copies which will be mailed through the US Postal Service.  For those receiving electronic delivery, the tax documents can be found on the CJM Client Portal as well as Pershing’s NetX Investor sites.

We also want to remind you that realized gains/losses are part of the Form 1099.

When will I receive my tax documents?
January 31: Form 1099 will be sent for those clients who hold only stocks and bonds. Form 1099-R will also be sent for those clients with retirement account distributions (IRAs).

February 15: Form 1099 will be sent for those clients who have mutual funds, REITs, etc. If a 1099 is not yet ready, a “Pending 1099” notice will be sent to you.

February 28: Most of the remaining final 1099s will be sent at this point.

March 15: This final 1099 mailing would be for the fund companies that were very late in sending income reclassification data to Pershing, causing them to miss the February 28th deadline.

How do I download my tax information into TurboTax?

If you use Quicken, Turbo Tax, or H&R Block for your tax preparation, you can import your account information directly from NetXinvestor for both investment accounts and bank accounts.

1. Once logged in, you will be prompted to import 1099 information.
2. For your Pershing accounts, please select – BNY Mellon|Pershing
3. This will prompt you to enter your Investor portal User Name & Password.

How do I find the amount of municipal bond income that is excluded from state tax?

If you owned a municipal bond fund and are being asked for the amount in which your income dividend is also to be excluded from state tax, use these sites:

American Funds: https://www.capitalgroup.com/individual/service-and-support/tax-center/interactive-worksheets/munibondtax.htm

T Rowe Price:https://www.troweprice.com/personal-investing/resources/planning/tax/fund-specific/t-rowe-price-tax-free-funds.html

If you owned municipal bond funds from other companies, you can use Pershing’s helpful tool: https://ofx.netxinvestor.com/tools/mftoolsecure

Where do I find my tax documents?

For accounts held at BNY Mellon/Pershing you can find the information on the CJM Portal or Pershing’s NetX Investor site.

CJM’s Client Portal Website

1. Sign on to:https://login.orionadvisor.com/
2. Click on the Folder icon in the left menu bar
3. Click on Pershing Documents
4. Click on Tax Statements
5. In the top right, change the year to 2023 to access the tax year 2023

Pershing’s NetX Investor Website

1. Sign on to NetX Investor Site: https://investor.pershing.com/nxi/welcome
2. Go to Communications on the left-hand side and choose All Documents
3. Click on Tax Documents for Income, Dividends, and Realized Gain/Loss information.

Be aware that in non-qualified accounts (Trusts, Joint, Individual, etc.), you could have a combination of covered and non-covered cost basis. You should report both the covered and the non-covered cost basis, not just the covered amount.

End of Year Reflection – Be Authentic by David Greene

As a firm, we always try to pause as the year comes to a close to reflect on the past 12 months and consider what the next year may have in store for us.  2023 often seemed consumed with headlines about AI (artificial intelligence), deep fakes, and ChatGPT.  Now, almost as a counterbalance, my thoughts lead me to the concept of “authenticity”.  It seems that I am not the only one thinking of this – did you know that Merriam-Webster’s word of the year for 2023 was, in fact, “authentic”?!?

Exploring what it means to be authentic fits quite well with this time of year when many of us focus on the very REAL triumphs and challenges that we faced in 2023.  It’s highly likely that our success in those ventures relied on the genuine authenticity of everyone involved to get to the root of the problem and find a long-term solution.  In a world of ten-word tweets and five second sound bites, we often miss the genuine parts of a story or the very real consequences of an event.  More and more, we seem to depend on computers and computer-generated content to do our thinking for us.  Yet, I maintain hope and confidence that REAL people will maintain their AUTHENTIC dreams and see those dreams to fruition.

We see this authenticity of living REAL lives on a daily basis through the lives of our clients.  Adult children generously supporting one aging parent serving as caregiver to another parent struggling with a life altering condition like Parkinson’s or Alzheimer’s.  Professionals inspired to reinvent themselves with a second or third career focused on various non-profits with the mission of helping those in need. Young adults leveraging their parents’ investment in their education to lead fulfilling lives with inspiring careers.  Artists and musicians in our client family who show incredible creativity and talent through music, painting, etc.  Families suffering through the loss of a cherished grandparent while honoring their legacy through hard work and sacrifice.

At CJM, we also strive to model such authenticity in our support of and interaction with our clients. It can be as simple as sympathy card written by a real person with genuine emotion. Even the act of actively listening to a client without interruption to truly understand their current situation.  Our team strives to consistently and genuinely help our clients with REAL solutions and an authentic interest in their lives and their futures.

So, as we all hopefully find time to celebrate the holidays with friends and family, let us commit to each other to maintain our authenticity as human beings.  To have empathy and grace.  To challenge each other while maintaining mutual respect.  To harness passion, innovation, and inspiration.  Look out 2024…it is about to get REAL!!!

Day of Service 

This fall CJMers volunteered at the Audrey Moore Rec Center in Annandale. We were graced with beautiful weather to do some pruning, weeding, and planting of colorful bushes. We all really enjoyed the positive feedback from the local residents and spending time together out in the community.

GMU Externship Day at CJM

Brian Jones hosted a group of students from George Mason University’s Financial Planning & Wealth Management department. Brian has served on their Advisory Board since its inception and works with the financial planning community to promote the degree program, recruit, and outreach to the student body, as well as accreditation.  As part of the Financial

Planning & Wealth Management Externship Experience, the students got to spend time at CJM and learn more about the inner workings of a wealth management firm.

PINK DAYS!

This year CJM had several Pink Days in support of Breast Cancer Awareness Month. CJM has 4 breast cancer survivors, several of whom also fundraise to support the cause and bring awareness and outreach to their communities. We are stronger together!

For those still actively working full time, funding your employer retirement plan every year is the foundation of any long-term plan to retire from the workforce. Setting aside dollars today into a tax deferred account (401(k), 403(b), TSP, etc.) helps to grow one’s nest egg for tomorrow when you are no longer working full time. Clients frequently ask how they could save more into these plans, since there are limits, and one great solution is the ‘Mega’ Back Door Roth.

Let’s take a step back and review how this works. All retirement plans have a maximum annual contribution amount. In 2023, the maximum annual employee contribution to 401(k)s, 403(b)s, and the TSP is $22,500.  If you are over 50, there is an additional “Catch-up” contribution of $7,500.  The IRS has announced the 2024 contribution limit will increase to $23,000, but the catch-up contribution will remain at $7,500.

There is another number to be aware of in 2023 — the maximum that can be contributed to a 401(k) plan by both the employee and employer is $66,000 (or $73,500 if you are at least 50 years old).

       Source: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401(k)-and-profit-sharing-plan-contribution-limits

So, if you are a high income earner and have maxed out your annual employee contribution ($22,500/ $30,000 in 2023), what should you do next?

Enter the “Mega” Back Door Roth.

The “Mega” Back Door Roth allows you to contribute above and beyond the $22,500/$30,000 to your employer retirement plan.

In order for this strategy to work, you must meet certain criteria:

1. Have earned income to contribute and enough disposable income to make after-tax contributions
2. Your employer plan allows you to make those after-tax contributions
3. The plan must allow periodic in-service distributions or Roth conversions of your after-tax money and any earnings

Roth accounts are a better “deal” for taxpayers in retirement compared to a traditional account for a few reasons. Traditional accounts require an annual distribution beginning at age 73 (age 75 beginning in 2033). This distribution is taxed at ordinary income tax rates, whereas Roth distributions are federal tax free.

Let’s look at how this strategy has worked for our clients using the case studies below.

Case study

Client (age 42) works for a large IT company. The company 401(k) plan allows after-tax contributions and periodic in-plan Roth conversions. In 2023, she contributes $22,500 as her base employee contribution to her company’s 401(k) plan. Her company matches 5% of her $400,000 annual salary to the plan totaling $20,000.

Employee pre-tax contribution   $22,500

Employer contribution                    $20,000

Total 2023 contribution                  $42,500

On top of the contributions above, she contributes an additional $23,500 in after-tax contributions to the 401(k) plan to reach the maximum of $66,000. She immediately does an in-plan Roth conversion of these dollars (if done immediately, there should be no additional income tax liability on the $23,500 as there won’t be any earnings).  These dollars are now in a Roth 401(k) meaning that they will grow tax deferred and distributions in retirement will be federal tax free.

As you can see from the example above, this employee is making maximum use of their employer retirement plan by a) maxing out their annual employee contributions b) maxing out the employer annual matching contribution and c) deferring additional after-tax contributions inside her 401(k) plan and immediately converting these additional contributions to Roth for retirement.

Age 50+ case study

In the example above if the client were age 50 (instead of 42) her contributions would look like this in 2023:

Employee pre-tax contribution                                  $22,500

Employee age 50+ “Catch-up contribution”            $7,500

Employer contribution                                                $20,000

Total 2023 contribution                                                $50,000

In this example, the employee would also make an after-tax contribution of $23,500 (after which the employee does an in-plan conversion of the after-tax dollars to a Roth 401(k) as the IRS allows up to $73,500 including the age 50+ catch-up.

Whew. The tax code, qualified retirement savings rules plus upcoming changes as part of the SECURE 2.0 Act make this quite a complicated tax strategy. But leveraging after-tax contributions inside your employer retirement plan has significant benefits over the long term if done properly.

Note that everyone’s situation and plan is different. You should work with your planner and tax preparer to implement the strategies above.  If you have questions about maximizing your retirement savings or any additional options available to you to make more of your hard earned dollars tax-free in retirement, please contact us today.

Required Minimum Distribution rules used to be simple enough that clients knew when they were subject to the rule. Confusion around Required Minimum Distribution (RMD) rules started in 2019 with the passing of the Secure Act. Additional changes over the past four years have prompted many questions from clients. In this article, we’ll summarize the current rules, what is different for 2023, and what you should do if you have questions.

Current Required Minimum Distribution Rules

• Traditional IRA RMDs must be met as outlined in the below chart

• Inherited IRA RMD rules have not changed for IRAs inherited prior to 2020.
  • Prior to the SECURE Act, beneficiaries of Inherited IRAs had the option to “stretch” the distributions over their own life expectancy, allowing for potentially smaller annual distributions and longer tax-deferred growth.
• IRAs inherited in 2020 or later, most beneficiaries must fully distribute the account within 10 years. In addition:
  • If the original IRA owner was taking RMDs during their lifetime, an annual RMD may be required. However, this requirement is currently waived through 2023.
  • If the original IRA owner had yet to begin taking RMDs, annual RMDs are not required.

So how did we get here? Prior to the passing of the SECURE Act at the end of 2019, the age to start taking RMDs was 70 ½ years old. The Secure Act changed the RMD rules for anyone other than a spouse who inherited an IRA in 2020 or later. The major change requires non-spouses to take all money out of the Inherited IRA within 10 years. My partner, David Greene, put together a great summary article of the SECURE Act.

The Secure Act 2.0 clarified a few points and materially changed the RMD age to 73 starting in 2023, then back further to age 75 beginning in 2033. My colleagues, Brian Jones and Parker Trasborg, wrote an article highlighting the changes.

The IRS ultimately waived the new inherited RMD requirement for 2021 and 2022. They also issued guidance that annual RMDs may be due going forward and vowed to clarify the rule. In June of this year, the IRS issued additional guidance that further waived inherited RMDs for 2023 and noted that final guidance should be expected in 2024. Beneficiaries who inherited their IRAs in 2020 and after may be required to take their first annual RMD in 2024. In 2024, anyone subject to an annual RMD would need to take that distribution or face a tax penalty of 25%. Of course, we’ll continue to monitor the situation in case the IRS decides to change its mind again.

For some clients, it makes sense to take an Inherited IRA distribution this year even though there is no requirement. The 10-year rule still applies, so it’s important to work with your accountant and financial planner to plan for the long-term tax bill that could be associated with the distributions.

With the frequent changes to the RMD rules, our clients have had a lot of questions about their RMDs. At CJM, we handle RMDs for all our managed clients to alleviate the stress of having to keep up with these ever-changing rules. If you still have questions or are uncertain whether you are subject to an annual RMD, please don’t hesitate to reach out; we’d be happy to have a conversation.

Section 529 plans are tax advantaged savings plans that allow you to save money for a beneficiary’s educational expenses. Sometimes referred to as “qualified education (or tuition) plans”, these plans allow for contributions into a 529 savings account to grow income tax deferred and these dollars may be withdrawn federal income tax free for education costs.

Some history….

Section 529 was originally created by Congress in 1996. This allowed for federal rules with regards to taxation of 529 plans. Numerous states have set up their own 529 plans (classified as either a tuition savings plan or a prepaid tuition plan) and these may offer additional state income tax benefits for contributions in a calendar year.

Revisions to the laws over the years have broadened this unique college funding planning tool. Today, it is possible to use up to $10,000 of 529 plan funds annually to pay for K-12 qualified education expenses.  However, there is one major development that we continue to watch with great interest: the ability to convert up to $35,000 of unused 529 plan dollars (beginning in 2024) into a Roth IRA, without being subject to income tax limitations.

In December 2022, Congress passed the Secure Act 2.0 which contained a provision allowing for a Roth IRA rollover of unused 529 plan dollars beginning in 2024. It makes sense that the goal here was to alleviate worries about incurring penalties or income tax in the event that 529 money saved over years was not needed in the future for education purposes.

As always, the devil is in the details. While final regulations continue to trickle out on this important planning issue, here are some key current specifics:

• The 529 plan must have been open for a minimum of 15 years.
• The owner of the Roth IRA must also be the beneficiary of the 529 plan.
• Rollover requirement is subject to earned income, meaning the Owner must have includible compensation at least equal to the rollover amount in the current tax year.
• Contributions made to a 529 plan in the last five years plus earnings are ineligible for a tax free transfer.
• The lifetime limit for these rollovers is capped at $35,000 per person and is limited to the annual IRA contribution limit which in 2023 is $6,500.

As a parent of two teenagers rapidly approaching college, this will be a topic of conversation with my wife regarding the 529 plans that we have for our children. By leveraging this change in the tax code, parents can add some additional resources to their 529 plans that, if not used for college, can give their children a jump start on their retirement funding upon graduation from college.

Saving for college gets an unexpected major boost with SECURE 2.0. For working age parents looking for every tax advantaged way to save on taxes and help their children get started after college, this new benefit is an added opportunity that is worthy of your consideration.  These are the current rules as of July 2023 and as with all changes to the tax code, they are subject to change in the future.

As I meet with clients and prospects to discuss retirement planning, I usually greet them with more “lifestyle” questions than they might expect.  I’ve always been a strong believer in the concept that you need to be going “toward” something, not just “leaving” something to feel fulfilled.  This is especially true to the monumental decision on when to retire from working life.  That decision is so much more than financial.  It wraps up a person’s entire sense of self and seriously impacts your happiness going forward.  Money is not the goal; it is simply a means to that end.  The life you want to live is the goal!

It’s understandable that you may not have clarity on how that journey will look.  I describe it as having a foggy windshield.  Slowly, over time, I hope by talking through the options, clients will have more expanded conversations among themselves.  It seems like when we’re in our 30’s, the dreams come easily. My 29-year-old son can tell you a dozen things he wants to do when he retires.  I don’t know why that exercise gets harder as we get closer to actually stepping away.

Some plans beyond working can be simple, such as losing those stubborn twenty pounds, beginning a regular exercise routine, or learning a new language.  In fact, did you know that many universities and community colleges allow seniors to audit classes free of charge.  Imagine learning in a college setting again when you’ll really appreciate it!

Many retirees offer their time and talents in the community as volunteers. I can’t recall the last time I toured a museum, art gallery, church or cathedral where the guide/docent wasn’t a retiree.  What a great way to stay active and sharp while giving back!

There are a few common things all people want in retirement.  Everyone wants a safe and comfortable place to live, with access to good medical care and the financial independence to afford those things.  That’s really it.  That’s where we come in, to help make sure that the financial side of the equation will support successful retirement, however YOU define it.

So, looking ahead, what do you want to do after you retire? Do you plan to stay in the area? Are you retiring for good or just from your current career? You will have the gift of time.  Have you given any thought on how you want to spend that time? Do you love to travel or are you a hobby person? What’s your dream? Where is your happy place?

CJM hosts Dr. Anirban Basu from Sage Policy Group, presenting Show Me the Money (Supply). Soft landing? Something harder? This presentation will supply in-depth analysis of the major factors shaping economic outcomes, including central bank policymaking, worker attitudes, business confidence, and geopolitics. It will then turn toward a forecast for the year to come, highlighting the major risks that economic stakeholders will likely encounter.

Jessica Ness:

Okay, so we’ll go ahead and get started. As I’ve mentioned, I’m Jessica Ness, owner and senior vice president here at CJM, and we’ve got a great presentation planned for you guys today. I’ll introduce my speaker in a moment, and he will spend about 45 minutes taking us through a presentation. Then we’ll leave a few minutes at the end for Q&A and my colleague Parker Trasborg here. He will be collecting your questions along the way plus anything submitted to us prior. So we’ll try to tackle as many of those as we can. So let’s go ahead and get started. Again, welcome. Thank you for joining us. We appreciate you guys taking time out of your really busy days. I know there’s always lots going on. We value your trust, partnership, just really thank you guys for joining us today. We’re excited to welcome economist, Dr. Anirban Basu from Sage Policy Group.

We saw Dr. Basu most recently at one of our industry conferences, the FPA Conference earlier this year, and he impressed us in his engaging and interesting presentation. As you can imagine, that’s high compliments for economists that we run into. So as our clients know, we believe in education and awareness. To that end, we invited Dr. Basu to speak with us today. Now his presentation will supply in-depth analysis of the major factors shaping economic outcomes, including central bank policymaking, worker attitudes, business confidence, and geopolitical politics. Then it’ll turn to a forecast for the years to come, highlighting the major risks that economic stakeholders will likely encounter.

Now, Dr. Basu himself is a study in contradictions. He’s been called an economist with a personality, which we’ve seen, or alternatively, one with a sense of humor. He has been twice recognized as one of Maryland’s 50 Most Influential People. He has also been named one of Baltimore Region’s 20th Most Powerful Business Leaders. In 2014, Maryland Governor Larry Hogan appointed Dr. Basu as Chairman of the Maryland Economic Development Commission. Quite a mouthful, and he teaches global strategy at Johns Hopkins University and serves as the Chief Economist function for a number of organizations across the country. He has also read every one of Agatha Christie’s novels as an avid fan of James Bond, loves English football, Indian cricket, all the Baltimore teams, as do I, and lives with his wife and two daughters, Kimaya and Kohena. Dr. Basu, thank you again for joining us, and take it away.

Anirban Basu:

All right, let’s do this. Thank you so much, both of you, Jessica and Parker, for inviting me. I want to share my screen as it turns out, and going to go through some slides here. As had been noted, please use that Q&A function to ask your questions. Obviously, I hope to answer some of your questions with respect to the economy as I go through the material, but please don’t hesitate. Indeed, Parker and Jessica have told me that if there’s a question that fits neatly with what I’m speaking about in that moment, they’ll ask it while I’m going through the material. I will leave some time at the end parenthetically for questions and answers. My presentation today is entitled, Show Me the Money Supply. This is a Tom Cruise themed presentation. You’ll see that theming throughout the presentation whether you like it or not. I hope you don’t hate it, but it’s firmly baked within the cake.

This is Tom Cruise from the 1996 film, Jerry McGuire, in which he plays the role of a sports agent with a single client, the fictitious Arizona Cardinals wide receiver, Rod Tidwell, played by the actor, Cuba Gooding, Jr. In any case, it’s not about Tom Cruise so much as the economy, but the question then becomes, why wouldn’t an economist introduce the concept of money supply right from the get go? The topic of the economy is vast. So why because money supplied? Well, as it turns out, it’s at the heart of the matter. Much of the data I will show you today, our time series data. So the more contemporary data will be part of the right of the slide. This is Money Supply Graph back to 1959 and again, focusing on the right side of the slide, you can see that during much of the pandemic recovery period, this phenomenal growth in money supply. This is engineered largely by policymakers.

The Federal Reserve, expanding the size of balance sheet. Flooding the banking system with liquidity, driving interest rates as close to zero as was possible to try to induce people to borrow more and spend more, borrow more and invest more to countervail the worst effects of the pandemic on the economy. The federal government also is borrowing lots of money and spending lots of money in the economy. All of this [inaudible 00:05:03] to the benefit of money supply growth. From the perspective of economic recovery, this absolutely works. By the second quarter of 2021, U.S. gross domestic product is above its pre-pandemic level. So the pandemic undoes the economy during the spring of 2020. A bit more than a year later we’re back, at least along that dimension. However, that V-shaped very rapid economic recovery brings with it a bout of enduring inflation. The Federal Reserve, of course, has been contending with that for more than a year now.

They’ve been raising interest rates until recently, shrinking the size of their balance sheet, trying to reduce borrowing and spending, borrowing and investing to try to bring demand into conformity with supply to bring excess inflation out of the economy. So now money supply has been shrinking, you can see that heir. So money is more expensive, interest rates have gone higher, for instance. It’s more difficult to access. We’ll talk more about that and when money supply is disappearing, that can create some pretty risky business. One of the things we want to talk about are some of the risks inherent in the economy, and what’s the culprit here? Why have we gone from a period of very rapid economic recovery from the worst stage of the pandemic economically to speaking about the risk of recession in the next few months or at least at some point over the next 12 months? Well, again, the culprit here is inflation.

Now we economists, when we talk about inflation, we tend to talk about it in the context of its effect on interest rates and Federal Reserve policymaking. Of course, as stakeholders of CJM Wealth Advisers, many of us are concerned about that, not just as economists, but just as stakeholders in financial markets. But there’s another effect of this, of course, that’s on households. Households are walloped by these inflationary pressures and that, of course, has an economic impact as well. This is the U.S. Consumer Price Index 12 month percentage change. You see two lines here. The line in green is your overall rate of inflation, your all items Consumer Price Index, which over the past year has run at 4.9%, past year ending with April of 2023. Now the gold line is your so-called core inflation rate. That’s all items less food and energy.

Food energy prices are notoriously volatile but also susceptible to non-economic influences like Vladimir Putin as it turns out, but also droughts and natural disaster generally. So for much of this pandemic recovery period, food and energy prices are rising faster than most other prices. Now, food and energy prices have been generally speaking, falling more recently. So after the outbreak of hostilities in Ukraine, oil prices were trading above $120 a barrel. Today we’re looking at oil prices in the low 70s as it turns out. Egg prices have been falling since roughly December. I don’t know how many of you have become engrossed in a conversation about egg prices this year, often with neighbors. As you know, once you get involved in those conversations, almost impossible to extract oneself. Indeed, I delivered a presentation very early this year at the University of Delaware. The University of Delaware, of course, gave us the greatest quarterback in NFL history, Joe Flacco, but also their team name is the Blue Hens.

They’re the University of Delaware Blue Hens. I looked those Blue Hens right in the face and I said, “You ought to be raising chickens, you Blue Hens.” They also did not laugh at that. But the point is, egg prices were high and so it made sense to raise chickens. But since that time, those kinds of prices have come down. So we need stripped out food energy prices, you get that core inflation rate, that inflation measure is actually higher now, 5.5% year-over-year. In any case, inflation’s running well above the Federal Reserve’s 2% target, so the war on excess inflation persists even though the Federal Reserve has raised interest rates so significantly, and we’ll talk more about that in a couple of slides to come. Now again, there’s a cumulative effect to this because households are getting waylaid by this month after month after month, these high prices. So if you were to compare the price level in May of 2020, why May of 2020? That’s the first month of the economic recovery from the worst stages of the pandemic economically.

So we lost those 22 million jobs as a nation in March and April of 2020. We start to add back jobs in May. So if you look at what prices looked like in May of 2020 as the recovery commenced versus April of 2023, the last month which you have data, you look at the headline numbers down below, all items, Consumer Price Index up 18% in less than three years in a country that aspires to 2% inflation per annum. The so-called core rate of inflation down below, all items less food and energy, 15% inflation, again, in less than three years. The green colored bars show you things categorically, so energy price is up 55%. Used car and truck prices up 39% in less than three years. Transportation services, that includes things like airfare is up 27%. Tobacco and smoking product prices up 22%. New vehicle product prices up 22%. One of the worst things you can do, one of the worst things you can do is smoke in a new car because it’s bad for your health. It destroys the new car smell but renders also one susceptible to all these inflation pressures.

Of course, if you’re in Northern Virginia and Baltimore where I’m right now, it’s pretty smokey out there, thanks to these Canadian wildfires. So probably It’s just not a good idea to smoke generally. In any case, again, lots of cumulative effect here. Now it is true again that inflation has dissipated more recently. So to go back to the previous slide, back in June of 2022, if you look at this, overall inflation was running at 9% year-over-year. Now it’s down to 4.9%. So if I just show you the Consumer Price Index for the period April of 2022 versus April of 2023, just last year, you can see again the headline numbers at the bottom of the slide, 4.9% overall inflation, 5.5% on the core, but you still see some lumpy inflation rates here. Transportation services, again, things like airfare is up 11%. Shelter and food price is up 8%. Who does this affect the most, by the way? It’s people with lowest quintiles of income, people for whom food and shelter comprises a disproportionate share of their household budgets.

I think that’s one of the reasons the Federal Reserve is so aggressive in trying to get us back to 2% inflation. They know that people in lowest printouts of income are most affected by inflation include people on fixed incomes, let’s say people in their 70 and 80s as an example. So what do they turn to? They turn to their leading policy instrument, which is, of course, the fed funds rate, the overnight bank lending rate, the rate at which banks could borrow from one another overnight. Why do they do that? To throw up their reserves because you need a certain amount of reserves in the bank to make the loans outside of the bank, so you don’t want to run up against that constraint so that you want to make more loans. So here on the grant free the federal funds pocket range upper limits. I should point out that I did not create these slides, that was done by our economist, Sayer Niblett, who is a fabulous professional, but in any case, setting that aside.

So the lowest upper limit you can get here is 0.25%. Coming into the pandemic, the federal fund rate was non-zero, but then the pandemic sweeps through the economy. The Federal Reserve lowers interest rates as close as possible to zero, which is 0.25% since I’m graphing, again, the upper limit. It stays there for about two years. When inflation begins to blossom during the spring of 2021, they respond by doing precisely nothing. They presume that inflation is transitory. A synonym for transitory is fleeting. They think it’s purely supply chain driven, that the economy was coming out of its doldrums. People were becoming vaccinated. We had the surge in demand particularly for goods, but the supply chains had been closed to various degrees, of varying degrees. So supply was falling short of demand, that’s inflationary. But as supply chains healed, as they normalized, supply would rise up to meet demand, inflation would come back to its pre-pandemic 2%. Instead, what the Federal Reserve oversaw was the creation of a wage price spiral. So during the spring of 2021, prices take off.

Employees say, “My goodness, boss, look at this. Are you looking at the CPI data the way I am? Could I look at them all the time?” They actually never had before. But setting that aside, “Are you looking at these data? I need a raise. It’s getting very expensive to live out here.” Boss says, “No problem. The economy is come back very, very quickly at V-shaped recovery. I’ll just pass all my costs increases to my customers because in an inflation environment I can support higher profit margin. In fact, corporate profits are positively correlated with inflation.” Well, of course, we get another burst of inflation and now the employee comes back knocking on the door, “Boss, I need another raise.” “Okay.” So now you’re in the midst of a wage price spiral. The Federal Reserve to get inflation back to this 2% target has to break that wage price spiral, so that since March 16th of last year, they’ve been raising interest rates. First they dip their toe into the inflation fighting water, 0.25%; then 0.5% the next meeting; then four consecutive meetings of 0.75%, back to 0.5%; then 0.25%, 0.25% again.

Then on May 3rd, meaning a month ago, 0.25%. So what was a 0.25% rate of interest is now 5.25%. Now, most pundits and analysts and so on agree that the Federal Reserve will pause in June. So they meet June 13th, June 14th, and they will not raise rates this month, and we’ll get into why that is. But interest rates are much, much higher. Now, ostensibly, they’re not trying to destroy the economy, they’re trying to engineer a soft landing. What does that mean? They want to frustrate borrowing and spending, borrowing and investment by driving up the cost of capital, bringing demand down into conformity with supply to ring out excess inflation. But the question becomes, is it possible at this point to engineer a soft landing or is that mission impossible? That’s really the question here. Now the good news is that they still have some room to maneuver. The economy is not in recession right now. Let me talk a little about how they conceive of the issue.

These two quotes come from our Federal Reserve Chairman, Jerome Powell, who back in August of 2022 says the following quote, “While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they’ll also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” For them, the definition of price stability is 2% inflation. So since they started finding inflation, we could make the argument that they started too late. But since that battle has begun, they’ve been very aggressive in their language and their actions, words and deeds. They’ve talked about raising interest rates, talked about fighting off inflation, and they, in fact, have raised interest rates quite significantly. In November of 2022, the Federal Reserve Chairman says the following quote, “Let me say this, it is very premature to be thinking about pausing,” even thinking about it. “So people, when they hear lags, they think about a pause.” What does that mean?

So when the Federal Reserve raises interest rates, whether on March 16, 2022 or May 3, 2023, the complete effect of that on the economy does not show up immediately. It takes a while to work through the economy. It could be as much as 18 to 24 months before an interest rate increase has its complete effect on the economy, which means even the March 22nd of … sorry, the March 16th of 2022 rate increase has not as had its complete effect on the economy, let alone let’s say, the four rate increases of 0.75% a piece. So there’s all these lag effects built up in the economy. So many stakeholders, including investors would say to the Federal Reserve, “Slow your roll. What are you doing here? You’ve raised rates at the fastest pace in more than four decades. Let these lag effects wash through the economy. It’ll bring growth down, bring inflation back down to 2%, your target, your mandate. You don’t keep raising rates because you’re going to drive the economy unnecessarily into a recession,” ’cause joinder to that comes from the Federal Reserve Chairman in the form of this third sentence, it’s very premature.

So in the span of three sentences, our Federal Reserve Chairman says the words very premature twice, not especially eloquent, clearly not written by ChatGPT, but it makes the point, “It’s very premature, in my view, to think about or to be talking about pausing our rate hike.” Now that was said seven months ago, it’s now June of 2023. It is true that they’re pausing in June because I think they want to see what these lag effects look like. They want to take a pause and, then they meet again in July and the bond market is suggesting that maybe they pause in June but start raising rates again in July, so we will see. But the war inflation is not yet done. But again, the good news is there is some underlying lingering momentum in the economy. So as an example, the broadest measure of U.S. economic progress is growth in gross domestic product, quarterly data, annualized rates of growth.

Now if you look at the left-hand side of the slide here, you can see the undoing of the economy during the first half of 2020, including that -29.9% performance through the second quarter of 2020. Then the V-shaped recovery, 35.3% during the third quarter of 2020. Several ensuing quarters of high single-digit rates of growth in an economy accustomed to growing 1 1/2 to 3% per annum, true. During the first half of 2022, America sustains a setback, two consecutive quarters of negative real GDP growth. The economy grew in nominal terms, but once you adjust it for inflation, it turns negative, satisfying a technical definition of recession, but then the third quarter, bounces back, 3.2%, 2.6% to conclude last year, the fourth quarter of ’22. During the first quarter of 2023, the U.S. economy grows 1.3%, which sounds pretty weak and it was, but misleading because a lot of that was about inventory decumulation, which really pushes the gross product estimates around.

But consumer spending was still pretty strong during that first quarter, consumer spending growing about 3.8% annualized pace during the quarter. Now the Atlanta Federal Reserve maintains a product known as GDPNow, which estimates current quarter gross domestic product, and that estimate right now sits at 2.0% for the current quarter. None of these are indicia of a recession. Indeed, they’re certain parts of the economy that have been especially strong, including as it turns out, the consumer. Here is U.S. retail sales, and these are monthly data, stretching to April of 2023. You can see the consumer has been on fire and spending massively. Ah, it is true that in November and December of last year, retail sales slipped. So retails came into 2023 with plentiful inventory. They discarded that merchandise aggressively right after the holiday shopping season. Sales took off in January, but then fell again in February and March, more discounting, sales come back a bit in April. We’ll come back to this. But in general, the consumer has been spending pretty aggressively, wouldn’t you say? Let me look at this from a circle perspective.

The consumer has tended to stare inflation right in the eyes and spent right through it, and I’ll give you an example. I mentioned that transportation services has been a source of significant inflation in recent years. Airfares during a recent 12-month period rose 17.7%. Now, I’ve been told by the folks at CJM, you’re speaking to a group of very successful people; not only our own staff members, but people who are with us as clients. Because they’re successful people, Anirban, when they board an airplane, they tend to be isle or window people. That’s who you are. You’re successful people, so you’re isle and window people, that’s who you are. When you get into your isle or window seat, there’s only one thing you’re hoping you’re praying for, and it is not the safety of the flight. It is not that because you presume the safety of the flight. That’s incidental.

No, the only thing you’re hoping for in that moment of that kind of history is an empty middle seat, and that’s all you want. That’s all you care about. You don’t have to feel embarrassed by that. Wanting a empty middle seat does not make you a bad person. It doesn’t make you a good person. It doesn’t make you a bad person, but the middle seat has been full, ’cause the consumer has been spending. You can see that in the form of lengthy security lines, so on and so forth. So the consumer has been spending and yes, supported by stimulus payments and accumulated savings during the pandemic. They didn’t take vacations then, so they had more money later on, all that, but also supported by a very strong labor market. This is net change in U.S. jobs, monthly data.

We’ve been adding jobs there since December of 2020, a month during which it was COVID intensive as it turns out, and also, pre-vaccination. We just got the data for May. In May, America has 339,000 jobs. The unemployment rate is 3.7%, and I will give you a forecast, my forecast later in this presentation. But I got to tell you, the economy has not worked out the way I would’ve expected in many cases. I’ll give you an example. If somebody had told me back in February of 2022, “Anirban, here what’s going to happen. On February 24th, the Russians are going to make a move on the Ukrainians. Natural gas and oil prices will skyrockets along with fertilizer prices, cooking oil, those kinds of prices. Then the next month, the Federal Reserve will start raising rates at the fastest pace in more than four decades, what do you think is going to happen with unemployment, Anirban?” Now at that time, March of 2022, the unemployment rate was 3.6%. I’m skeptical that I would’ve said, “It’s going to rise maybe to 3.7%,” but that’s what’s happened.

The economy has been incredibly resilient in the face of war and higher interest rates, higher cost of capital and bank failures like Silicon Valley Bank, March 10th; Signature Bank, March 12th; the issues at First Republic Bank, which was taken up by J.P. Morgan. That was your 14th largest bank in the country. Silicon Valley Bank was 16th, so Signature Bank was 19. So lots of headwinds out there, lots of dog room. Here’s the thing, as many people as American employers have collectively hired, they want to hire even more. According to the JOLTS, the job openings and labor turnover survey in April, 10.1 million available unfilled jobs in America, about 1.7 job openings in this country for every unemployed American. America’s still very much the land of opportunity. You want a job in America, there is one waiting for you. In fact, there are two. Well, that’s inflationary. You got 3.7% rate of unemployment, 10.1 million available unfilled jobs, almost 400,000 in construction. As we try to rebuild the nation’s infrastructure, all of that’s inflationary, because people are scarce and that puts upper pressure on wages.

The problem here is not simply a cyclical one, it’s not simply the fact that we’ve come out of the pandemic so aggressively from an economic growth perspective, it’s a structural one. The labor force is not growing rapidly enough to accommodate the needs, wants, aspirations of the people of this country, and the real problem here is, it’s men. Men are the problem. Some of the women that you ask might say, “Well, that’s a job proposition, sir. I’m only talking about the labor force dynamic. It’s not household chores or anything else.” So if you were to look at labor force participation rates in 1980 when music was good versus 2023, this is what you get. So you’re part of the labor force to be either working or looking for work. So I’m looking at the proportion of the eligible population that’s either working or looking for work, and then taking a delta between the proportion of 1980 versus 2023. So you look at the tabular data here, you see that top row there, which is also the bolded row?

To be part of the U.S. labor force, you have to be at least 16 years of age. In Canada, it’s 15, here it’s 16. So the labor force participation rate between 1980 and 2023 fell 1.2 percentage points, but it fell 9.4 percentage points among men, but rose 5.7 percentage points among women. So men jumped out of the labor force, women jumped in. Now you can break this down by age, 16 to 19 year olds -19.5 percentage points overall, -0.3 percentage points for men, -60 percentage points for women. What’s that about? That’s college. So you might remember in the 1970s, we lost a ton of manufacturing jobs in this country. The notion was that we were going to become an increasingly service sector-oriented economy, which proved to be true. To participate at the commanding heights of that economy, one would have to be quite gainfully educated, college degree, for instance, to become an engineer, a lawyer, a financial advisor, an economist, whatever it happens to be, an accountant, an actuary.

So if you’re in college, you’re less likely to offer your services to the labor force. 20-24 year olds, -5.6 percentage points overall, -13 percentage points for men, adds a one percentage point for women. What’s that about? Well, it could still be college, ’cause it probably takes most guys six to eight years to finish college. But then you look at 25 to 34 year olds, +3.6 percentage points overall, -6 percentage points for men, +12.6 percentage points, women, what are these young men doing? What are they up to? They’re neither working nor looking for work, and they’re 25 to 34 years of age. What are they doing? No one really knows cause everyone’s too scared to ask. But it probably involves a couch in a parent’s basement, maybe some video games, who knows? But not work at a construction job site or an Amazon facility or any other place. You might say, “Anirban, look, I’m pretty sure that CJM invited you to be an economist, to be unemotional, dispassionate, data-driven. You’re getting angry out there in computer labs. You’re getting pretty emotional.”

You might say to me, “Anirban, the idea of a 33-year-old American man sitting his parents’ basement playing video games while eating bologna and salami sandwiches that his parents made, maybe smoking some weed, that’s adorable.” I don’t disagree. I think that’s adorable. They’re less adorable when they’re 43. 35 to 44 year olds, +3.7 percentage points overall, -5 percentage points for men, +11.8 percentage points for women. So it is often said, by the way, that men make more than women, which is true as it turns out. Men make more than women still statistically speaking. But young men do not make more than young women. Young women are far more less to own a home than a young man. So this is part of the challenge here, particularly for industries that are male dominated like construction, 87% male, manufacturing, 70% male, ’cause it means more labor market tightness. It puts upward pressure on wages, that’s inflationary. Here’s the thing, this gives you some sense of how hot the economy remains. Even though American employers have hired so many people, and again, we’ve recovered fully along this dimension, they want to hire even more.

If you were to compare job totals for this nation in February of 2020, why that month? That’s the month when we shut down the economy versus May of 2023, last month virtual of data, America is up 3.7 million jobs. So we’ve recovered. The top segment here is professional business services, that’s your law firms, your accounting firms. Many white collar jobs are allocated into those segments. So it’s a very large part of the U.S. economy, which helps explain part of its privacy here, but also disproportionately, it offers the opportunity for people to work remotely, and that’s what many Americans want. They want to work remotely. A recent survey indicates that 68% of Americans, more than two in three want to work remotely, not at a job site. They don’t want to commute, they don’t want to be with their colleagues. They do not like their colleagues. A separate survey finds that 57% of Americans find their colleagues to be annoying because they overshare, meaning, “I asked you what you did this weekend. I did not intend for you to answer.”

They take credit for one another’s work, but the number one reason people find their colleagues to be annoying, they interrupt during meetings, which can happen on Zoom as it turns out, it typically does. Nonetheless, there is this general preference for remote work. At the bottom of the list, leisure and hospitality, that’s your hotel and restaurant worker. By and large, it’s the lowest wage segment of the economy, so often out competed for human capital along the dimension of compensation, but also as a general proposition, does not offer the opportunity for people to work remotely. Now, these labor shortages have been even greater in regions of the country that have been growing with particular pace. This employment growth from the 25 largest metropolitan areas in our country, February of 2020, again, the last month before we shut down the economy versus April of 2023, the last month, which are the sub-national data. Notice the primacy of the American South. We’ve got people on this call from all over the country, but notice the primacy of the American South.

Dallas, Tampa, San Antonio, Orlando, Charlotte, Phoenix, Orlando, Riverside, California, Houston, Miami, San Diego, that’s where the job growth has been fastest. That’s where the population growth has been, that’s where the job growth has been. Now Philadelphia sneaks into that left-hand column, but for the most part, the Northeast Corridor is in the right-hand column. You can see Washington and Baltimore, and several others from Washington to Baltimore here among the least dynamic economically in terms of job growth over the last three plus years. You can see New York or Boston also in the right-hand column along with the Midwest. So Chicago, Minneapolis, Detroit, St. Louis, in that right-hand column, slower growth. That’s not where the population growth has been as rapid, that’s not where the job growth has been as rapid. Now I find this slide to be interesting, but the next slide is far more important macroeconomically and from an investor perspective, same 25 major metropolitan areas. But instead of percentage job growth, it’s unemployment rates. Here’s the problem: these unemployment rates are too low.

You say, “Anirban, that’s crazy talk. We love low rates of unemployment. We love it when people graduate from an apprenticeship program, high school and college and can quickly secure opportunity. We love it when somebody loses job through no fault of their own, let’s say, and can quickly find replacement employment.” Yes, we view it as a sign of national economic strength, economic vigor, but it’s less positive when you’ve got 10.1 million available unfilled jobs and inflation is still raging across the countryside. So when the Federal Reserve looks at these data and says, “I can’t stand by this. I can’t allow this equilibrium to stand, because I’m seeing wage growth between 4 and 5% because the labor market is still too tight. There’s too much demand for workers, and to get back to 2% inflation, I might need maybe three to three-and-a-half percent wage growth, but I can’t deal with the wage growth now. Somebody has got to lose their job. This labor market has got to be loosened up.”

So when the Federal Reserve Chairman said back in August, “I’m going to cause some pain to households,” that’s what he’s talking about, and so the war inflation is not yet done. Interest rates are already high and could rise further, and that dynamic along with some other things we can talk about increases the risk of recession. Again, 1996, Jerry McGuire, I cried. I cried. I wept. I wept. Now before I come with the definition of a recession, let me define it for you. I had mentioned a moment ago that we sustained those two consecutive quarters of negative real GDP growth during 2022’s initial half satisfying a technical definition of recession, but not that definition of recession. This is my definition. “The National Bureau of Economic Resources Business Cycle Dating Committee is the official recession scorekeeper. They’re the arbiter of when recessions begin and if they occur at all.” Accordingly, they’re the ones that maintain a chronology of U.S. business cycles. So they’re the ones who told us in 2002 that the recession of 2001 began in March of 2001 and ended in November of that year.

Now, the traditional definition of a recession is, quote, “a significant decline, a significant decline in economic activity that spread across the economy and that lasts more than a few months.” That’s the recession that they declared in 2020 begins in February of 2020, ends in April of 2020, arguably not more than a few months. They declared it a recession [inaudible 00:32:32] because they can, they can do whatever they please. They sit in Cambridge, Massachusetts and they can do whatever they please. They are the definition of a recession. What’s more, there is no fixed rule about what indicators contributed information to NBER’s process or how they’re weighted in the termination of a recession. They can look at wherever they please they can. Now, as a practical matter, they look at employment, unemployment, gross domestic product, industrial production, retail sales, but they can look at whatever they please, stock market, whatever.

Because the government statistics NBER relies on are published at various lags, the NBER Committee cannot officially designate a recession until after it starts and often, not until it’s over. So for instance, we shut down the economy in March of 2020. So it was open in February, shut down in March. Clearly there was a recession, but they could not declare that until the confirming data arrived. Okay. So again, we’re not in a recession now. How could you be with consumers still spending and with so many jobs being created? But there are some signs. So for instance, for much of this pandemic recovery period, the mantra among many CEOs has been, “Let me case demand. Clients are coming back very, very quickly. There’s lots of unmet demand out there. If I can meet that demand, I hire the employees, I lease the warehouse space, I purchase the equipment and I meet that demand, I gain that market share. In an inflation environment, I can monetize that market share. I can drive profits higher. I’ve got more room to push margins higher in an inflation environment.”

But more recently, there seems to be more emphasis on cost containment. This comes from the U.S. gross domestic product data, non-residential fixed investment in equipment. You can see for the last two quarters, this investment has been in decline. Now that could be in part because of the supply chain issues. They’re still lingering. So I spoke to a group of mechanical contractors recently out of Washington D.C. and they told me their lead time to acquire switch gear being for electrical equipment was something like 50, 60, 70 weeks, in many cases; in some cases, 100 weeks, two years. They told me their lead time for generators are similar to that, so there’s that. But I think this is because more and more businesses, more and more CEOs are deciding, “I need to think about my cost structure. I took on a lot of costs during this pandemic recovery period, maybe I hired too many people. Maybe I took on too much capital expense.”

According to the November 2022 PwC survey of U.S. executives, 26% of firms are planning to reduce the number of full-time employees over the next 12 to 18 months. Now you can see from the employment data, there’s still lot of hiring, but the plans are in place to maybe let some people go. In August of 2022, 50% of firms said they already had or had a plan in place to reduce overall headcount. Four to five executives surveyed by PwC in November of 2022, said a recession was coming within the next six months. They’re wrong about that. That was said seven months ago. A recession did not come, but again, they’re nervous. They’re planning maybe for layoffs. In fact, some firms have already, of course, moved forward with the layoffs. There’s some noteworthy layoffs in 2022, 2023. At the top of this here is Amazon. The CEO, there is Andy Jassy. Andy Jassy has announced two layoffs recently, the most recent being 9,000 jobs, totaling 27,000 jobs.

But here’s the thing, Andy Jassy did one other thing at least. He said to his white collared workforce, “You’ve got to come into the office three days a week.” “Yeah, that’s right. You’ve got to come into the office three days in one week.” Are we barbarians? Is this how we treat people? Three days in the office? I can’t imagine. Now my guess is that was done to foment collaboration, innovation, supervision, but also try to get some people to quit and some people have quit over that policy. Meta, the CEO there, of course, is Mark Zuckerberg. He announced a massive layoff. But during a recent earnings call, he said the words efficient or efficiency 41 times. He’s declared this the year of efficiency at Meta. So many CEOs watched as his share price was 100% so far this year, at least until the last few days. Looking at Meta and saying, “You know what? If that’s how you drive up your share price by cutting costs, by focusing on efficiency, maybe I shouldn’t be chasing demand, maybe I should cut costs.”

This shifting attitude in an interest rate-driven environment is particularly impactful on interest rate sensitive segments like real estate. So let’s talk a little about real estate. So this is from 1992, A Few Good Men playing the part of Lieutenant Daniel Kafee, a young military attorney. So I begin this story talking about interest rates. I think that’s the right place to begin. That’s what’s really shifted over the past year, the trajectory of the economy over the past year, but also going forward. So let me show you two interest rates of interest. The 15-year fixed mortgage rate here is in green and the 30-year fixed mortgage rate here is in gold. Green and gold, of course, The Color of Money, which was the 1986 Tom Cruise film also starring Paul Newman playing the part of Fast Eddie Felson. In any case, in January of 2022, the average 30-year fixed mortgage rate according to Freddie Mac was 3.22%, according to the most recent weekly data, 6.79%.

Now, some of you might say to me, “Anirban, a 6.79% mortgage rate on a 30-year fixed is not a big deal. My first mortgage rate was 18%. My first mortgage rate was 15%.” I’ve had people come up to me after presentations bragging about the fact that they used to pay 15% interest. I am not impressed, but it is an interesting history, and for those folks, 6.79% would not seem especially onerous, however, to millennials and generation Z, preposterous. That’s who’s really subtracted themselves from the would be buyer market, is that first-time buyer or the first-time move up buyer, the more interest rate sensitive buyers. Now as I move toward the tail end of this presentation, I want to show you a number of leading economic indicators because I want to pivot from a discussion of what’s been going on to the discussion of what’s likely to happen going forward. Now the whole purchasing process often begins with a mortgage application.

So unless you’re a private equity firm or a quite well-heeled American household, people typically have to borrow money to purchase a home. This is your U.S. Mortgage Loan Applications Composite Index for the Mortgage Bank Association, the measure of loan applications. It is down this index by 80% since its 2021 peak. Again, who has subtracted themselves larger from that marketplace? It’s that first-time buyer, that millennial or generation Z buyer. Generation Z is not quite old enough to be in prime home-buying age, but they’re getting there. Within five years they will be there. But so it tells us the story, and predictably with high reward rates, we’ve seen some price adjustments. So this is the S&P Case-Shiller U.S. National Home Price Index. You can see after a period of phenomenal growth in home prices, you saw some give back, except that during the most recent month, home prices bounced a bit higher. I’ve been amazed by this.

I would not have predicted the kind of strength here. Now, true, the inventory of unsold homes is very scant, so people are competing over very few homes. By and large, all the entry level or first-time buyer homes have been bought. So what’s left is an inventory of quite pricey housing as it turns out. You see a lot of cash deals out there, and you still see some bidding wars. Now again, there was a period during which home prices were in decline, particularly in certain markets. So I can break this down by metropolitan area. This is the S&P Case-Shiller Home Price Index by Metropolitan Area, total month percentage changed. You can see some technology-intensive markets like Seattle and San Francisco, also San Diego giving back some home price gains over the last 12 months through March. But then you look at the bottom there, Miami, Tampa, Charlotte, Atlanta, again, the American South with still some price gains.

You would not know the interest rates have increased in Miami when there’s so much cash pouring into that market from Russia, from Latin America, so on and so forth. So property has been very expensive there as you know, getting more expensive. But here’s the thing, so you see a mix here, but in the next slide, you will not see a mix. The next slide is just the one-month percentage change. This is March of 2023 itself, so here you go. The 0% line is left-hand access. Everything is gaining in terms of home price again. You could make the argument, the home market or a single-family housing market has already bottomed out. It’s already had its recession. There’s similar appetite to buy homes. I think one of the things that’s happening here is that people are always looking for diversification opportunities. They’re in equities, they’re in bonds, of course. S&P is trading right now at 4265.11. It’s down about 18.59 points so far today, but it’s been strong. It’s been a strong performance.

So people say, “Oh, I’ve got some equity market gains. We’ll see where the equity markets go, but to diversify my portfolio, maybe I should buy a property.” So you see a lot of these all-cash deals and the homes at the upper end of the spectrum due to trade at handsome prices. Now I want to show you that leading indicator, but this one relates more to construction of homes. This is U.S. residential building permits. That’s a leading indicator because if you’re a builder, you’ve got to pull a permit before you build. You see the yellow line there? That single-family building permits. That has been down recently until, again, a recent bounce back, ’cause home builders see, “Oh, my goodness, housing market’s holding up better than we thought. There’s still some unmet demand out there.” Permits have been actually pushing higher very recently. So again, I’ve been surprised by that.

I would’ve thought that given the interest rates have risen so much and that they’re set to rise perhaps even further, we’ll see, that you’d see more permanent downward pressure on the single family market. Actually, the market we’ve seeing more weakness recently has been the multifamily market if you look at that downward trajectory. That includes your apartment construction. I would’ve thought this segment would’ve been stronger because you have to have a place to live. All things being equal, high mortgage rates are good for the apartment rental market. If you can’t buy a home because of affordability issues ’cause of higher mortgage rates or lack of inventory or high prices, generally, you’re going to rent. Well, if you’re a millennial for instance, or if you’re generation Z, you’re going to rent. But here’s the thing that’s happening. I think that this is really driven by the lack of access to capital. Among many developers. There’s developers that pull permits.

What they’re finding is that bankers in many cases are more reluctant to expose themselves to real estate fundamentals, dynamics. We’ve got 1 1/2 trillion dollars in commercial real estate related debt to refinance between now in the end of 2025, the so-called debt maturity wall. Who’s going to refinance that debt? Who’s going to finance more apartment buildings? Because bankers at least are risk averse right now given what’s happened at Silicon Valley Bank, Signature Bank, First Republic, Credit Suisse, Deutsche Bank, more recently, PAC West and Western Alliance. So there’s still these banking issues out there. Now this next measure pertains more to commercial real estate. It is the Architecture Billings Index. It’s a reflection on how busy architects are. You see that 50-yard line running west, east across that slide? Any reading above 50 means that architects are collectively busier now than they were the previous month.

You can see that during much of the pandemic recovery period, architects are getting busier and busier and busier. Well, of course, it is. The economy was coming back very strong and people were looking for income. You might remember that for a while there interest rates were very low. So it’s difficult to generate interest income. Bonds were not yielding. The last year fixed income got its last name back, but prior to that, people were looking for other sources of income. Real estate is one of them because real estate generates rents and hotel daily room charges, that kind of thing. That kept architects busy because property is being purchased and then repositioned is the marketplace, design builds. But six of the past seven months, the architects have be getting less busy. Again, I think there’s a big issue in commercial real estate that last year, the U.S. economy grew 2.1%. We added hundreds of thousands of jobs in white collar segments, and yet, the U.S. office vacancy rate rose last year as remote work stays pervasive.

This is misleading, this 12.5%, there’s a lot more office space vacant than that, but it’s not considered vacant statistically because it’s still leased. As these lease renewals come up, you’re going to see a push higher. There’s another segment of commercial that’s in trouble, at least one. That’s your malls, your shopping malls. This is vacancy and shopping malls. Yeah, consumers have been spending, but increasingly online is getting market share. So something like one in four malls is set to fail within the next three to five years. We saw a lot of retail bankruptcy during the pandemic, so Brooks Brothers, Francesca’s, Pier 1 Imports, GNC all go bankrupt. With that comes lots of foreclosures and many of those operated in malls. So watch out for commercial real estate. It is one of the real drags on the economy going forward because these properties are simply not cash flow sufficiently and they’ve got a lot of debts against them and somebody holds that paper. Okay, enough of that. Let’s go to the forecast now and then we can open for Q&A.

Just give me about three or four more minutes here and then we can go to Q&A. So it’s a 2014 film science fiction, not my favorite Tom Cruise film in the interest of full disclosure, but an amazing transition slide, so it makes the cut. Now, you cannot have a recession unless the consumer participates, because they’re about 70% of aggregate demand. So as long as the consumer is spending, no recession by and large. So one of the things that we do is we monitor their psychology. Are they happy? ‘Cause the theory is that if they’re happy, they’re more likely to spend. So this is the University of Michigan’s Index of Consumer Sentiment. Where is the consumer right now psychologically? They’re miserable. What has them so miserable more than any other factor is inflation. They’re roughly where they were in 2008 psychologically in the midst of the global financial crisis. They’re angry about it. People ask me all the time, “Anirban, why do people drive angry?” ‘Cause they’re angry, generally speaking, and they’re not the only ones to become quite pessimistic.

So I talked about the PwC survey data, and that largely relates to large corporate CEOs. You could see the consumer is downcast, downbeat, small businesses too. This is from the National Federation Independent Businesses Survey Index or Small Business Optimism, questioned small business America, “Is it a good time to expand your business over the next three months?” In April, only 3% said yes, akin to where we were in ’08 or ’09. They would like to expand their business, mind you. They live for that. But they can’t find workers, can’t retain workers, can’t afford workers, can’t afford their healthcare premium. They suffer equipment delays and shortages. Their materials prices have gone up. So concrete prices, as an example, are 13% over the past year. So is it a good time to expand? Many of them would say no. Now these are considered soft data, the psychological data, survey data. This is a bit harder. This is the U.S. Leading Economic Index on the Conference Board. It’s 10 that the indicators all bundled.

The one indicator that I’m graphing for you here, actually I’ll say a niblet from our staff graphed here. Now this is an index that predicted the 2001 economic downturn, predicted ’07, ’08, ’09. Now it’s telling us tougher times are in front of us. The economy has been stubbornly resilient so far, but there’s a lot of lag effects in the economy. There’s tightening credit conditions. Consumers have taken a lot of debt. They’re not happy with life as a general proposition. So these measures at least taken collectively suggest to me that a recession is quite likely, you’ve got an inventory cycle working against us. This is business inventories. So look at the slice in the middle there. That’s the green slice. That’s retail inventories. I had mentioned that retail sales actually fell in November and December, then again in February, March. There’s been lots of discounting. Maybe you heard some negative things from Home Depot and Target lately, again, the middle market.

So when retailers see that after discount merchandise to move it, they order less from the merchant wholesale. That’s your distributors or middlemen and women. Their inventories have risen. You can see that. When they see their inventories rise, they order less from the manufacturers, that light blue down below, manufacturing inventories are up. If you look at the Purchasing Managers’ Index, which is from the Institute for Supply Management, it’s one of the federal leading indicators for our economists, the manufacturing indicator is sitting at 46.9. Well, that’s below 50. That means manufacturing is now in retrenchment. So again, all of these measures suggest a recession is quite likely. This one screams that a recession is coming. This is your U.S. Treasury Yields. It’s your yield curve. Again, two interest rates of interest, the yield on the one-year Treasury is in gold. The yield on the 10-year Treasury is in green. So typically, you’d expect the interest rate or yield on a 10-year instrument to be above that on a one-year Treasury. If I want to buy a U.S. Treasury thereby, lending to the federal government for 10 years, I’m not going to see my principle for a decade. I want to demand more interest in the interim per annum to reward me for my patience. Conversely, if I buy a one-year U.S. Treasury, I want to see my principal in 12 months risk-free, now that the ceiling is behind us, and so I don’t need to be so richly compensated. But occasionally, the bond market goes topsy-curvy, upside down, inside out, Diana Ross. The gold line, the yield on the one-year goes above the green line, the yield on the 10 year. These gray shaded areas are periods of a recession dating back several decades.

So where do you see the gold line go above the green line, this yield curve inversion? Just before the 1970 recession, before ’73, ’74, ’75, before 1980, before ’81, ’82, before 1990, 9 91 before 2001, before ’07, ’08, ’09, not so much before 2020 that was caused by something else. But now we have massive inversion of the yield curve as it got up here, about 1.4 percentage points in terms of that inversion. It’s screaming recession. I think a recession is coming, and maybe you can’t handle the truth. Now you might say, “Anirban, a couple of things. First of all, it’s not the truth. It’s your forecast. Now you just said that the economy has not worked out the way you expected.” Fair enough. This is not about you buying into my forecast, not at all. I’m agnostic with respect to that. My goal today has been to do some issue spotting on your behalf, looking at some of the economic risks out there so you can think about your portfolio and other aspects of your economic life.

You can refine your own outlook for economy. You might also point out to me, “That wasn’t said by Tom Cruise, sir. That was said by Jack Nicholson in 1992, A Few Good Men.” Fair enough. Jack Nicholson played the part of Colonel Nathan Jessup and he’s on the stand. He is being grilled by young military attorney, Lieutenant Daniel Kaffe, who eventually asked him a question that elicits this response, which is an admission of guilt. That young military attorney, Lieutenant Daniel Kafee, well, that role was played by one young and quite handsome Tom Cruise. I think the economy gets worse before it gets better. Now you might see a bit of a bounce back in the second quarter of gross investment product because again, the first quarter was weakened by inventory deaccumulation. You might see some inventory rebuilt during the summer spending months, and again, we’re the last month of that, of the quarter as it turns out.

But then I think the weakness comes later in the year. In fact, I think the recession begins September 5th, thanks to omnibus, check up. At no point have you demonstrated enough insight to forecast that with that level of specificity. I don’t disagree, but what is September 5th? It’s day after Labor Day, and I think that’s what it really catches up to us, that consumers will continue to spend and travel during the summer months. But come Labor Day, after that weekend, they;; look at their credit card balances. Some have to start paying back their student loans. That’s when recession begins, and I think we’re going to see more layoff announcements between now and then. The global economy is weakening, which is reinforcing our economic weakness.

Our economy is weakening, inventory cycle, so on. Bordering costs are higher, that’s incontrovertible and excess inflation persists. Some segments seem to hold up better than others include public construction, grocery stores at multifamily housing, at least from the perspective of leasing. We got to eat, a lot of money lined up for infrastructure, need a place to live. At some point the Federal Reserve will stop raising rates and as importantly, will start lowering them. Now the bond market is saying different things, but now the bond market seems to be agreeing with the notion that they won’t start reducing rates until 2024, though, we’ll see. That will spawn the next growth cycle for America. But until then, I think recession conditions are set to prevail at somewhere over the next 12 months. I think it could a bit sooner than that. Of course, again, I could be wrong. I am an economist. With that, thank you very much to CJM for the opportunity to be with all of you today. I’ll stop sharing and we’ll turn it over to Q&A.

Parker Trasborg:

Thank you. That was excellent. We did have a question come through, “How does wealth disparity in society affect the various charts that you presented? Is there a large percentage of the population that doesn’t have dispensable income to participate as they may have been able to?”

Anirban Basu:

Yeah, as I pointed out, inflation is particularly high in those categories that would most impact the people in the lowest quintile of income, food prices for instance, and also shelter prices. Yes, we have an incredible number of Americans who depend exclusively on, for instance, Social Security for their income. About 40% of people are seeing Social Security, depend on that exclusively for their retirement income. It’s not meant to be that, it’s meant to be an income supplement, but again, 40% depend exclusively on that for their income. Obviously., A lot of the savings generated during the pandemic from stimulus payments and foregone vacations, so on and so on, that money’s been spent down. So during the peak, as it turns out, we had about 2.3 trillion in excess savings at the household level.

So again, foregone vacations and other experiences and stimulus payments, all of that, 2.3 trillion in excess savings is what above and beyond what would’ve transpired but for the pandemic. About 1.3 trillion of that has been spent already, so we’re down to a trillion dollars in excess savings. But a lot of that trillion dollars is held by people in the highest quintile of income. So people at the lowest quintiles of income have spent through those savings. The credit card balances are rising. Many of them now have to restart paying student loans. You put all that together, you’re going to see in that lowest quintiles of income, let’s say the lowest two quintiles of income, a lot of pressure, especially if I’m right, that the labor markets softens for the months ahead.

Parker Trasborg:

Thank you. Did have a question about the debt ceiling, which they did wrap up on Saturday, “What is the impact on the economy here in the U.S. and relations with other world countries if they just keep with the political infighting as they renegotiate this every couple of years?

Anirban Basu:

Yeah, I don’t think it helps America. It said that markets hate uncertainty, and this is a source of uncertainty, but one has to say that the markets is not seen particularly roiled by this. Neither the bond markets or nor the equity markets seem to take this very seriously. The equity markets were rising for the most part as they reached that agreement, there was the presumption they’re going to reach that agreement. Once they reached the agreement, the market gave back a little, you might know, because you buy the rumor you sell on the news.

So the presumption was they were going to make an agreement, it was catastrophic. They weren’t going to do it. There’s a selection year next year and incumbents want to be reelected. If you want to be reelected, you want to create an economic crisis. But in January 2025, apparently, we’re going to revisit this, and we’ll see what that looks like. But by that point, we have a new president and all those kinds of things, so very different dynamics. Actually, we might have the same president still be reelected. Let me be clear about that. But it’ll be a new presidential administration, one way or the other.

Parker Trasborg:

Yes. A question around cryptocurrency with the Fed and potentially banks looking at issuing their own currencies, should we be concerned about that at all?

Anirban Basu:

Oh, I don’t think we should be concerned necessarily unless we’re owners of Bitcoin or something like that because here’s the thing. I’m often told by often young men, like 27 years old, who are the leading advocates of Bitcoin. “It’s digital gold, man.” They’ll say, “It’s digital gold, man.” I’m like, “Don’t call me, man.” But then I’m also like, “Why do you say that?” They say, “Well, it’s the currency of the internet.” I said, “Well, my credit card works on the internet. My PayPal works on the internet. What do I need digital currency for or cryptocurrency?” So what is the difference between cryptocurrency and digital currency? Digital currency comes from governments. It’s government backed, government issued. So the Treasury Department has been researching for a couple of years now their own U.S. digital currency, which could actually compete with Bitcoin and Ethereum and Litecoin and Ripple and so on and so forth.

So I think that as you see these governments put forth these digital currencies, that’s going to create more competition for Bitcoin and so on and so forth. So with the SEC coming down on Coinbase and other companies, all this regulatory uncertainty and with more competition coming from governance in this space, that’s why I’m concerned about the long-term value of Bitcoin. Look, Bitcoin is 27,000, 26,000, whatever it’s today. But yeah, anyway, I’m not worried about it, but I would be thinking about this if I had made a lot of money in cryptocurrencies about whether I would continue to.

Parker Trasborg:

A question around the recession that’s going to start on September 5th, “How long do you think it will last, and how deep do you think it will be?”

Anirban Basu:

Yeah, I think it’ll be actually a quite shallow recession. I’ll tell you why. It’s because we’ve already had these rolling recessions. As I mentioned a little bit about this, you’ve seen some retrenchment in the technology sector. Big tech has already announced some serious layoffs. You’ve seen the housing market maybe even bottom out already. So some of the imbalances that have been in the economy have already been worked out even before we entered an economy-wide recession. So I think the recession is going to be quite mild, and I think the Federal Reserve is going to come forth with interest rate cuts in 2024, and so the economy is going to weaken for a time, but I don’t think it’s going to be a very lengthy time.

Parker Trasborg:

I have one last question, and we’ll end hopefully, on a positive note, “What are the top factors that are actually keeping the economy steady right now?” Which you did cover a little bit throughout the presentation.

Anirban Basu:

I would say it’s lag effects. That’s what this has been about, Parker, lag effects. That’s why it’s not very interesting. But you’ve had all these things take place in recent years. So for instance, you’ve had the interest rate increases, but before that, you had interest rate decreases. Stimulus has taken some time to work through the economy. You had all that fiscal stimulus, whether under the Trump or Biden Administration, American Rescue Plan Act, signed by President Biden, March 11th of 2021, the Infrastructure Investment and Jobs Act signed by him on November 15th of 2021. Before that, it was the CARES Act signed by Donald Trump, March 27th of 2020, a $2.2 trillion package, he signed the Appropriations Act, signed by him on December 27th of 2020, $960 billion in stimulus.

So this stimulus is still working its way through the economy along with all that previous marketing stimulus. But now what you’re seeing is the stimulus is starting to go away. The fiscal stimulus is starting to wane in its terms of its impact on the economy. Now, of course, more recently, we’ve had interest rate increases. You’ve got all those negative lag effects now built into the economy. That’s why I think the economy gets worse before it gets better. That’s why I’m predicting a recession, and maybe it’s not September 5th. It could be maybe the 6th or the 7th.

Parker Trasborg:

Okay. Thank you. That actually wraps up all the time we have for today. I really appreciate your time, Dr. Basu, and the insight and the entertaining presentation for today. At CJM, we have a big focus on education and just awareness of what’s going on, and hopefully, today’s presentation helped fulfill that, our goal there and appreciate everyone sitting with us as we try a new format here on Zoom versus an in-person meeting as well. Again, that’s all the time for today. Thank you all so much for your time for joining us, and feel free to reach out if you’ve got any feedback or any questions that we didn’t get answered for you today that we can maybe answer sometime in the future. That concludes the presentation, and we will see you all sometime soon. Thank you.

Jessica Ness:

Thank you.

Tracey and Griff discuss things that you should think about to try to avoid becoming a victim of a financial scam.

Griffin:

Hello, my name is Griffin Baker, Financial Adviser here at CJM Wealth Advisers. I am joined here today by Tracey Baker who is not only the President and Chief Compliance Officer of CJM Wealth Advisers, but also happens to be my mother. We, along with the rest of the planning team, often get phone calls and emails from clients and how they recently were scammed and we want to try to have a discussion here today to hopefully empower individuals to avoid being scammed in the future. Recently, the Social Security Administration and Federal Trade Commission declared March 9th Slam the Scam Day in an effort to increase financial scam awareness and what to do in the event that you are scammed. With that being said, I want to turn it over to Tracey to share some ways to determine if a communication is in fact a scam.

Tracey:

Thanks, Griff. Yeah, we get almost inundated with stories from clients of contacts that they’ve had that from sometimes government authorities, social security, or they go and file their taxes and find that in fact, someone has filed their taxes for them and already received their refund. There are four basic things that all scams share. And so, just remember the four Ps. The first P is pretend. They’ll pretend to be an authority, either it’s social security, it’s the IRS. It can be a medical thing, or it can be a group that gives a prize, publishers clearing house, those kind of things, the lottery. So, the first thing is they’re pretending to be something else. Second P is kind of a combination. They’ll either put pressure on you to pay something or to win a prize. They’ll tell you you’ve won something, but you’ve got to give information so they can send you money and they want to get your bank account information.

The third is that they pressure you, and that’s probably the most important thing. If someone contacts you and puts pressure on you to act immediately regarding something, you can’t get off the phone, you can’t call them back, you can’t reach out to your family members, that is often a sign that it’s a scam. And lastly, it’s they’ll ask for payment. Even some of the ones with prizes will say, “You need to send us money so we can verify your account and then we’ll send your money back.” Or they’ll ask you to pay them in the form of a gift card. No government agency is asking you to send them gift cards, but that’s an unregulated way for them to receive money. So if you can remember those Ps, you should be in good shape with avoiding that.

Griffin:

That’s good to have four kind of main types of scams to look out for and hopefully recognize in future communications. With that, are there preventative ways that you can kind of get ahead so that you aren’t scammed to begin with?

Tracey:

Well, it’s a good question. One of the things that we always tell people is to be very mindful of when someone reaches out to you. If there’s a link or it’s something that you don’t recognize, just don’t open it. There are programs that if you open a link will allow the scam artists to get into your computer and even access your emails. So, when they do that, then they can then email other people saying they’re you. That’s one important way to avoid it. And then also, just catch a breath. Take a minute. Government agencies are not just going to dial you up and start telling you that your social security has been compromised or you owe money to the IRS. That’s not how it works.

Government agencies reach out via letter usually if there’s an issue or a question or problem. So, I would say if you receive a call, just take a minute. You don’t give them any information, just even hang up on them. You can turn around the call, you won’t get in trouble. That’s probably the most important thing. And then lastly, you can’t rely on your caller ID because these folks are so smart. They are able to log in and mimic through caller ID, government agencies or the FBI or those kind of things. So, be mindful of that. You can hang up, don’t worry. You’re not going to get in trouble.

Griffin:

Now, for email communications, something I recommend to folks is to go to the website directly rather than clicking on any links that are embedded in the email to hopefully avoid any kind of malware being downloaded or anything like that.

Tracey:

Right. That’s great advice. That’s great advice. Yeah. You just want to be very mindful of that and only open things from people that you actually know.

Griffin:

Well, I hope all of you listening are taking notes and want to partner with us to slam the scam. Hopefully, some of these tools can be used for future communications and stuff like, to hopefully give you peace of mind that you’re not actually getting some terrible things from the IRS or whatever it may be.

Tracey:

And one of the smartest things that you know can do is go out and change your password on your email address. That’s-

Griffin:

That’s right.

Tracey:

…the one of the easiest things and you do a complicated password. It can be a sentence, just something that you’ll remember. And then that is the best way. I know I did mine last week, and I think everybody is trying to be very mindful of protecting your data and your information.

Griffin:

Very true. With that, I hope you all stay safe and take care.

Tracey:

Thank you, Griff.

Griffin:

Thank you.

A while back, a wealthy (and well known) hedge fund titan stated that “cash is trash”. In my time in this business (27 years) I have watched cash holdings bounce around between yielding something (5% in money markets back in 1996) to yielding zero (think any time since the Great Financial Recession). I would argue the last 15 years (recency bias) have been as difficult a time for cash holdings as any in recent memory, as the bank paid “zero point zero”.

That all started to change last year as the Federal Reserve started raising interest rates. It continues to do so in 2023. We are seeing cash options offering attractive yields and as a long time investor, I am thrilled with the options available in today’s market.

In January 2022 most of these were paying close to 0%. What a difference 12+ months makes.

As of 3/13/23, some possible options for your cash at this point include:

Vanguard Cash Reserves Federal Money Market (symbol VMRXX)

Current yield is over 4.50%

Capital One 360

3.40% savings accounts

5.0% for an 11 month CD

Marcus (by Goldman Sachs)

3.75% savings account

4.50% on 12 month CD

AMEX

3.50% savings account

Discover

3.50% online savings account

Your local bank may also start paying “something” on deposits too; it’s worth checking out online, or asking the next time you are in the branch. I have noticed several local banks are also increasing their CD rates. Those may also be worth a look as well, but please note that there can be penalties for “breaking” your CD prior to maturity, so please make sure to read the fine print.

For compliance purposes, please note that the above information does not constitute a recommendation to buy, sell or hold any of the instruments listed. They are for illustrative purposes only. For more options, please check out bankrate.com or nerdwallet.com.

What does this all mean for cash holdings in 2023?
It means that your cash is no longer trash BUT you do need to be proactive on where you park your cash. On demand and ease of accessibility can be key for a lot of us but at the same time so is the rate of return. Today more than ever we are finding options for clients who have cash reserves that could be earning more than they have in the past.

If you have questions or want to discuss your cash options, please give us a call.