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Linnard Financial Management & Planning, Inc.

Fee-Only Financial Planning and Investment Advisor


January 1, 2021

Outlook & Trends

Last year was a year of rapid change. Rapid changes cause stress, particularly those for which we are not prepared. As time passes, we learn to cope and our situation normalizes. We see opportunities in the new paradigm as it is revealed to us. Slow incremental change is perhaps less stressful, for we have time to adjust. It may be more insidious though, because it can seem more natural and may go unnoticed, like the fable of the frog that does not jump out of the pot of water that is slowly heated to boiling. While it is difficult to prepare for the unexpected, we should endeavor to be aware of slowly evolving trends that can eventually cause great change while masquerading as “this is the way it has always been”.

The Economy

Whether the shape of the economic recovery resembles a “V” or a “K” may depend on your political stance. But the economy is unquestionably recovering. Annualized GDP was down 32.8% in the second quarter and up 33.4% in the third. Federal Reserve banks do not agree on current conditions though. The Atlanta Fed’s “GDPNow” sees 10% growth in the 4th quarter, but New York Fed’s “NowCast” predicts only 2%. The Purchasing Managers’ report shows expansion in manufacturing and services. Much is unknown and unpredictable, but conditions are clearly improving. Government support has driven many investments to new highs. Employment has improved, although it is not close to pre-Covid levels, nor is capacity utilization. The vaccine roll-out should continue to normalize our work and our lives, although there may be bumps in the allegorical road. In a real example of “Back to the Future”, pundits are suggesting we will be back to 2019 by the end of the year.

The rapid recovery from what could have been a long economic winter was due to intense government intervention, both financially and in the vaccine and therapeutics development arena. While the administration and congress were handing out $1,200 stimulus payment to most citizens, the Fed was pumping $3.2 trillion more into the economy. While necessary to head off potentially years of economic malaise or depression, the creation and distribution of free money may have long-term effects. For now though, interest rates recently hit all time lows. Thirty-year mortgage rates were 2.77%, which helped single family home prices to increase by 11.8% in the last year. Low interest rates are good for borrowers (including the government), but confiscate money from savers and the retired population. The stock market advanced as businesses failed, causing long-term stock valuations to exceed their 2000 peaks, as measured by the ratio of market capitalization to GDP (Warren Buffet’s favorite measure), Tobin’s Q, and others. The Fed has indicated that they intend to keep rates low for years, until inflation picks up, to address the continuing risk of fallout from the COVID problem, as well as the slowing secular (non-cyclical) growth. Meanwhile, the policy is blowing investment bubbles in stocks, bonds and real estate.

The Markets

The stock market typically stays within a reasonable distance from its recent average price, so its position within that range provides an indication of short-term valuation. In addition to the long-term measures indicating historically high valuations, the range observations show that shorter-term valuations are also near maximum on a monthly, weekly and daily basis, suggesting that potential gain is limited while significant risk is present. On the other hand, the Fed has made it clear that they intend to support the markets, which people see as reducing risk. The overall market is largely disassociated with fundamentals, reacting to easy money and the speculation activity that it promotes. Margin borrowing, a sign of speculative activity, also has reached an all time high, even though we are straining to get back to where we were two years ago economically. The difficulty with this high valuation, artificially supported environment is that prices continue to advance and everyone becomes complacent until it abruptly stops and the bottom drops out, sharply normalizing value as it did in February and March 2000. Without intervention cutting it short, that process likely would have continued for some time.

The Frog

Just as complacency got the metaphorical frog into hot water, long-term economic trends and policies can do the same. The longer that government unfunded outlays continue, the more they are viewed as benign entitlements. That is until conditions change, then it can be a big problem. Take Social Security for example, Social Security is a Ponzi-like scheme that works as long as demographics continue to support receiving sufficient current tax revenue to support promised payouts. With the aging baby boom generation retiring, the water is finally heating up this frog, although at this point there still is no escape plan.

There are two factors conspiring to create our GDP frog. First, government policies have effectively borrowed from future productivity to pay for current expenses for decades. Over the years this builds up until the future is completely mortgaged. It is a slow, cyclical phenomenon. More debt improves today’s conditions, but reduces future GDP, so evermore debt is required to maintain the standard of living. The frog continues to feel good as the water warms. Recently the boom generation is leaving the work force, resulting in less GDP growth and therefore even more debt is needed to compensate. As this process continues the frog eventually finds it needs a survival plan.

One not-so-good survival option is commonly called “austerity”. Governments can spend less and borrow less, just as families do. Politicians, being politicians however, have a difficult time taking this course, reneging on promised entitlements and raising taxes. This plan reduces economic activity, making it even harder to raise revenue, pay back debt, and maintain living standards and social order.

What other options are there to put off the day of reckoning?

  1. Keep borrowing as long as possible.
  2. Reduce interest rates to make the budget burden more sustainable.
  3. Raise taxes to buy back debt or borrow less.
  4. Pay back lenders with cheaper money through inflation.
  5. Default.

We have seen options #1 and #2 slowly appear over the last several decades. The recent election was won at least partly on the basis of #3, promises to raise taxes, especially on the wealthy. The current Fed policy and the broader acceptance of Modern Monetary Theory implements #4 to keep spending until inflation becomes an issue. #5 Default, has always been unthinkable for the US, although it is a frequently used option in emerging or other over-leveraged countries. It is typically structured as an offer to pay some fraction of the original debt value.

It is also possible that if the frog survives long enough, the heat can be turned down through technological productivity breakthroughs that improve living standards, while practicing delaying tactics 1-4, or through another demographic shift, as the millennial generation takes over for the boomers.

In the interim, our long-term financial planning should consider a slow creep of inflation and higher taxes on the horizon within the likely 20-year time frame of a typical retirement. Planning should also consider current asset values to be somewhat of an illusion and expect lower ongoing rates of return for financial assets than have been historically recognized. Retirement saving should be a priority. Supporting living expenses from “real” (inflation-adjusted) returns could continue to be more difficult, so the old model of living on dividends or interest may no longer work well. On the other hand, bank interest will also be insufficient. The necessity of taking more risk has become part of the equation. It is worthwhile to be cognizant of risk protection. Developing a plan is in order.

For now we can look forward to getting by the virus and enjoying both mental and economic recovery, but we should also recognize and maintain awareness of the long-term issues that can affect our long-term well-being.

These are not issues for tomorrow or next week, but they are issues to consider and plan for. What has worked in the past will likely change in the future. We suggest considering the possibilities for you and your children. If you create and maintain a financial plan, you will be ready. LFM&P is ready to help when you are.


David C. Linnard, MBA, CFP®



Barbara V. Linnard
Vice President


A Registered Investment Advisor and NAPFA-Registered Financial Advisor

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The contents of Outlook & Trends reflects the general opinions of LFM&P, which may change at any time, and is not intended to provide investment or planning advice. Such advice is only provided by means of individual agreement with LFM&P.