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Linnard Financial Management & Planning, Inc.

Fee-Only Financial Planning and Investment Advisor


October 1, 2021

Outlook & Trends

While no time is exactly like any other, we are currently living in a period of mixed influences as we enter a new period that will be shaped by the changes encountered, decisions made, and actions taken as we grappled with the pandemic. Some of the forces that will influence our prosperity have been building for decades, others are new. Awareness of these trends will be important. Financial autopilot is a risky proposition.

The Economy

The post-Covid recovery continues with the economy bouncing back at a 6.7% rate during the second quarter and an expected rate of 3.2% currently. Home prices continue to lift off as buyers respond to low mortgage interest rates and shortages of supply. The employment picture is mixed, however, showing 8.4 million people unemployed, but there are 10.9 million jobs waiting to be filled. Fortunately, household debt is well under control, better than any time since at least 1980. This is likely related to low consumer confidence, which is at a level often seen during recessions.

The Markets

Stocks reversed during September after a strong run starting in March. It is too early to tell whether the correction will last or will reverse soon. Treasury bonds, which often move opposite to stocks, followed their equity cousins in lockstep, experiencing a sell off as interest rates began to increase. Interest has risen in concert with inflation concerns and talk from the Fed about reducing their bond-buying market support.

The Trends

How can we possibly understand the current economic environment? There are so many competing global influences. There is so much noise. Does raising the debt ceiling matter? Does the deficit matter? What about inflation? What is Evergrande anyway? Is there any consistency between these issues? Should I care?

Taking the last three questions in reverse order:

1) Yes, you should care.

2) Yes, there are consistent trends underneath the seemingly random events.

3) Evergrande is a Chinese conglomerate that has significant holdings of Chinese real estate. In fact it is the second largest property developer in China according to Wikipedia. It has $300 billion in debt and has recently had difficulty making an $83 million interest payment. The potential default has raised questions around the world whether this situation is like the Lehman Brothers collapse that was the final blow before the 2008 financial melt-down. Will the contagion spread?

Evergrande accumulated debt for speculative building to satisfy the appetite of Chinese investors, who have few other investment opportunities. The availability of government supported excess money sent the value of Chinese residential property through the metaphorical roof, despite the fact that many apartments are reportedly uninhabited. In Beijing an average home price is 22.3 times an average annual salary. The Chinese government has declared that homes should be for living in and not for speculation, has tightened regulation of the industry, and pressured Evergrande's cash flow. Apparently they can recognize a bubble when they see one and are moving to deflate it. Analysts expect that the government will contain the problem.

There is a parallel between China’s real estate bubble and our stock market. The consistent factor is government-provided easy money and excess debt, both in the US and worldwide. The US Federal debt is 125% of the country's GDP. Japan's is 266%. Regular people get into trouble by putting too much debt on their credit card. How do countries do it? As shown by the current budget deficit and debt ceiling maneuvering, the US Congress passes legislation without any real concern about how to pay for it. They give lip service to "the American taxpayer", but in reality, taxes and other revenue only pay for 80% of government expenses. The shortfall is added to the debt every year. In order to better finance all the debt, the Federal Reserve Bank buys the debt in the form of Treasury Bonds. Then they create their own debt, Federal Reserve notes (look at the dollar bill in your wallet), to pay for it. It does not cost them anything. It is just financial engineering. The bonds simply become an asset on their ledger offset by the liability of the notes that is used as currency. The tidal wave of money that has been created by this process has caused interest rates to reach the lowest level in more than 5,000 years (according to Merrill Lynch analysts, going back to 3000BC in Mesopotamia). In response, the low rates have spurred stock and real estate markets that have grown to the highest level ever.

Common sense tells us that someone must eventually pay for all this debt. Who will it be? As Willie Sutton answered when asked, "Why do you rob banks?", he answered, "Because that is where the money is." Currently the visible political targets are corporations and the taxpayer who earns more than $400,000 per year. But it is really all of us. The people who are trying to save for their future in bank accounts earn close to nothing in interest. In reality, they are losing ground at an annual rate of 5.3% considering recent inflation. It will also be paid by all the workers who are contributing to their 401(k)s, buying stocks that are overvalued by somewhere between 100% and 200%. Consumers pay higher prices for an increase in corporate taxes. We must also remember the next generations of Americans who are on the tail-end of this "buy now, pay later" philosophy.

According to, "A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors". This closely resembles the policy that has prevailed for years, although when it is government sponsored, like Social Security, it is called "Pay as you Go", which promises current benefits paid for by hypothetical future receipts. The effect is the same as a Ponzi, providing benefits to those who came first at the expense of those who will be last. Speaking of Social Security, it is ironic that while Social Security has been described as a “trust fund” or “lock box”, implying a high degree of safety, in Janet Yellen's recent congressional testimony she said that, unless the debt ceiling is raised (so that the government can continue borrowing), Social Security payments would be delayed for 50 million seniors. Why? It is because the money raised from past payroll taxes has already been spent, The lock box is full of government IOUs.

Some of the debt accumulation has been for good causes, restoring the banking system after 2008 and stopping the COVID recession in its tracks. The Fed has been battling deflationary forces brought on by an aging workforce, lower growth, and trends toward global manufacturing. The problem is that the economy and markets have become accustomed to a continuing debt fix even in good times, so it has become difficult to stop, let alone reverse. The long-term deflationary trends are still in effect, so inflation has not increased until recently. The Fed originally expected it would be a “transitory" experience. Now it is being called "frustrating" due to its persistence, because post-Covid supply chain bottlenecks are not getting better. Eventually, however, the economic principle of supply and demand suggests that too great a supply of money beyond what the economy requires to run smoothly will result in a lower value for the dollar. A lower value means the dollar will buy less, and items will cost more. This is the definition of inflation.

Increasing debt is also associated with lower economic growth rates, meaning that the growth of wealth (and the intrinsic values of investments) is slowing down. As an individual, this means that your long term planning should not expect returns like we have seen recently. Furthermore, recognize that the value of your 401(k) is inflated, and may not be worth its value when it comes time to retire if left unprotected from the vicissitudes of the market. On the other hand, it makes sense to hit what the economy is pitching. Use the current low interest rates to borrow for productive investment, but not consumption. Be careful of holding set-and-forget target date or index funds, if the trend of the stock market changes. If you expect inflation to pick up seriously, consider holding tangible or real estate assets.


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.