"Inflation hasn't ruined everything. A dime can still be used as a screwdriver." - H. Jackson Brown, Jr.

"It's tough to make predictions, especially about the future." - Yogi Berra

The Federal Reserve is meeting today and tomorrow for it’s regular review of the economy and what, if anything, to do about it. This is also one of the meetings when the Fed announces its member’s economic projections. Nobody expects the Fed to raise interest rates at this meeting, but everybody will be watching and listening for clues on when they plan to start doing so, and if they’ll begin earlier than anticipated.

As we’ve discussed before, the Fed is viewing the recent spike of inflation as something they’ve planned on, a goal realized, and something that’s also likely to be short lived. In other words, the Fed added a bunch of fuel to stoke the economy’s fire during the worst of the pandemic and a flareup was to be expected. Eventually the flames will settle, and we’ll be back to the slower burn we’ve grown accustomed to. Or at least that’s the plan. The Fed has a tough job, no doubt about it.

It took a while to kick in, of course, but we now see the fiery part of this playing out around us every day. Grocery and gas prices seem higher. New and used cars and trucks are more expensive. Housing costs are soaring. There are tons of anecdotes of increased demand just as a wide variety of supply chains across the globe struggle to keep up. Name the industry and it’s being impacted. There are even reports of long lines awaiting visitors at national parks. Lots of activity after a prolonged lack of it equals inflationary pressures, but will it last?

Across the country people (generally speaking) have less debt, more cash, and are feeling the so-called wealth affect that comes from soaring home and stock market values. Much of this is psychological, but how we feel about the economy is important because it impacts how we spend. And if consumers feel like prices will be more expensive in the future, they’ll buy now, stoking more inflation.

Workers are also feeling their oats a bit as our economy picks up. Nationally, the unemployment rate has continued to decline in part because more people are dropping out of the labor force. They’re retiring early, exploring opportunities, taking a crack at the Great American Novel from a beach in Fiji, and so forth. And a growing number of those who plan to remain employed are switching jobs.

While all this is important for the economy and impacts inflation, the latter point, the job switching, is something the Fed watches closely. The so-called quit rate is measured in the Job Opening & Labor Turnover Survey (JOLTS) and is a key indicator for how healthy the labor market is. It’s seen as positive when workers feel confident enough to jump ship and head to another employer. And since they typically do this for more money, this activity helps drive wage growth within the economy and has a direct impact on inflation. A high quit rate isn’t a problem if it’s a blip, but if it persists those extra costs for employers have to go somewhere, like increased prices for consumers.

This week I wanted to share some snippets of analysis and a few charts about JOLTS and the employment situation from my research partners at Bespoke Investment Group. Yes, looking at JOLTS data is a bit wonky, but the Fed will undoubtedly be looking at the same information, so it’s helpful to have a general understanding of the numbers.

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Happy first day of June! The year is ripping right along and so are developments in the financial services industry. This isn’t anything new. One of things I love about my work is the constant change and the need to continually educate myself. It’s daily reading, industry conferences, and a never-ending stream of webinars. But it’s wonderful to learn new things and to challenge my understanding.

This brings me to the subject of bitcoin, the most well-known (and yet vastly misunderstood) member of the emerging investment category called “digital assets”. Bitcoin is a thing in and of itself, but also the “Kleenex” term describing the wide variety of so-called cryptocurrencies. I’ve written about bitcoin in the past and have generally dismissed the category as being too volatile and otherwise inappropriate for anything other than pure speculation.

Price action in recent months has only served to prove this point. The value of one bitcoin, again one of many digital coins out there, hit almost $65,000 in April, up from less than $7,000 a year prior. But only a few weeks later the price had dropped to the mid-$30,000’s. That’s huge volatility driven primarily by headlines and active traders who were mostly late to the party. I imagine buying at recent highs, as many did, felt something like finding yourself at the apex of a rollercoaster just before your stomach rises to your throat.

But amid all the news and noise the powers that be, across government and a variety of industries, are taking digital assets and the blockchain technology that underpins them seriously. Part of this is a reaction to what’s happening in the markets, of course. Another part is a slow but steady institutional recognition that this technology could lead to a lot more than just digital currencies. Some even talk of it changing the world. Eventually.

My relationship to all this is evolving. Some months ago I made the decision to start going down the digital assets rabbit hole in a more meaningful way. I quickly realized just how superficial my knowledge was. I was looking for deep understanding, but my research began to feel scattered. I found myself studying the nature of money, world history, and navigating all sorts of diverse territory in trying to understand bitcoin. I longed for a structured course, something that would help tie the seemingly disparate information together.

Then boom, I got an unexpected invite via my professional organization, NAPFA, for a new course on you guessed it, all things digital assets. There was serendipity in the air and another sign of “crypto” going mainstream. (That’s the driving force behind the name change to digital assets, by the way.) It would be a 13-hour course taught by experts including one of the two guys who actually invented blockchain technology back in the 90’s, and cover everything a financial planner needs to know, from the super-technical stuff to incorporating digital assets into a portfolio.

I’m mid-way through the course and honestly can’t say where it will lead. Each module is full of brand-new information and often creates additional research. Bitcoin and the thousands of competing coins, blockchain technology itself, “trading” coins and tokens, concerns about global central bank policies and inflation, the potential rise of so-called decentralized finance, and use cases for non-financial companies and individuals alike; all this and more is exciting but still unresolved in my mind. Frankly, it also seems unresolved in the minds of people who are actively trying to figure it all out. It’s the modern Wild West in many ways. Nevertheless it seems clear that blockchain technology will prove revolutionary, we just don’t know exactly how yet.

But a huge open question is what, if anything, should individuals, bystanders if you will, do about it. Figuring this out at the portfolio level is difficult to say the least. I still haven’t decided how much bitcoin is the right amount and even where or how best to hold it. It may turn out to be investible for some of you and not others.

Many questions remain and I’m working diligently to find answers as I also confront my preconceived notions about digital assets. I want to be a good resource for you, even if it’s just providing information so I’ll plan to write a few more of these posts as I continue down the rabbit hole.

For now, here’s a link to some articles and other information from the organization that’s putting on the course. There’s a good list of articles to scan through if you’re interested. Keep in mind the content is geared toward financial folks, so there’s some jargon mixed in.

https://riadac.com/digital-assets-are-now-mainstream/

Have questions? Ask me. I can help.

Here we go again. Stock and bond markets have been volatile lately due to fears about inflation. I say fears, but perhaps uncertainty is the better word. Either way, there’s an ongoing and growing disconnect between how investors, central bankers, and ordinary folks think and feel about inflation.

Last week the Bureau of Labor Statistics announced that the Consumer Price Index had ticked up from last April to this April at the fastest rate since at least 2008. As usual, some parts of the economy were moving normally but others were ripping right along. Prices for used cars and trucks were up more in April than at any time since at least 1953. Airlines, recreation, and costs for housing and home furnishings also rose rapidly.

Much of this was expected following the one-year mark from the pandemic lows as year-over-year comparisons on all sorts of things started to show dramatic change. But many were wondering and worrying about the rate of change. Energy prices were up 25% from April 2020, but you’ll recall that the price of oil went negative for a short while back then and the industry was hammered. So, while 25% is a big increase, it’s from an extremely low level. The CPI also showed that hotels and car rentals were up huge in April compared with a year prior. Pent-up demand is a powerful force.

Not all prices rose dramatically. Food at home (versus restaurants, which rose faster), alcohol, apparel, and new vehicles were up a relatively modest 2%. All told, headline CPI came in at 4.2% from April to April. The “core” number that strips out volatile food and energy prices was 3%.

While those numbers might seem small, it’s a big change from where we’ve been. And you might report your personal inflation rate as being much higher. Also, you feel this surge of activity all around you and it makes sense that it would be inflationary. I mean, seriously, the government will have pushed trillions of dollars into the economy when all’s said and done. How can the Fed and others suggest that all this activity and corresponding inflation is only “transitory”? Two words: excess capacity.

(For reference, the Fed has targeted a longer-term average of 2% core inflation. We’ve been below this for so long that they’re willing to let things run hot for a while before trying to tap the brakes.)

The Fed has two mandates from Congress; to manage inflation and to shoot for full employment. Even with all the free money flowing into the economy helping to fuel demand, the Fed expects that the recent consumer spending spree won’t last long enough to be a problem. They’ve also been saying there’s room, or excess capacity, in the economy to soak this up. Millions are still unemployed and service workers, those near the bottom of the employment food chain, still aren’t fully back to work. In other words, everyone isn’t out there buying cars and booking hotel rooms. Until they are, at least from the Federal Reserve’s perspective, it’s much ado about nothing when it comes to last week’s inflation numbers.

Investors see it differently. Or, maybe it’s more accurate to say they don’t know what to think. We haven’t had to deal with an inflation problem for a long time. We also haven’t had a Fed this interested in propping up the economy. Then again, we haven’t gone through a Covid-level pandemic in recent history either. And millions of new investors have entered the markets and have mostly just seen things go up. So, maybe it makes sense that there’s uncertainty about the risks posed by inflation. It’s hard enough to understand the ins and outs of inflation in the best of times.

But what is inflation? Is it helpful or harmful? Is it something we actually need?

There are a variety of answers to these questions from diverse sources like bland Economics 101 textbooks to deep dives down the Bitcoin rabbit hole. But for a more straightforward conventional set of answers, here’s a few links from the middle of that spectrum.

The first is a video (about eight minutes long) from the folks who present Marketplace, a great program for distilling the complexities of markets and the economy down to something understandable.

Fun tip: try to watch the video without looking at the date. You might guess it if you stick around toward the end, but I’ll leave you to appreciate the irony.

https://www.youtube.com/watch?v=9sZdXJbK554

Here’s a short article that gets into why at least some inflation is necessary.

https://www.marketplace.org/2019/09/12/why-is-inflation-necessary/

Then here are two good articles from Schwab (one shorter, one longer) talking about the current outlook.

https://www.schwab.com/resource-center/insights/content/is-1970s-style-inflation-coming-back?cmp=em-QYD

https://www.schwab.com/resource-center/insights/content/world-inflation-transitory-or-more-nefarious?cmp=em-QYD

I’m purposefully leaving out the cryptocurrency stuff because it really is a rabbit hole. I don’t think that’s a bad thing, by the way, just that it’s way beyond the scope of this post.

Have questions? Ask me. I can help.

This week I wanted to address a question that’s come up a few times lately: Is it better to buy an existing home or build your own? It seems the lack of available homes to buy in Sonoma County is forcing folks to get creative.

Times are challenging for home buyers. It’s old news at this point that a lack of supply is causing buyers to contend with all sorts of competition that often seems to have a limitless supply of cash. This can be demoralizing and incredibly stressful. The basic economics of this has been driving the average price of existing single-family homes to almost $830K locally, up about 10% from the same time last year, according to Zillow.

This is unsustainable and leads to lots of buyer frustration (but great news for sellers, of course) in the short-term. It’s also leading some to consider building the home they can’t find on the market. Or moving out of the area and building it there.

The idea of having your home custom built, or even semi-customizing in a new development, is appealing. You can create exactly what you want, everything is shiny and new and up to code and, at least some say, doing so maybe a little cheaper than buying an existing home.

But these would-be home builders are up against an array of challenges perhaps more daunting than low inventory. And the biggest issue right now seems to be inflation. On everything. Land is expensive, and so is lumber, concrete, and drywall. Even copper wiring and truss prices are through the roof (sorry, couldn’t resist the pun). And those are problems on average across the country. Locally, toss in our fire-related backlogs and just getting a contractor to finish your project is challenging, not to mention expensive.

But which is better, to buy or build? From my research and conversations with folks over the years there doesn’t seem to be a clear financial answer to this question. Lots of anecdotes and some data suggest that buying is more expensive than building after you factor in all the upgrades to make the home the way you want it. Newly constructed homes can also be cheaper to run than an older home, at least according to the National Association of Home Builders (their opinion is a little biased, I think, but seems intuitive). Still more anecdotes bemoan the cost overruns and unexpected delays encountered when building a home. In other words, talk with ten different people and you’re likely to get ten different opinions.

Ultimately, buyers and builders both tend to overpay because their transaction usually ends up being more expensive than intended. And the recent inflation uptick is only increasing uncertainty.

The bottom line is you should look hard for an existing home to buy, potentially even a fixer-upper, before embarking on the builder’s journey. The reason is that the existing home is obviously already there, is more or less a known quantity (following good inspections during the escrow period), and you can take possession sooner. And, at least in theory, you can control costs more than a contractor can potentially over a multi-year timeframe. (See one of the links below for more information on this.)

Beyond that, buying or building is a huge financial and life decision, so try not to let market forces create a false sense of urgency. Easier said than done; believe me, I know.

To help with decision-making I’m including a good basic pros and cons list from bankrate.com. You can use it as a jumping off point to start your own research.

I’m also including a short article from Bloomberg detailing how inflation is driving up the price of just about everything that goes into a new home, with good graphics showing price increases at different construction stages.

https://www.bankrate.com/mortgages/build-or-buy-a-house/

https://www.bloomberg.com/graphics/2021-us-housing-construction-costs/?srnd=premium&sref=vuYGislZ

Have questions? Ask me. I can help.

This is an exciting time for software in my little corner of the world. There’s so much available, from apps aiding retirement planning and investment management, to software that helps me run my business. These are just fancy tools, of course, and can only be helpful if you know how to use them. But for planners like me who enjoy delving into the details, the level of innovation creates tons of possibilities, especially for the important subject of tax planning.

Our tax code is easily one of the most complicated parts of our financial lives. It has tons of moving parts, changes frequently, and just about everything is interconnected; one simple change can have expensive ramifications.

While I’ve long done tax planning and strategy work for clients it’s mostly been pen and paper, Google searches, and studying client returns and the IRS’s website. This is useful but often incomplete without help from the client’s tax advisor.

The issue is that most tax advisors don’t really do tax planning, or at least they don’t make the process easy. Instead they focus on preparing tax returns. We’re all aware that this is a difficult seasonal grind, so it’s understandable if some of the profession goes MIA between seasons. This creates problems, however, because tax advisors have client data in their own software and crunching numbers amid all the complexity pretty much requires replicating it.

I don’t normally use these posts to talk specifically about my business, but this week I wanted to introduce a new service: tax return review. I spent the better part of a year evaluating a new software program called Holistiplan and was waiting for after tax season to open it up to you.

My ongoing clients will get this at no additional cost and my hourly folks can access it as a separate project.

Let me be clear in that I’m not angling to replace your tax advisor. That’s a full-time job and I already have one. Instead, I want to provide better financial planning that helps you through life’s important decisions. Since just about all financial decisions involve tax considerations, efficiently analyzing your tax return will help me help you more.

Here’s how it will work –

The process begins with you getting a digital copy of your tax return. Upload it to my website www.ridgeviewfp.com by clicking on “Secure File Upload” in the Clients dropdown at the top of the homepage, or at the bottom of each page. There are no space limitations, so you can upload the whole document, ideally as a PDF. A clear scanned copy saved as a PDF works also.

We’ll upload your return to Holistiplan for analysis. It typically takes a few minutes.

Then the software deletes your return. It only holds the return data, not your personal information. This is an extra level of security I implemented with the company.

Then we’ll look for planning opportunities. Some are obvious while others might be deeper in the weeds. Or maybe you’re in good shape already. Either way we’ll be able to tweak your prior year numbers to gauge the impact of extra income, capital gains, funding an IRA, and the potential for Roth conversions, to name a few.

We can hop on a Zoom call and look at the information together, send you a report with our notes, or both. Also, Holistiplan keeps everything current, so we’ll be able to understand how any changes to the tax landscape might affect you.

Then we can look for help and confirmation from your tax advisor. You’ll be able to ask specific questions and, hopefully, get good answers.

Ideally, we’ll keep doing this every year. We’ll build up history for you and, hopefully, leverage tax planning to help make your financial life better.

Have questions? Ask me. I can help.

Change is all around us and has certainly been kicked into overdrive during the past year or so. There’s so much to stay on top of and in my industry, conferences have been an excellent place to take it all in. The conferences are virtual, of course, but are still a great way to hear from a variety of experts all in one place (so to speak) about the economy, the markets, taxes, and various other topics related to financial planning.

I spent the better part of last week at one of these virtual conferences. There was a lot of investment-related stuff that I won’t bore you with, but I will share other information with you today about expected changes to tax policy.

Late last month the Biden administration proposed the American Families Plan, a major tax overhaul reversing much of the last major overhaul from just a few years ago. There’s sort of a washing machine feeling that comes with these lurches in tax policy but deal with it we must.

I’m going to present this information in bullet format to try and replicate my notes from a couple of the sessions last week. There’s a lot to the tax plan and much is subject to change as it works through Congress. (That old saying, “the President proposes, Congress disposes” comes to mind.) Still, the thrust of the plan is what’s important and, with Democrats in control of the government, most of these proposals will likely be implemented even if the numbers end up a little different.

• It’s assumed that the new tax laws will take affect in 2022 and won’t be retroactive for this year. Hopefully Congress doesn’t wait until late in the year as they did with the Tax Cuts and Jobs Act, and the SECURE Act (both passed in late December 2017 and 2019, respectively). Doing so makes planning difficult.
• There’s a line being drawn in the sand at $400,000 of annual income. Those above are likely to pay substantially higher tax rates than those below. If you know, or at least expect, to be around that income number you should pay close attention to the news around these proposals. You may end up trying to pull income forward into this year and delaying expenses into next, if possible.
• Again, those well below this supposed threshold shouldn’t see their taxes go up. The opposite should be the case, at least on average.
• Higher earners could see a host of other changes, including itemized deductions getting capped at 28% and losing the Qualified Business Interest deduction for those with small businesses.
• Retirement account savings methodology could be flipped on it’s head. We could see deductibility capped on contributions to IRAs and 401k plans for higher earners while lower earners could receive a refundable credit. Essentially, this would take deductibility from higher earners and give it to lower earners to allow them to save more toward retirement (a so-called Robinhood provision. The man in tights, not the brokerage firm). This could make Roth IRAs and Roth 401k plans more appealing to higher earners and traditional IRAs more attractive to lower earners – a reversal of current thinking.
• The so-called SALT provision that caps deductibility of state and local taxes could go away. This isn’t in the Biden plan but is thought to have to be included to get support from coastal democrats.
• Capital gains, real estate exchanges, and the so-called step-up in basis could have a $1 million income threshold. Those with income (which includes the value of asset sales) over the threshold would pay higher rates, be unable to do exchanges, and even lose their basis step-up. All of this would lead to more capital gains taxes being paid by higher earners.
• As a reminder, your tax status is generally looked at one year at a time. You could have a more “normal” income situation followed by a surge of income from a business sale or maybe a taxable inheritance. This could bump you up beyond these thresholds for one year and you get hammered by taxes, only to go back to normal the next year.
• The ramifications of this last bullet are interesting in states like CA where folks often have a lot of home equity. Under the proposed plan it’s possible that death triggers a “sale” for tax purposes above this $1mil income threshold. The step-up in basis would go away and the larger gain becomes taxable for higher earners who inherit family property, for example.
• Also along these lines, the so-called death tax limit could be reduced to $3.5 million but could be as high as $6.5 million. Nobody I heard from thought it would be anywhere close to the current $11+ million level.

These and other proposals are now subject to the vagaries of our duly elected officials in D.C. The main point of this post is that, even with everything else going on in the world right now, major tax changes are being planned yet again. If you’re anywhere near the thresholds currently being talking about, you should pay close attention to how this plays out.

Also, I think this should be obvious, but I’ll say it anyway: none of the above should be taken as specific tax advice. I’m not a CPA and don’t even play one on TV. I am enhancing my services in the tax planning area, however, in part because of this latest round of proposed tax changes. More on that in the coming weeks.

Here are two links to read more about the proposals.

https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/28/fact-sheet-the-american-families-plan/

https://www.wsj.com/articles/whats-in-bidens-american-families-plan-proposal-11619621174

Have questions? Ask me. I can help.