Health insurance is extremely expensive, no doubt about that. But the total cost for many workers is a mystery because most of the monthly premium is typically born by their employer. That is until they get laid off, of course. Then, unless their former employer is extremely altruistic, the newly laid off employee must pay the entire cost to keep their health insurance going plus a 2% administrative fee while they look for a new job.

This ability to continue typically higher quality workplace coverage after a layoff or large reduction in hours is due to the Consolidated Omnibus Budget Reconciliation Act (COBRA), passed by Congress in the mid-80’s.

As you can imagine, COBRA has been extremely helpful for workers who lose their job but it’s costly. The average monthly premium is a couple thousand bucks for a family. That large expense adds to the stress of trying to find a new job, and due to the complexity and cost lots of workers simply go without until they can hopefully restart coverage with a new employer. This lapse in coverage can have major ramifications. Lump that stress on top of job hunting during a pandemic and you’ve teed up a problem for a free-spending Congress to try and solve. While fully addressing the problem would be a major undertaking, Congress at least gave it a band aid within the nearly $2 trillion American Rescue Plan recently signed into law.

I had read about the plan’s COBRA-related provisions when it passed but wanted to share the following Wall Street Journal article with you. The big news is the federal government will foot the premium bill for a while, but an interesting twist is how coverage can be backdated. Typically the worker has a short window to decide to continue their old workplace plan under COBRA, but now they can go back to last March if necessary. A link to the story follows, but I’ve pasted most of it below.

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The term Wild West has deep historical significance but is also used broadly to signify, as Merriam-Webster puts it, “… a period characterized by roughness and lawlessness.” That’s where I think we are right now with the melding of social media and the surge of people using online trading platforms like Robinhood. But isn’t confined to just one firm. The frontier is wild, and the law is too slow in catching up.

My industry is heavily regulated, but you wouldn’t know it by much of what’s posted online these days. I take industry rules seriously because they’re there for a reason, usually the result of shenanigans that cost people serious money. So I really look askance at unregulated “influencers” giving investment advice on social media platforms. Many of them cheapen the process, as if the decision to buy or sell a stock was like any other product review. Bad online purchases can be annoying and inconvenient but buying the overpriced stock of a silly company just because some bloke suggested it online could cost you bigtime. Simply put, lots of people are being taken advantage of right now and the regulators, the “law” of the Wild West, are wondering what to make of it all.

As you can imagine, I’m not the only financial planner who feels this way. But what to do about it? After all, many of us don’t play in the social media sandbox and easily get drowned out by all those talking heads on YouTube. Instead of joining them, maybe it’s better to educate one investor at a time.

Along those lines I’m doing something a little different this week. Sara Grillo, an industry insider, has written a good “explainer” piece to send to anyone who may be considering day trading. I usually remove imbedded hyperlinks from articles I post, but I’ve left them in this time as they provide further explanation on important topics like defining margin debt, what real stock analysis is, and so forth. The idea is that this piece could be a helpful tool for anyone getting started with trading and needs help (or maybe a reason not to start).

Let me also add that I don’t want to stop anyone from trading stocks if that’s what they genuinely want to do. Instead, I hope they do some homework and try to develop an understanding of how complicated it is and, hopefully, don’t go overboard with the dollars they invest. Ideally, a first trading account should be thought of like money being set aside for that trip to the casinos with friends. It’s fun money, money that you could lose without repercussions aside from feeling silly. Start out trading with more than that and you’re really asking for it.

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As I sometimes do, this week I’d like to address questions I’ve been hearing from clients in recent days. The questions revolve around Prop 19, the proposition passed in November that takes effect today, a deadline that seems to have snuck up on folks, me included.

The idea behind Prop 19, so far as I remember from the political ads, was to free up the ability for seniors and certain others, such as wildfire victims, to move more easily about the state while taking their lower property tax base with them. There was also talk of freeing up more of the housing stock that was stuck, for lack of a better term, while folks waited to pass their homes to heirs. The emphasis was on favoring owners of primary residences over owners of rental properties. Helping fire fighters and providing for additional fire prevention was in the mix too.

To pay for this it was necessary to slam the door shut on what many viewed as a loophole allowing unfair tax breaks for those inheriting long-held family homes. There were (and still are) many notable examples of this. A 2018 story from the LA Times (a link is below) circulated about the actor Jeff Bridges and his siblings easily earning enough in a few weeks of renting an inherited family home to pay for a years’ worth of property taxes. Those taxes, according to the newspaper, were a small fraction of what they would have been if not for Prop 13. That late-70’s legislation and an additional inheritance tax break passed later capped taxes on certain properties and let those low rates carry over to heirs. The proponents of Prop 19, however, wanted would-be-landlord heirs to pay property taxes on the current value, not the much lower value the parents were assessed on. In other words, reversing an unintended consequence of Prop 13. The result is either a huge tax revenue opportunity for counties, or an unfair wealth redistribution strategy, or both, depending on your perspective.

While the ramifications of Prop 19 are positive for some, ordinary mortals without the deep pockets of celebrities may feel like they’re getting the short end of the stick. As this goes into effect people are wondering if they should be concerned, if there’s anything to do, and so forth. On the one hand, folks 55 and over will have expanded ability to move about the county. That’s a good thing that we’ll leave alone in this post. But others, those who will have to “pay” for Prop 19, have lots of questions.

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I don’t think it comes as a surprise to anyone to hear that major shifts are happening in our country and economy. People are on the move. Industries are changing. Long-term trends seem to be playing out all at once. These shifts create lots of questions that are hard to answer, and the uncertainty can be uncomfortable, to say the least.

This impacts everyone and even flows over into the normally staid world of bonds. Recent months have seen the stock market rise but prices for bond benchmarks like the 10yr Treasury have fallen. The 10yr Treasury is important to follow because it serves as the benchmark for mortgages and is a good proxy for bond returns in your investment portfolio.

The yield on the 10yr is currently about 1.6%, up almost 1% from the lows of last Spring (as a reminder, yields rise when prices fall). The 10yr yield remained low until late-Summer when it began to rise again before falling prices accelerated in the last month or so. The result is that the average 30yr fixed rate mortgage is now over 3%, following many months below that, and typical bonds within your investment portfolio are probably down around 3% year-to-date. Longer-term Treasurys are down more, almost 12%, and short-term bonds are down too, maybe less than half a percent. This volatility follows strong returns for bonds over the past two years.

So why is this happening to the bond market now? In short, bond investors are struggling with big questions just like the rest of us. How quickly will our economy get back to normal? What will that even look like? How helpful will government stimulus programs be, and will they become problematic by causing inflation?

Bond investors have been reacting to these questions in recent weeks primarily by selling bonds. That selling, as I mentioned, causes yields to rise, mortgage rates to go up, and so forth. The primary culprit is said to be inflation fears. These fears appear to be warranted, at least if you look at things through a short-term lens.

Manufacturing is roaring back to life even as companies deal with material shortages, shipping delays, and higher commodity prices. And Congress seems poised to pass massive amounts of economic stimulus this week that will inject hundreds of billions of additional cash into the economy. Many market prognosticators are assuming that the coming rush of consumer spending could hit supply-constrained manufacturers and lead to, you guessed it, inflation.

An interesting aspect to this, however, is how the government agencies that are supposed to stay up nights worrying about inflation, simply aren’t. Or at least not in the way you might think.

In the past week or so we’ve heard Jerome Powell, the Fed chair, and his predecessor and current Secretary of the Treasury Janet Yellen, express a distinct lack of concern about inflation. The issue, they say, is that our economy is still reeling from the pandemic and has lots of room to absorb all the stimulus money. If you just look at recent months, yes, the economy is growing quickly, and some prices seem inflationary. But that’s growing from the bottom of a deep hole. Instead, if you broaden your comparison to pre-pandemic levels certain sectors of the economy are still struggling, and overall inflation is quite low, currently less than 2%.

Reasons for this come from many places but primarily we see it playing out in our country’s unemployment rate, which is 6% or so. According to Secretary Yellen, however, real unemployment is more like 12% if you define the term more broadly. The bigger picture unemployment rate was about 7% before Covid-19 hit our shores and rose to around 22% last Spring. Yes, 12% is much better than 22% but we still have a way to go before “full employment” is reached. And recent reports indicate that about 40% of the unemployed have been so for over half a year, the so-called long-term unemployed. That’s a lot of people who are losing touch with their respective industries, skillsets, and so forth. Essentially, both Powell and Yellen are staying up nights concerned about those people, not inflation.

Regarding current moves in the bond market, Powell and Yellen seem equally sanguine. The yield on the 10yr Treasury was about 3.2% a lifetime ago in late-2019, so they likely see the recent yield uptick to 1.6% as a step toward normal for bonds.

A takeaway from all this, I think, is that even though we had strong returns last year from stocks and bonds, this year, like we’ve discussed in other posts, is likely to be volatile. This is nothing new for the stock market, but you might be less used to it coming from the typically stable world of bonds. Modestly higher interest rates will take a little pain to reach but will be healthier for the economy in the long run. So, try to take recent bond market volatility in stride as part of an adjustment phase for bonds. Just one more aspect of our lives and economy searching for normal.

Have questions? Ask me. I can help.

The Paycheck Protection Program was an important part of the CARES Act passed by Congress last March. While there are stories of unfairness and even outright fraud involving the program, it helped many small businesses stay afloat during the first wave of the pandemic. But as the virus wore on that initial round of PPP money needed to be refreshed. Congress did that prior to year-end and is poised to do so again in the next week or so as part of the broader stimulus legislation being worked on. And fortunately there will be added emphasis on getting money to small businesses more easily.

The new round of PPP is much like the last but with some important differences. This time to qualify you’ll need to show (or perhaps simply attest, verify that with your lender or tax advisor) that your business suffered a 25% decline in revenue during any quarter in 2020 over the same quarter in 2019. If so, and if you plan to spend at least 60% of the money on payroll and the rest on a host of other eligible business expenses, you should be able to have the loan completely forgiven. And yes, this also applies even if you participated in a prior round of the PPP so long as you suffered enough of a revenue decline. Below are sections of an article from an industry publication, Financial Advisor, addressing this at a high level so you can see if you’re likely to qualify.

But, as they say, the devil is in the details. Work with your current business bank to do the application and they should be able to walk you through it successfully. These banks have had lots of practice since last March, especially with small businesses that are typically looking for relatively small loan amounts.

And as I mentioned a moment ago, small businesses are finally getting some favoritism in this new round of stimulus. Just yesterday President Biden announced that Congress will open a special two-week PPP application window this Wednesday for businesses with fewer than 20 employees. The Wall Street Journal reported about this yesterday, so I’ve also included a link for further details on that as well.

So if you, or perhaps a small business owner you know, might be eligible the time to act is now (or tomorrow, you know what I mean).

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I’ve written several times about the rise in retail day trading last year but, frankly, I am surprised at how many people jumped on the bandwagon in recent months. Millions of new taxable brokerage accounts (industry jargon for not being a tax-deferred retirement account) were opened last year, many in the final quarter, and many of those were opened by Robinhood, the upstart firm that’s been in the news so much lately.

Now, I’ll freely admit to admiring the firm’s espoused principles of making investing and financial education accessible to everyone regardless of net worth. This is laudable and necessary, I think, for a variety of reasons. For one, a large portion of the adult population doesn’t own stock or even have enough in savings to cover an emergency $1,000 expense. Getting those people as much financial knowledge as possible as quickly as possible would benefit the entire country. I don’t know that these folks need to jump right into trading stocks on their iPhone, however.

I also admire how the firm shook up the industry back in late-2019 by offering free stock trading. Other major firms quickly followed and we’re now at a place where investors can buy and sell most investments without paying a trade commission. This dramatically lowered the barrier to entry for new investors. It was also destabilizing in other ways but was still positive, I think, on balance.

The issue I have with Robinhood (and other companies like it) is the so-called gamification it employs to reel you in and hold your attention. This gins up enthusiasm among its customers, at least half of whom are apparently brand-spanking-new to the complex world of investing. From what I understand, the education provided by the firm drives new customers toward trading as opposed to more, shall we say, boring but sound investment strategies.

Robinhood makes more money when its client’s trade more frequently, so it naturally leads me to be a bit skeptical of the “we’re out here for the little guy” routine. Robinhood then sells client orders to third parties to the tune of hundreds of millions in annual revenue, so the firm isn’t in the buy and hold business. In other words, the free trading I just mentioned should be thought of as more of a freemium. It’s the free drinks while playing the tables at a casino. To be fair, this sort of thing isn’t unique to Robinhood. All the major brokerage firms make money like this, just perhaps with less confusion about the firm’s motives.

We know that gamification impacts our psychology, but it can easily be downplayed as something that happens to other people. Along these lines, here’s an article from Jason Zweig, The Intelligent Investor, at The Wall Street Journal. This is from December and I had wanted to bring it up then, but other things took priority. Anyway, check it out for an illuminating look at how easy it is even for the well-informed to get sucked into the Robinhood platform. It should be read as a cautionary tale, even though for Mr. Zweig it was a reporting assignment with little money at risk. Many haven’t been so lucky, and they won’t be the last.

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