“The Fed is Dead”      
                        -Brad McMillian, Commonwealth’s Chief Investment Officer

I recently returned from Commonwealth’s 40 th anniversary National Conference which was touted as being in Denver, Colorado but was more accurately held airport adjacent in a large convention center and hotel. But those are just semantics. I got to spend four days with thousands of advisers from all around the country as well as financial analysts and experts from some of the leading investment firms in the United States. I learned a lot, and I’m still trying to process how to incorporate those lessons into practice over the next year. But in the meantime, I came away from this event with four main themes that were discussed over and over again by different people from many diverse firms. I wanted to use this newsletter to present those themes to you.

1.      Demographics are Destiny

A lot of what has driven interest rates, inflation rates and equity values over the past seventy years or so, not just in the U.S. but worldwide, has been demographics. Take interest rates, in the 1950’s and 60’s rates were pretty low as the WWII generation were starting families, entering the workforce and eventually reaching their highest earning years. There was a lot of capital in the United States, as we came out of the war as the only functioning industrial economy. At the same time, that generation was larger than the one before it, but not by all that much – so there was a lot of money chasing a moderate number of borrowers keeping rates at that low level. At the same time, there were a lot of consumer goods, tons of new oil production, and a home building boom – a lot of goods being chased after by a moderate number of people, keeping inflation in check.

Then in the 70’s and 80’s – here come the Baby Boomers. The Baby Boom generation contained 135% more people than the previous two generations combined. There were roughly 32 Million people born in the United States between 1916 – 1946, in just about half that time from 1947-1965 over 75 Million people were born. A huge population uptick all entering the workforce only compounded by the larger percentage of women working outside of the home. That huge generation wanted to buy stuff – raising prices, and wanted to borrow money to buy big stuff, raising interest rates. Now did rates become a bubble in 1979-1982, yes, they did. Greed and fear are always there to over buy or over sell in any, but by and large this explains the inflation, interest rate and market movements of this time period. 

Since the early 2000’s as this generation has headed toward retirement, the generations following it, Gen X (me) was a little smaller and then the much talked about Millennials (the majority of whom are now in their 30’s) were a little bigger but just slightly. The growth in capacity (more houses, more cars, more office space) didn’t need to increase much to accommodate these new workers and what we’ve seen has been slower growth, lower rates, and low inflation. Even the places where growth and inflation have been higher are explained by this theory. The stock markets have done very well, but over the past thirty years private pension plans have gone from being in about 80% of companies to less than 5% - that money going into 401(k)’s and similar plans has ended up in the stock market. The stock markets are also pretty international, so while our demographics may seem to lead to a slower growth market, the stability of our systems and currency have allowed a lot of those in countries with growing populations to invest in the United States. When it comes to inflation, while overall inflation is low the inflation in health care and tuition payments is up substantially. Well the Baby Boomers explain that as well. Now that generation is entering the period of their lives when they spend the most on health care – the capacity isn’t there and the population is – leading to higher costs. As for tuition, while there aren’t many more kids of college age today compared to twenty, thirty or fifty years ago -the necessity of a college degree has increased dramatically. Many professions that you could enter without a degree when the Baby Boomers were coming of age, now require one. Even in my profession the Certified Financial Planner designation I proudly hold could be obtained without a college degree in the ‘70’s and early ‘80’s. Now you have to have a Bachelor’s Degree just to enter the program. Once again, more people chasing the same or only slightly higher capacity.

This pattern holds true in the rest of the Developed world as well. These generations are present in Europe and Japan, they are just staggered by a few years here and there. As the population in Japan has declined, they have seen fairly significant negative interest rates and deflation. As the population of Europe has slightly declined, they have slightly negative interest rates and zero inflation, and as the population growth in the U.S. remains positive but very low, we have very low interest rates and very low inflation. China’s population peaked in 2009, we’ll see what that means to them long-term. This leads me to point number two:

2.     Investing in the Late Cycle

The economy is like Tom Brady; he’s going along great but at that age he has to be closer to the end than the beginning. In this late part of the investment cycle, with the lower returns and slower growth likelihood, how do you have investment success? The good news is, with low inflation you don’t have to have double digit investment growth to meet your long-term needs, assuming they were reasonable to begin with. The year Commonwealth was founded, 1979, the S&P 500 was up 18% - but inflation was 13%, so at the end of the year if you were all in stocks you only had 5% more purchasing power (and that’s before taxes which were much, much higher than today.) If you earn 6% today with a 1% inflation rate you are in exactly the same boat – in fact probably better off since you’ll pay less of that gain in taxes. But this doesn’t mean you don’t want to get higher returns or at least take less risk for the returns you are getting. This is where you need to understand the difference between strategic and tactical investing. A strategic portfolio is one that should work all the time, if you have a long enough time frame. If time travelling kidnappers grabbed me and took me back in time but didn’t tell me what year it was, just that I have to pick an investment portfolio and it had to make money over the next ten-year period or else, I would choose our strategic models. Tactical investing is taking a slice of those models and investing in opportunities that are less than five years in time frame. Like being in gold for the past year for example. These tactical investments can be actual parts of the market, or investment strategies or certain financial arrangements that either shoot for outperforming the market, or minimizing the downside risk of your portfolio. Which ones we choose are based on a lot of factors, but none more important than our client’s goals and objectives. You might think that since we specialize in retirement planning, we would favor limiting risk over getting higher returns and that leads to point number three:

3.     The New Retirement

A financial advisor in New Hampshire was going out to dinner with his wife. They were celebrating, they got a baby sitter for the kids and rather than drive home after having maybe too many drinks, they decided to get an Uber. They waited outside the house as the car pulled up, and there in the driver’s seat was the advisors’ biggest client. A multi-millionaire who had retired several years before. The advisor asked his client what he was doing driving for Uber, he said it was great, it gave him something to do every day and he got to talk to and meet interesting people. He didn’t need the money – he needed the purpose. We have clients who go back to work, volunteer at non-profits, teach classes and become artists. Retiring and then just relaxing in the sun is not for everybody and it’s for less and less of the generation nearing retirement age right now. But this means working around the rules that were set up for what retirement meant in the last century. The rules that don’t allow you to take Social Security without a huge penalty before your full retirement age if you earn more than about $17,000 and can force you to pay higher Medicare co-pays if you have too much income. Even Congress who usually does nothing has recognized this and has a bill pending that will allow you to contribute to an IRA after the age of 70. This new retirement isn’t because Baby Boomers are cooler than their predecessors (those bell bottoms and pastel flowered shirts were not cool) but because they’ll live longer. While it’s a struggle to get guaranteed income of any reasonable level in this world of low interest rates, it’s also not advisable to go completely out of higher growing investments when you may live twenty or thirty years after traditional retirement ages. You are still a long-term investor at least with some of your money and should invest like it.

4.     Financial Scams are on the rise

Oh, the internet such a wonderful tool. I never have to worry about not remembering the name of that actor, who was in that thing – you know with the car and that brunette woman maybe set in New York, or Chicago? It also made it easier to get people’s personal information and once you have that information to scam them. The two biggest scams going on right now are the Mexican time-share scam and the old fashion romance scam.
The Mexican time-share scam is pretty ingenious as it’s also insidious. Mexican cartels have gotten the rosters of time-share owners in Mexico either though theft or bribery. If you own a time-share in Mexico (and I’m sure this will expand to other Central American, Caribbean and South American countries in the near future) a Mexican “real estate agent” may contact you claiming that your time-share can be sold for a reasonable amount more than you paid for it, but not so much as too arouse suspicion. Since it’s Mexico, you have to deposit money in an escrow account to cover fees and taxes. They will keep bilking you for more and more fees and taxes until you figure out it’s a scam, some people only lose a few thousand dollars while others have lost over $500,000 this way. Now the real pernicious parts comes, assuming you didn’t contact authorities, and most people never do since they’re embarrassed, you will get a call a few weeks after you cut off contact from a Mexican “policeman” who will tell you they broke up this criminal ring and have gotten most of your money back – you just need to pay the Mexican taxes first before they can send you the money.

The second scam is what’s called the romance scam and it’s used by criminals who set up fake profiles on dating sites, typically sites that specialize in matching older people but not exclusively. They will even target specific people by finding them on the dating site and then going to their Facebook pages and designing a dating profile that matches that person’s interests. They will communicate in every way but in person, via the dating site, then email then by phone. Gaining your trust and maybe your heart before asking for money, typically for a medical procedure or for travel to come see you. What’s worse, is sometimes they will pay you back the money you gave them – and then ask for it back a few weeks later, laundering other people’s money through your back accounts. 

At Keeling Financial we have to verify every monetary request or request for information from our clients by a phone call for just this very reason. We also make sure never to send financial information unless we use a secure email system, the U.S. mail or something like Docu sign®   that has built in safeguards. These same scammers that try to get money from you also try to get us to send them your money. If you get a call that sounds maybe true but you’re not sure, you can always call us – or you can go to www.ic3.gov where the U.S. government keeps people updated on internet, mail and phone scams. If you help an elderly relative, we can serve as a barrier between them and the con-artists. For our clients we have been trained to look for certain behaviors and patterns that indicate they may be getting defrauded. It’s not a perfect system, but it’s better than if they have full access to everything over the internet without an actual person in between. 

5.     Commonwealth is Great

This isn’t one of the major themes but it is number five for me as I leave that conference. The broker dealer I have affiliated with is really fantastic. The other advisers, the home office staff and leadership is made up of just fantastic people whose driving motivations are to either make our businesses better, for the Commonwealth staff, or make their client’s lives better for the advisers. I never heard one word about selling to clients, but I heard a lot about training better staff, hiring better advisers, expanding services and improving the service we provide our clients. As an example, before I end this very long article; Commonwealth put a huge four sided chalk board (roughly the size of a big SUV) in the lobby of the meeting rooms that said; Before I die… across the top with hundreds of fill in the blanks after the words I Want To…   We as advisers were tasked with filling in all those blanks and the answers were great. 

They ranged from the Personal:
 …Get a Tattoo; …Find True Love …Write a Book,

to the Physical:
 …Break 80 on the golf course; …Bike across the U.S.; …Surf on Every Continent,

To the Aspirational:
…See the World at Peace; …Make a Profound Difference in Other People’s Lives, …See My Daughter Thrive;

To finally the impossible; …Watch the Cleveland Browns win the Super Bowl. 

Commonwealth is a great place because of its awesome advisers, Keeling Financial is a great place because of our awesome clients. If you are one, thank you – if you’re not one, give us a call.