Spring 2019 Quarterly Newsletter

Apr. 11, 2019 | in Newsletter

Fact-Checking the Mainstream Economic Narrative

By: Nicholas A. Boyer, Chief Investment Officer/Executive Vice President

For the last several months, we have been talking about the stubborn and perplexing gap between perception and reality in the economy and financial markets. Unfortunately, much of this confusion and misinformation has persisted through the first quarter of 2019. Undoubtedly, part of the problem stems from a lack of accountability in the mainstream media surrounding sensational reporting on financial and economic topics – including various social media platforms (looking at you, “FinTwit”). Accordingly, we thought it imperative to take a moment to try to dispel some of the most frequent and sensational myths we have seen develop.

Myth #1: Modern Monetary Theory (MMT) is a viable economic theory.

The Economist described MMT as a theory in which, “A government that prints and borrows in its own currency cannot be forced to default since it can always create money to pay creditors.” In reality, MMT is nothing more than a “greater fools” theory intended to justify currency wars and permit governments to abandon sound and reasonable fiscal policy. While seemingly new, these kind of old, recycled theories take no account of basic economics while ignoring the very real risks and potentially destructive side effects of global currency hegemony, including specifically the U.S. dollar.[1,2] As we’ve quoted previously, author James Rickards wrote in his 2011 book Currency Wars, “Printing dollars at home means higher inflation in China, higher food prices in Egypt and stock bubbles in Brazil. Printing money means that U.S. debt is devalued so foreign creditors get paid back in cheaper dollars. The devaluation means higher unemployment in developing economies as their exports become more expensive for Americans. The resulting inflation also means higher prices for inputs needed in developing economies like copper, corn, oil and wheat. Foreign countries have begun to fight back against U.S.-caused inflation through subsidies, tariffs and capital controls; the currency war is expanding fast.”[3] These kind of reckless monetary and fiscal policies are what led the U.S. into the great financial crisis and continue to damage global trade and geopolitical discourse even today.

Myth #2: A global financial crisis is imminent.

Currently, the global tally of Total Foreign Exchange Reserves (financial assets or money held by sovereign monetary authorities to cover liabilities) have grown from U.S. $5.5 trillion in Q3 2017 to U.S. $11.4 trillion today, an increase of over 80% since the beginning of the financial crisis.[4] Ultimately, despite some tightening by a few central banks over the last two years, global monetary policy remains quite dovish or easy, especially relative to history.[5] The evidence is very clear: the world remains awash in liquidity.

Myth #3: A U.S. recession is imminent.

Nearly any official economic forecast you read today will show a slowdown in the pace of U.S. economic growth this year; however, exactly none of them are forecasting a recession in either 2019 or 2020.[6,7,8] Moreover, based on the most recent data, models like the Atlanta Federal Reserve Bank’s GDPNow have revised gross domestic product (GDP) forecasts up rapidly following recent economic data releases on trade, manufacturing and jobs.[9] The U.S. economy remains strong and healthy by nearly all objective metrics.

Myth #4: But what about jobs and wages, aren’t they slowing down?

The U.S. Department of Labor’s most recent report indicated the U.S. economy just added 196,000 jobs in March as the unemployment rate remained remarkably low at 3.8%.[10] While this followed a lackluster number in February, the report also revised up February’s jobs number from 20,000 to 33,000. Additionally, unemployment claims (the number of people seeking unemployment benefits) just fell to its lowest level in 49 years. Meanwhile, wage growth remains strong as average hourly earnings (AHE) have grown at 3% or more every month since July 2018. As we’ve previously noted, these indicators reflect the health of the consumer, which remains the primary driver of the U.S. economy with consumption accounting for nearly 70% of GDP.

Myth #5: But surely the U.S.-China trade war will lead to a global recession..?

In reality, the global slowdown in economic growth has had a lot more to do with China tightening its fiscal policy rather than any tariffs or trade pressure.[11] After decades of robust economic growth, China tightened fiscal policy in order to respond to rapidly rising asset prices in specific sectors of their economy that threatened longer-term growth. Now as growth has slowed following tighter credit conditions and lower capex, China has resumed a more stimulative fiscal policy approach. The most recent Chinese economic data have been stronger and have eased worries about a broader slowdown.[12] Meanwhile, as of this writing, U.S.-China trade talks appear to be progressing well, and may lead to more positive developments for the economy and upside in financial markets in the near term.

Myth #6: But wait, the inverted yield curve MUST mean catastrophe, right?

In March the 10-year U.S. Treasury (UST) rate sunk below the three-month UST rate for the first time since 2007. Interestingly, the 2s10s spread (the difference between 10-year and two-year UST rates, another popular metric for measuring the yield curve that ignores most of the front end of the curve) has still not inverted. In any case, the Federal Reserve, based on its own research, cannot decide whether a yield curve inversion can either predict or cause a recession,[13,14,15] and moreover, absent a significant change in risk appetite, it’s unclear whether an inversion will have any meaningful impact on equity markets at all.[16] We will continue to watch this develop but feel that the recession signal is significantly less powerful this cycle given the economic circumstances, including specifically the absence of tightening monetary policy and very low unemployment.

Myth #7: Umm, but we’re in a credit bubble and isn’t that dangerous?

First, there is no generally accepted definition of a bubble in finance or economics. That said, it is reasonable to consider whether credit has expanded too rapidly for sustainable economic growth based on unprecedented fiscal and monetary stimulus following the global financial crisis. However, it’s important to note the decade-long expansion of money and credit has not ultimately manifested in a significant increase in liabilities for either corporates or households as a percentage of GDP (see chart).[17] Rather, where the more significant imbalances have appeared are in government debt. The Organization for Economic Co-operation and Development (OECD) statistics illustrate a growing problem, as the number of developed countries with a Debt-to-GDP ratio above 100% has increased to 10 in 2017 from 3 in 2007 (this excludes China which is not an OECD member but registers well above 100% Debt-to-GDP).[18] While this very well may become a problem at some point, today sovereign monetary authorities have significantly increased their total reserves since the financial crisis to prevent liquidity shortages (see #1) and sovereign credit markets are currently functioning well and remain healthy.

Myth #8: But wait, U.S. stocks can’t possibly continue to rise…can they?

Equities, both U.S. and global, have performed well in 2019 and continue to build on their strongest quarter since 2010 amid easy monetary policy, favorable financial conditions and improving economic data in the U.S. and China. Ultimately, investors buy stocks for their earnings, and while corporate earnings have cooled off following an extraordinary 2018, estimates for 2019 remain solid.[19] In fact, some analysts have pointed to the fact that currently strong economic fundamentals mean that estimates for corporate earnings– specifically for the S&P 500 – may be too low.[20] While the path forward may involve further volatility, given reasonable U.S. equity valuations we see no legitimate reason U.S. stocks can’t go higher from current levels, particularly if economic conditions continue to improve.

For all of these reasons above, among others we’ve noted in the past, we believe economic and financial market conditions will continue to improve, which should help refresh investor sentiment and provide support for global equities and risk assets. While a market correction is always possible, we believe the merits of a correction (10% sell off) or a major market reversal remain unconvincing given the current economic landscape, accommodative monetary policy and the healthy outlook for corporate earnings. As always, we will be closely monitoring these developments and encourage our clients to reach out at any time to discuss our strategy and individual circumstances in further detail.

Palley, Thomas, “Modern money theory (MMT): the emperor still has no clothes,” February 2014 (http://www.thomaspalley.com/docs/articles/macro_theory/mmt_response_to_wray.pdf)
Fiebiger, Brett, “Modern Money Theory and the ‘Real-World’ Accounting of 1-1<0: The U.S. Treasury Does Not Spend as per a Bank,” Political Economy Research Institute, University of Massachusetts Amherst, Working Paper No. 279, January 2012 (https://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP279.pdf)
Rickards, James. Currency Wars: The Making of the Next Global Crisis; November 2011.
International Monetary Fund: Currency Composition of Official Foreign Exchange Reserves (COFER) (http://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4)
Council on Foreign Relations: Global Monetary Policy Tracker (https://www.cfr.org/global/global-monetary-policy-tracker/p37726)
World Economic Outlook Update, International Monetary Fund, January 2019 (https://www.imf.org/en/Publications/WEO/Issues/2019/01/11/weo-update-january-2019)
Federal Open Market Committee: Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents under their individual assessments of projected appropriate monetary policy, Board of Governors of the Federal Reserve System, March 2019 (https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf)
The Conference Board Economic Forecast for the U.S. Economy, The Conference Board, March 13, 2019 (https://www.conference-board.org/data/usforecast.cfm)
Atlanta Fed GDPNow, Estimate for 2019: Q1, Federal Reserve Bank of Atlanta, April 2, 2019 (https://www.frbatlanta.org/-/media/documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf)
The Employment Situation – March 2019, U.S. Department of Labor, Bureau of Labor Statistics, April 2019 (https://www.bls.gov/news.release/pdf/empsit.pdf)
Wei, Han, “Debate Over China’s Fiscal Policy Heats Up as Growth Slows,” Caixin Global, Economy, July 17, 2018 (https://www.caixinglobal.com/2018-07-17/debate-over-chinas-fiscal-policy-heats-up-as-growth-slows-101304793.html)
China Pledges More Stimulus in 2019 as Economy Seeks Bottom, Bloomberg News, Economics, December 21, 2018 (https://www.bloomberg.com/news/articles/2018-12-21/china-says-more-tax-cuts-coming-signals-easier-monetary-policy)
Koenig, Evan F and Phillips, Keith R. “Inverted Yield Curve (Nearly Always) Signals Tight Monetary Policy, Rising Unemployment,” Federal Reserve Bank of Dallas, February 12, 2019 (https://www.dallasfed.org/research/economics/2019/0212)
Wheelock, David. “Can an Inverted Yield Curve Cause a Recession?” Federal Reserve Bank of St. Louis, On the Economy Blog, December 27, 2018 (https://www.stlouisfed.org/on-the-economy/2018/december/inverted-yield-curve-cause-recession)
Bauer, Michael D and Mertens, Thomas M. “Information in the Yield Curve about Future Recessions,” Federal Reserve Bank of San Francisco, FRBSF Economic Letter, August 27, 2018 (https://www.frbsf.org/economic-research/publications/economic-letter/2018/august/information-in-yield-curve-about-future-recessions/)
Jorda, Oscar, Moritz Schularick, Alan M. Taylor, Felix Ward. 2018. “Global Financial Cycles and Risk Premiums” Federal Reserve Bank of San Francisco Working Paper 2018-05. (https://doi.org/10.24148/wp2018-05)
False Alarm: The Case for Corporate Credit, Goldman Sachs Asset Management, Market Commentary: Global Fixed Income, January 2019 (https://www.gsam.com/content/dam/gsam/pdfs/common/en/public/articles/2019/The_Case_for_Corporate_Credit.pdf?sa=n&rd=n)
OECD National Account Statistics: National Accounts at a Glance, OECD Data, General Government Debt (https://data.oecd.org/gga/general-government-debt.htm)
Yardeni, Ed and Abbott, Joe. “YRI S&P 500 Earnings Forecast,” Yardeni Research, April 1, 2019 (https://www.yardeni.com/pub/yriearningsforecast.pdf)
Adams, Gina Martin and Casper, Michael, “Macro vs. Micro: Earnings Forecast Differences,” Bloomberg Intelligence, April 4, 2019

What Exactly Does a Wealth Strategist Do?

By: William Onorato, Senior Wealth Strategist

As a family’s wealth grows, so too does the complexity of managing it. Initially, using Quicken and a few mutual funds may suffice to manage a family’s financial affairs. As a family’s personal wealth grows, however, overseeing it becomes a full-time endeavor, whether it is $1 million or $100 million. Navigating the many challenges and opportunities associated with growing wealth is critical to a family’s long-term success. This is where a wealth strategist comes in.

At RKL Wealth Management, our strategy revolves around maintaining an upward trajectory for family wealth. This can mean different things for different families, and should be measured in terms of a family’s unique outlook and circumstances. After all, wealth must be an asset not a liability.

Key wealth strategy themes

In order to maintain upward trajectory, a wealth strategist (as part of the family’s team of advisors) must address the various factors that can cause a downward shift, including market, economic, legal or political risks, estate and income taxes, disjointed advisory team and poor family dynamic. To that end, a wealth strategist’s responsibilities generally revolve around three interrelated themes:

Ensuring financial assets are sufficient to satisfy lifestyle needs
Transferring any excess assets to recipients (either individuals or charities) in the most efficient and protective manner
Preparing recipients to be good stewards of the transferred assets

Comprehensive approach to wealth planning

To be successful over the long term, a family cannot simply focus on investment return and ignore taxes. Nor can a family focus solely on the creation of trusts without educating the next generation who will serve as beneficiaries. Each of the above themes must be addressed by a family or else the upward trajectory will not be sustainable. All too frequently families focus on one or two but not all three. A wealth strategist’s role is to look at family’s complete picture and assess what needs to be improved.

A wealth strategist will tap into a number of financial disciplines, such as tax planning, estate planning, business continuity planning and financial planning, to create a comprehensive approach. With the ability to see the family’s entire picture across various disciplines, the wealth strategist then works with a family’s existing advisors (CPAs, attorneys, etc.) to develop a well-coordinated long-term plan. Having an integrated team of advisors is arguably the most important factor to a family’s success, especially as their wealth grows.

Understanding unique family goals

A wealth strategist must know a family better than they know themselves. That requires in-depth discovery starting with learning a family’s values, principles, vision and mission. Who are the family members? What drives a family? How did they get to where they are now? Where are they going to be five years from now? Ten years from now? Fifty years from now? This is all done in conjunction with learning about the family’s financial assets and overall balance sheet. By laying out where the family wants to be and the principles that guide them, you can then start to develop short-term and long-term goals. The ability to think long term – 25 years or more – ultimately leads to a more sustainable upward trajectory and, more importantly, less anxiety when there are short-term bumps in the road.

Now more than ever, a wealth strategist is critical to a family’s financial success. Whether it is increased taxes, political turmoil, an unforeseen lawsuit or family dynamics, the potential for hard-earned wealth to erode overnight is very real. The wealth strategist plays an essential role in helping a family weather any storm life throws at them and ultimately ensure long-term success, both in terms of dollars and overall health.

Interested in learning how a wealth strategist can help defend your family’s wealth? Contact your RKL Wealth Management advisor to explore our firm’s full suite of advisory capabilities.

New Faces at RKL Wealth Management

We recently welcomed three new team members to RKL Wealth Management: Rochelle Grey, William Onorato and Terri Reber.

Rochelle Grey, CFP®, CTFA, brings nearly two decades of experience with high net worth and ultra-high net worth clients to her role of Senior Wealth Advisor. Rochelle helps clients achieve their financial goals and build a legacy plan that meets their core values. She also has extensive experience in all aspects of financial planning, including asset allocation. Rochelle is a Certified Financial Planner (CFP®), a Certified Trust Financial Advisor and an honors graduate of Cannon Trust School. She currently serves as President and Board Member for the Berks County Estate Planning Council and belongs to the Lehigh Valley Estate Planning Council and the Financial Planning Association. Rochelle earned her B.A. in Business Management from Alvernia University and MBA in Business Management from Lehigh University. She resides in Exeter Township with her husband and son. In her free time, Rochelle enjoys vacationing at Cape Cod with her family, watching her son play ice hockey and taking photographs.

In his role as Senior Wealth Strategist, William Onorato, JD, MBA, advises high net worth families on multi-generational planning, legacy planning, business succession and estate planning. He has more than 25 years of experience in estate planning and wealth strategy, and collaborates closely with his clients’ team of advisors to provide integrated planning solutions for long-term success. Bill holds a B.S. in Finance and MBA from Loyola College in Baltimore, Maryland. He later earned his Juris Doctor from the University of Baltimore. Bill is a member of the Baltimore Estate Planning Council. He serves as President of the Looney’s Girls Lacrosse Club and Treasurer for Friends of Harford. Bill resides in Bel Air, Maryland, with his wife and two kids. His favorite pastimes include cheering on his daughter during lacrosse games and reading about the Revolutionary War and World War II.

Terri Reber, FPQP™, serves as Operations Supervisor for RKL Wealth Management. She taps into more than two decades of client service and management experience to provide support to the firm’s clients and advisors. Terri oversees the day-today operations of the firm, serves as a liaison between the operations team and management and implements processes and procedures. She holds a B.S. in Hotel and Restaurant Management from Widener University and earned her Financial Paraplanner Qualified Professional (FPQP™) designation from the College for Financial Planning. Terri belongs to the Pennsylvania Association of Notaries and National Notary Association. She resides in Sinking Spring with her husband and their cat and two dogs. Outside of the office you can find Terri spending time with her extended family and friends, enjoying the outdoors or trying out new recipes in the kitchen.

IMPORTANT CONSIDERATIONS
The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. The information and data contained herein was obtained from sources we believe to be reliable but it has not been independently verified. Past performance is no guarantee of future results.

RKL Wealth Management LLC is a registered investment adviser. To learn more about how we can help you meet your goals, please contact our office at (717) 399-1700 or via our website, rklwealth.com. Additional information is available upon request.